Pan Hong Property Group: S$0.20 NEUTRAL (TP: S$0.25) - A Modest But Reasonable Take-Up in Huzhou

A Modest But Reasonable Take-Up In Huzhou

Pan Hong attained a modest take-up rate of 41% for Huzhou Liyang Jingyuan (HLJ) Phase 2, a 150-unit residential project which it launched two weeks ago. A total of 61 units (~7,000 sm in GFA) were transacted at an average selling price of RMB4,950 psm, slightly under our estimates of RMB5,000 psm. Assuming a breakeven price of RMB3,000 psm, they would contribute 0.41¢ / share to NAV when completed and handed over in 2Q09. Despite the weakening sentiments surrounding China’s real estate sector and deteriorating operating environment for property developers, Pan Hong was able to sell close to half of the project within a short period of time from the launch date. We view this positively, and attribute it to a confluence of factors, including Pan Hong’s proven track record in Huzhou (having completed 7 projects here), the buyers’ genuine owner-occupier profile, as well as the project’s quality and good location. Of late, there has been a slew of government policies aimed at bolstering the role of the financial sector in supporting economic growth. At the same time, the Chinese government could be implementing more sector-specific policies in the near term. While the government’s increasing ardor in its introduction of expansionary policies are positive, we would like to stress that implementation is the key here. Judging from the size of the country and historical lead time of policies meted out, it could take a longer than expected time for the intended impact of the policies to filter down to each of the different provinces and cities. Since our initiation report, Pan Hong’s share price has remained flat. Given its residential-centric business model, Pan Hong is not spared from the current weakening sentiments, sales volumes and take-up rates that are plaguing the property sector across China, including the lower-tier cities which Pan Hong is exposed to. Any available catalyst would have to rely on the rate at which the government’s various policies hit the ground running, coupled with a global recovery in real estate sentiments. On the bright side, Pan Hong does have a relatively strong balance sheet - current net gearing ratio of 0.33x and cash position of RMB111.9m. In light of the above, we maintain our NEUTRAL call for the stock with a target price of S$0.25.

source:DMG

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