Excerpts from UOB Kay Hian report

Analyst: Edison Chen

 

Gaobeidian4.16KSH has a 22.5% stake in the massive 533.3ha Gaobeidian township project in Hebei province.
Artist's impression: KSH Holdings
LQM ad141e... It is a once-in-a-lifetime event that China decides to set up a new SEZ. There are tremendous opportunities with comparison drawn to Shenzhen and Shanghai Pudong. In Singapore, the announcement of the development of Sentosa also saw share prices of property developers with the correct landbank growing by several folds. 

-- Edison Chen, analyst, UOB Kay Hian


WHAT’S NEW
Buyers swarm the new economic zone. Within 24 hours of China’s announcement of its newest special economic zone (SEZ) - Xiongan New Area (XNA) - in the likes of Shenzhen and Shanghai’s Pudong, hordes of buyers swarmed the region, with Bloomberg reporting buyers camping overnight outside property agencies. To stem speculation, the government banned all property sales in the zone. According to the People’s Daily, 31 major SOEs like Sinopec have announced plans to develop their business in XNA.

Gaobeidian located between just north of XNA and Beijing. Gaobeidian, where KSH has the mega Sino-Singapore Health City project with land costs accounted for, is located between just right north of XNA and Beijing. Baoding, the designated secondary capital of China, lies to the south. Gaobeidian is connected by rail, high-speed rail and the G4 Beijing-Hong Kong-Macau Expressway.

KSH Holdings

Share price: 
82.5 c 

Target: $1.18

Prices have surged from Rmb9,000/sqm to Rmb20,000/sqm and continue to rise. As a reference, KSH’s smaller project in Gaobeidian (sold before the announcement) was sold to retail buyers at around Rmb9,000/sqm with all-in costs at only about Rmb3,500/sqm. Based on our channel checks, property prices have now surged to around Rmb20,000/sqm and look set to continue to rise.

NUS contract in line with expectations; orderbook hits S$360m. KSH also announced the value of its NUS contract. In line with our expectation, the main construction work is valued at S$145.7m. We expect other miscellaneous items (ie maintenance) to round up the contract value to about S$200m. This has lifted KSH’s orderbook to S$360m.

STOCK IMPACT
Singapore listco

Interest in Gaobeidian Project

Oxley Holdings

27.5%

KSH Holdings

22.5%

Lian Beng Group

10%

Heeton Holdings

7.5%

• KSH is the largest SGX beneficiary with healthy balance sheet. Among SGX peers, KSH is the second-largest stakeholder in the 5.3m sqm Gaobeidian project. However, unlike Oxley which has an extremely geared balance sheet (211% net gearing), KSH had net cash of S$78.5m (or 22.2% of market cap) as at end-16. 

• 1.9m sqm to be developed over next four to five years and another 3.9m sqm thereafter. The Sino-Singapore Health City has 1.9m sqm for development, with an estimated 1.6m sqm of net sellable area approved for the next four to five years. The 10-year plan covers 5.3m sqm but to be conservative, we are only accounting for 1.9m sqm now.

• S$368m RNAV on Rmb15,000/sqm assumption. As land costs have been locked in before the SEZ announcement, a conservative all-in cost estimate that accounts even for escalating construction cost would be around Rmb3,767/sqm. Even assuming a 60% tax rate (including income tax, land appreciation tax, value added tax) and a low launch price of Rmb15,000/sqm, our RNAV for KSH is S$368m (at a WACC discount of 7%). For every Rmb1,000/sqm increase, we expect KSH’s profits to increase by S$31m. 


EARNINGS REVISION/RISK

edisonchen1.16"KSH will see a huge surge in net profit in FY19 on profit recognition for the Gaobeidian project in addition to delayed profits. We raise our FY19 net profit estimate by 80.6% to S$107.8m."

-- Edison Chen (photo),
Analyst, UOB Kay Hian

• FY17 profit to be shifted to FY18 and FY18’s to FY19... While China is a huge positive for KSH, Singapore is more muted. Although sales for 95.6% of its Singapore projects have been locked in, these can only be recognised at a later stage.

The weak Singapore property market has seen KSH in no hurry to complete the projects, and it is likely to be focusing on managing cost. We opine that the recognition will be delayed but should come in FY18-19. In view of this timing issue, we lower our FY17 net profit by 20.9% to S$41.1m.

• Risk in Gaobeidian projects. As a huge chunk of profits is expected to come from Gaobeidian, related risks from execution to regulatory will definitely increase. 

VALUATION/RECOMMENDATION
• Reiterate BUY with new SOTP target price of S$1.18. To better appreciate the intrinsic value now that the Gaobeidian project has taken off, a SOTP methodology would be more suitable to value KSH. Maintain BUY and raise our target price to S$1.18.

Full UOB Kay Hian report here.


Share Prices

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Cordlife0.980-
Dutech0.4650.010
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$ GSS Energy0.1530.002
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Hiap Hoe0.700-
$ ISOTeam0.360-
KSH0.8750.025
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