KUALA LUMPUR, Dec 2 — The management of Hua Yang is positive of posting improved results for FY15, based on its pipeline of on-going and upcoming launches.

Hua Yang is a property developer with a niche in affordable housing.

Its landbank is located in locations such as Klang Valley, Johor and Perak.

The company just announced earnings for Q2FY15:

Revenue: +38 per cent to RM 139.5 million
Profit: RM 26 million vs RM 12.3 million
Cash flow from operations: RM 58.1 million vs (RM 75.8 million)
Dividend: 0.0 sen per share vs 0.0 sen per share

The management of Hua Yang said the higher revenue and profit before tax were contributed from steady construction progress from all on-going projects throughout Malaysia.

It did not provide further details in the statutory disclosure.

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1. How will heavyweight 1MDB entering Penang’s affordable housing market affect its prospects?

Hua Yang’s management said in a briefing to analysts that it will focus on landbanking activities in the second half of its current financial year, and it is targeting new markets in the Penang mainland and Kota Kinabalu.

Going by its annual report released on 31 July, it has not bought any land in Penang. It also does not own any land in Kota Kinabalu, its other targeted area for landbanking.

The decision by the management of Hua Yang to find land in Penang comes at a time when there is a demand for affordable housing on the Penang mainland.

An article in The Star said that in Penang, most of the incoming supply of residential properties are in the high-end category, which are unaffordable for the middle-income group.

The article, dated October 2013, reported that according to the National Information Property Centre report (NAPIC), the number of projects with approved building plans was made up of 46,610 units residential properties, of which 27,579 are two and three-storey terraced, semi-detached and detached properties, serviced apartments, and condominiums, while the remaining 19,031 are in the lower category.

There is also the recent development of government-owned development company 1MDB intending to develop high-end units on land in Penang which was originally set aside for affordable and public housing.

The Malaysian Insider reported on 11 November that Penang Chief Minister Lim Guan Eng is not allowing 1MDB to do that.

Lim was quoted as saying: “We know that 1MDB is trying to turn losses into profits by doing other projects, other than affordable housing that have been announced.”

According to the same report, 1MDB bought more than 234 acres for a reported RM 1.38 bln around the Ayer Itam area in Penang before the general election in 2013.

It supposedly wanted to build an affordable housing project made up of 9,999 units.

How will the prospect of a heavyweight like 1MDB (albeit a currently debt-ridden one) entering its niche of the affordable housing market affect Hua Yang’s landbanking activities and prospects in the Penang market?

2. Can it buy land for the same price as it did for One South and West Puchong?

Hua Yang is known for landbanking below the average 20 per cent land cost of the total gross development value that other property developers operate on.

Hua Yang’s land cost for its flagship One South project, which is in its final stage, and West Puchong, which is slated to take over as its next flagship, was only around 11per cent of the gross development value.

According to TA Securities, the management of Hua Yang intends to acquire land in secondary towns such as Juru, Butterworth and Bukit Mertajam in the Penang Mainland, and the Penampang areas in the suburbs of Kota Kinabalu. These areas should yield more reasonable land prices.

But are they going at prices that Hua Yang is used to?

What is its target psf for the land it intends to buy in Penang and Kota Kinabalu?

What is the expected percentage of the total expected gross development value?

3. Is there enough land to buy in Penang and Kota Kinabalu for its next flagship project?

Hua Yang said it has targeted land in Bukit Mertajam in the Penang mainland (which is not on Penang island).

The amount of land it will buy will also determine whether it has identified a new flagship project.

The last piece of land it announced that it had bought was just 7.2 acres of commercial land in Ipoh for RM 25.1 million in August.

Hua Yang entered negotiations for the West Puchong land in October 2012 and completed the transaction in 1 April 2013.

In fact, the first development of Puchong West was supposed to be launched soon — in the last quarter of the current financial year — but it has been delayed to FY16.

Management was quoted by TA Securities as saying it wanted to wait till after the implementation of the Goods and Services Tax in April so it can have a clearer view of the impact of the GST on sales.

Is there enough land in its target areas for its next flagship project?

Or are they smaller plots of land?

Has it identified its next flagship project yet?

4. Will it ask shareholders for money to reduce its debt?

Something that gets analysts concerned about Hua Yang is its net gearing.

According to a report in October by Kenanga, Hua Yang’s net gearing will shoot up to 0.8x if it draws down its entire RM250 million bond facility.

Hua Yang is set to issue RM250 million in Islamic bonds and intends to use the funds to purchase land for development or existing properties.

The broker thinks the company should consider some cash calls to pare down its debt quickly.

This is because it prefers developers keeping a net gearing of below 0.6x.

Its current net gearing is 0.6x, according to the Kenanga report, while it has RM 32.9 million in the bank as of 30 September.

Hua Yang has announced that it will make landbanking a priority in the second half of its current financial year.

The purpose of the Islamic bonds is to fund its landbanking, and it negates the need for equity financing.

So what does Hua Yang think of Kenanga’s idea of asking its shareholders for more money to reduce its potential debt from the Islamic bonds?

5. Why not reveal the details of its progress billings and revenue contribution from newly-launched projects?

According to a report in October by Kenanga, Hua Yang’s H1 revenue grew due to progress billings from its existing projects such as the One South project (the Gardenz) in Kuala Lumpur and landed residential projects, namely; Bandar University Seri Iskandar in Perak, Taman Pulai Indah and Taman Pulai Hijauan in Johor.

We derived this information from analyst reports, and not from what the company wrote in its statutory disclosure.

It will be useful to retail investors and its shareholders if it could write more in its review of its financial performance and discuss the details of its progress billings and revenue contribution from its newly-launched projects.

6. Will there be launches in Q3?

Unlike other property developers, Hua Yang was not severely affected by the property cooling measures by the Malaysian government last year, since its niche lies in affordable housing.

In fact, according to TA Securities, it is one of the key beneficiaries of the My First Home Scheme, in which the house price ceiling was raised to RM 500,000 in Budget 2015.

In the meantime, as mentioned above, it has pushed launches like Puchong West till after April 2015 so it “can have a clearer view of the impact of the GST on sales”.

Hua Yang launched two new projects in Q2FY15 — Cube @ One South and Citywoods @ Johor Bahru. But the booking rate was only around 40 per cent, based on non-bumiputra units released (the properties have certain units reserved for the bumiputra, or the local Malays), for both projects, according to TA Securities.

TA Securities called the 40 per cent booking rate satisfactory, in view of the slowdown in the property sector.

Does pushing back its launches mean Hua Yang will not be launching any properties in the next quarter (Q3FY15)?

7. How many properties is it delaying from launching?

By our count, Hua Yang has two properties that are ready to launch.

The first is the Puchong West serviced apartments, with a gross development value of RM 300 million.

They are to be launched after the implementation of GST, which is on April 2015.

The second is Zeta @ One South, which consists of 104 serviced apartments with a gross development value of RM90 million.

It also has upcoming releases/phases within Sentrio Suites, Bandar Universiti Seri Iskandar in Perak, Taman Pulai Indah, and Taman Pulai Hiiauan in Johor.

Will it be incurring any charges from delaying the launches?

8. Will it absorb the GST for its properties?

With the approach of the GST, there is some talk among industry leaders that property developers should absorb the GST.

Charles Tan of property website Property Hunter said SHAREDA’s (Sabah Housing and Real Estate Developers Association) President, Datuk Francis Goh had urged SHAREDA’s members to absorb the GST increase.

Charles Tan also supported the notion.

SHEDA (Sarawak Housing And Real Estate Developers Association) secretary general Sim Kian Chiok was also quoted by The Borneo Post that developers with properties that are in high demand should pass on the GST to house buyers while developers of properties in areas with less demand should absorb the GST.

Will Hua Yang absorb or pass on the GST for its properties?

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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