The Positives
+ 2H21 profit of $61.8mn above our estimates, at 53.6%. The beat came from property development and property financing. The Group made good progress with its various PRC property development projects with the handover of six out of eight fully sold residential apartment blocks of The Pinnacle project in Dongguan in December 2021. The average PRC PF loan book also hit a high of RMB2.7bn in 2021.
+ Revenue from hotel operations showed nascent recovery. Strong leisure demand led to better performance of its European hotel portfolio with revenue from hotel operations increasing 33% YoY in 2H21. Its European hotel portfolio also saw improvements in occupancy, average daily rate (ADR) and revenue per available room (RevPAR) following the easing of COVID-19 measures. According to management, January 2022 continues to be positive and is trending better than 2021.
The resurgence of COVID-19 cases in PRC, however, pared back gains. The implementation of restriction measures in Chengdu led to a weaker performance of its PRC hotels in 2H21 after it had to close the Holiday Inn Express Chengdu Wenjiang Hotspring Hotel for almost a month each in early August 2021 and early November 2021.
+ Revenue from property financing ahead of our expectations as PRC loan book exceeds. The PRC property financing business achieved a record full-year average loan book of RMB2.7bn for FY21.
|
The Negatives – Outlook for property financing disappoints. We believe the recent policy change in China will see clients repaying the loans in favour of bank loans. This, after the People’s Bank of China (PBOC) reduced the reserve requirement ratio for banks by 0.5% in December last year, in a bid to boost economic growth. This resulted in the release of an additional RMB1.2 tn (~$255bn) into the economy. To further ease the lack of liquidity in the property sector, PRC authorities are in the midst of drafting rules to allow developers to access funds from sales that are held in escrow accounts to meet obligations as well as payments.
– Dongguan’s property market slows, inventory rose to 12.5 months from 3.2 months. Curbs on debt and strict COVID-19 measures has negatively impacted property demand in China. According to Reuters’ calculations, property investment declined 13.9% in December 2021 from a year ago, dropping at the fastest rate since early 2020. Unsold housing stock in the PRC’s 100 biggest cities reached a five-year high in November last year. With the slowdown in the property sector, residential inventory in Dongguan rose to 12.5 months from 3.2 months as home buyers remain on the sidelines. |
|
Outlook Weak economic outlook in China clouds Group’s outlook. Falling property prices in China have resulted in a slowdown in demand. Unsold housing stock in the PRC’s 100 biggest cities reached a 5-year high in November last year. Some developers have also resorted to lowering prices to clear inventory, adding to the downward pressure in the property sector.
In January 2022, the PBOC cut the interest rate for the one-year medium-term lending facility from 2.95% to 2.85%. In the same month, the central bank reduced the one-year loan prime rate by another 10 basis points from 3.8% to 3.7% and the five-year loan prime rate by five basis points from 4.65% to 4.6%. To boost liquidity, the PBOC is also offering RMB700bn (S$148.7bn) of one-year medium-term lending facility loans in addition to RMB100bn (S$21.2bn) with seven-day reverse repurchase agreements. All these have culminated in a reduction in the Group’s PRC loan book, and is expected to add further pressure to its PRC loan book in the next two years.
In view of this, we have tweaked our model to account for the lower PRC loan book in the next two years. We lowered our expectations for the Group’s PRC loan book for FY22e-23e by 50% and 16% respectively as we expect customers to start repaying off its loans to refinance with the banks. Consequently, our earnings estimates for its PF business is reduced by 47% and 13% respectively for FY22e and 23e.
Strong balance sheet to capitalise on new opportunities. FSG is backed by a strong balance sheet, substantial unutilised committed credit facilities and potential equity infusion from the exercise of outstanding warrants. The Group is also expected to realise a substantial infusion of cash from the repayment of loans from its customers in the next two years. All of this will further strengthen the cash resources of the Group and to enable it to capitalise on any new business opportunities when they arise.
Downgrade to NEUTRAL from ACCUMULATE with reduced SOTP-TP of S$1.39. As the economic and property outlook in China turns more uncertain, we lowered our earnings expectations for its PD and PF business by 21% and 47% respectively for FY22e. Catalysts for an upgrade are a recovery in the Chinese property market and its China hotel portfolio. |
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.
He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.
