• Operational update suggests company is on track for record FY21 pretax profits, bolstered by property development and property financing.
• Unrecognised gross development value was S$620mn, after S$180mn recognised from handover of SOER, EoO and Plot F. FSG’s share of gross development value for unlocking from existing projects was S$3.2bn, before New Humen.
• New Humen project to increase its property-finance loan book by 30% and FSG’s exposure to Dongguan where residential demand is still holding up. Hotels underperformed.
• Downgrade to ACCUMULATE from BUY as recent run-up has priced in some positives. SOTP target price unchanged at S$1.56.

The Positives

+ S$180mn recognised from handover; at least S$115mn worth of GDV for recognition in 2Q21 and 3Q21. In 1Q21, FSG handed over 47% of office space and a remaining SOHO block at Star of East River (SOER) as well as two residential blocks at Emerald of the Orient (EoO). We estimate it recognised S$180mn GDV from these projects in 1Q21. The remaining S$50mn should be recognised over the next two quarters. Unrecognised revenue from the Pinnacle and Plot F of Millennium Waterfront was S$372mn as at December 2020. Revenue recognition has begun for Plot F, with the handover of 87 of its 807 units. We estimate this translated into S$10mn worth of revenue in 1Q21. Remaining sold units will be handed over in 2Q21, which could potentially yield S$65mn in sales recognition. Eight residential blocks sold at the Pinnacle are expected to be handed over in phases from late 2021.

The Negatives

– Hotels underperformed; 33%-owned FSMC to defer interest payment. Demand for both regional and city hotels was affected by Covid-19 restrictions. Only hotels in Chengdu Wenjiang managed to book EBITDA of RMB1.9mn in 1Q21. Most of FSG’s owned European hotels operated at EBITDA losses despite subsidies from the government. Occupancy is typically weaker in the first quarter of the year due to fewer events and public holidays. 1Q21 occupancy at its 31.4%-owned Dutch Bilderberg hotels dropped to 9.6% from 46.5% in 1Q20. RevPAR fell 83% YoY to €15. Given this, 33%-owned FSMC group deferred its €4.2mn interest payment in 1Q21 on loans extended by the group. FSG does not expect any recovery issues for the deferred interest and loan principal.

Reverse-roadshow highlights

Dongguan market still hot. Despite price ceilings placed on Dongguan’s residential properties, prices are still going up and inventory in the municipal is low. A typical holding period for outside central residential property is 3.6 months. Within the central region, the holding period is 1.8 months, before the units are snapped up. Even though some units have a stipulated holding period of five years or so before they can be sold, buyers have been paying upfront to reserve units.

Property financing business is less risky than most may think. FSG only lends on real estate it is willing to own. Before 2020, it had just two default cases. In both cases, it succeeded in recuperating principal and penalty interest, after collateral auctions. Loans are typically secured on LTVs of 50% or lower. Penalty interest is much higher than initial interest. In 2020, FSG commenced legal action against a borrower group with two cross-collateralised loans due to arrears for a month’s interest for eight months. FSG privately settled with the group on 16 March 2021, which has paid its first monthly instalment and prepaid its second monthly instalment in April 2021.