PhillipCapital analyst Terence Chua has turned “neutral” on First Sponsor Group, downgrading from his previous “accumulate” recommendation due to the slower economic growth seen in China.
The group’s property development (PD) and property financing (PF) market will be impacted by the slowing property market in the country, as well as the recent loosening of its monetary policy.
“Falling property prices in China have resulted in a slowdown in demand. Unsold housing stock in China’s 100 biggest cities reached a five-year high in November 2021. Some developers have also resorted to lowering prices to clear inventory, adding to the downward pressure in the property sector,” writes Chua in his Feb 25 report.
“In January 2022, the People’s Bank of China (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%,” notes Chua.
“To boost liquidity, the PBOC is also offering RMB700 billion ($148.7 billion) of one-year medium-term lending facility loans in addition to RMB100 billion ($21.2 billion) with seven-day reverse repurchase agreements. All these have culminated in a reduction in the group’s China loan book, and is expected to add further pressure to its China loan book in the next two years,” he continues.
As such, Chua has lowered his expectations for the group’s China loan book for the FY2022 and FY2023 by 50% and 16% respectively as he “expects customers to start repaying off its loans to refinance with the banks”.
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Consequently, Chua’s earnings estimates for the group’s PF business is lowered by 47% and 13% for the FY2022 and FY2023 respectively.
Further to the downgrade, Chua has also lowered his target price to $1.39 from $1.56. This is as he reduces his earnings expectations for the group’s PD and PF business by 21% and 47% respectively for the FY2022.
However, all is not lost. The group, which reported a profit of $61.8 million for the 2HFY2021 ended December, stood above Chua’s estimates, at 53.6% of his full-year expectations.
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The beat came from the group’s PD and PF segment, he notes.
During the half-year period, First Sponsor Group reported a 16.4% y-o-y growth in 2HFY2021 earnings of $52.5 million.
“Revenue from hotel operations showed nascent recovery as improvements in its European hotel operations lifted earnings pared back by weakness from its China operations due to the resurgence of Covid-19 in China,” he notes.
The group also possesses a strong balance sheet, which will enable it to capitalise on new opportunities.
“First Sponsor Group 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,” says Chua.
On April 30, 2021, fellow PhillipCapital analyst Tan Jie Hui downgraded her recommendation on First Sponsor Group to “accumulate” from “buy” as its share price at the time had already priced in its positives.
At the time, Tan kept her target price unchanged at $1.56.
First Sponsor Group is 35.72% held by City Developments Limited (CDL) and 45.63% owned by real estate firm Tai Tak Estates.
Shares in First Sponsor Group closed flat at $1.35, representing an FY2022 P/NAV of 0.6x and dividend yield of 2.6%.
