PhillipCapital’s senior research analyst Terence Chua has upgraded his recommendation on First Sponsor Group to “accumulate” from “neutral” as he sees the latest relaxation of property measures in China’s Dongguan as a positive sign for the group.
“We believe the relaxation measures will provide support for the upcoming projects the group will launch in 2HFY2022,” he says.
Chua has, however, kept his target price unchanged at $1.39, citing a recovery in the Chinese property market and in the group’s China hotel portfolio as catalysts for an upgrade in the group’s target price.
In his report dated Aug 4, Chua notes that the group’s profit of $71.3 million during the 1HFY2022 ended June surpassed his estimates at 60.5% of his full-year forecast.
The beat came from the group’s property holding business, which was driven by the acquisition of the Dutch Bilderberg hotel portfolio it acquired on May 2. The overall improvement in revenue per average room (RevPAR) of First Sponsor Group’s hotel portfolio also contributed to the higher profit.
In addition, the relaxed housing policies in Dongguan drove sales higher for the group during the period.
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“Buyer sentiment in the Dongguan residential market improved after two rounds of housing policy relaxation by the local municipal authorities in May. 190 residential units of its project in Time Zone were sold in 1.5 months after relaxation measures were announced,” says Chua.
“This was significantly higher than the 139 residential units sold in the first 4.5 months of 2022. We believe this bodes well for the two residential projects it has targeted to launch in 2HFY2022, the Hefu project and Phase 1.2 of its Time Zone development, both in Dongguan,” he adds.
In addition, the group recovered a portion of the proceeds in April from the mortgaged properties. The estimated net proceeds of RMB 271.6 million ($55.4 million) however, is insufficient to cover the outstanding loan principal, default and penalty interest and other fees, resulting in an estimated shortfall of RMB 160.4 million, with a book exposure of RMB 112.8 million left to be collected.
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Needless to say, the amount would have a negative impact on the group if it fails to recover the shortfall, says Chua.
The analyst also sees the group potentially recovering from the disposal of Pudong Mall. The legal title of the Pudong Mall as well as net auction proceeds of the Pudong Villa are expected to be transferred to the group in 3QFY2022.
“As the group managed to win the title of the mall through an auction process, we believe there is upside to the valuation of the mall at the end of the year when a valuation is done. We believe the Group will attempt to divest the mall to recover the shortfall, which we estimate to be in FY2023,” he says.
Despite the upgrade, Chua notes that the group may suffer from potential impairments of its hotels in the 2HFY2022 amid higher rates.
“The European Central Bank (ECB) recently raised rates for the first time in 11 years, with a larger than expected rise of 50 basis points (bps). That said, we expect the impairments, if any, to be offset partially by the continued recovery of RevPAR and occupancy in Europe,” he says.
The muted response at the launch of the Primus Bay residential apartment blocks is also a concern.
“[Primus Bay’s] average selling price (ASP) of RMB26,200 sqm is on the lower end of the spectrum, but we expect pricing to remain stable as the group will launch the smaller units in 2HFY2022, which should support pricing,” he adds.
Shares in First Sponsor Group closed 1 cent lower or 0.77% down at $1.29 on Aug 8.
