Pan Hong Property Group - pegged fair value of S$0.25

Another project hits the market, but take-up reflects tepidity. Pan Hong Property Group (Pan Hong) attained a take-up rate of 23.5% for Hangzhou Liyang Yuan (HLY), a 226-unit residential project which it launched at the turn of the year. A total of 53 units (making up ~6,400 sm in GFA) were transacted at an average selling price (ASP) of RMB9,500 psm, above our estimates of RMB9,000 psm and in line with management’s expectations. Assuming a breakeven price of RMB5,600 psm, they would contribute 0.94¢ / share to NAV when completed and handed over in Sep 09. Pan Hong would also book in the proceeds as revenue upon the project’s completion. Overall, this project accounts for 5.4% of our GAV. Buyers were mostly genuine owner-occupiers.

But take-up reflects continued tepidity. Pan Hong’s additional entitlement to HLY’s sales agency (25% of ASP above RMB9,500 psm, on top of regular commission and promotional fees) was not adequate to offset the continued tepidity within the Chinese property sector. We believe this could also be due to the targeted buyer profile for this project, which is more inclined towards the middle to upper-middle income group, rather than low-income urban families. From our view, if take-up does not improve, Pan Hong could be more open to lowering its initial ASP. Given the low acquisition cost of HLY, PBT margins should remain attractive at above 20% even if ASPs are slashed by 20% to RMB7,000 psm.

Shanghai’s further loosening bodes well for lower tier cities. Following the State Council’s litany of property stimulation measures, Shanghai has become the first city to further unscrew current rules, i.e. second homes can be purchased under similar preferential mortgage terms as first homes, no restrictions on family types in enjoying the terms and increase in the quantum of borrowings from the local housing fund. While we note that the first tier cities usually set the tone of policies and we believe these measures would filter down to lower tier cities in the near term, we are also wary of the difference in extent of the measures’ implementation on each individual province and city. That said, we are expecting a recovery in China’s home prices sometime in 3Q/4Q09.

Maintain NEUTRAL with RNAV-pegged fair value of S$0.25. While keeping our overall estimated ASP for HLY, we have now factored in Pan Hong’s new sales of 90 carpark lots in Nanchang Honggu Kaixuan Phase 1. As such, FY09’s topline and PATMI increase by 7.9 – 8.8% to RMB83.6m (previously RMB76.8m) and RMB28.8m (previously RMB26.7m) respectively. FY10 estimates are unchanged. Our recommendation for Pan Hong remains a NEUTRAL at S$0.25, 50% discount to base case RNAV of S$0.49.

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