Huayang- another bonus issue!

Background

Hua Yang Bhd ('Huayang') is a medium-size property developer with four main projects:

1) Symphony Heights, a 3 blocks serviced apartment consists of 946 units, offers 2, 3 and 3+1 bedroom apartments with a built-up area from 863 sq ft to 1,246 sq ft. Symphony Heights is located off the MRR2, at Selayang.

2) One South, the latest mixed development in Seri Kembangan, Selangor, comprising shop offices, service apartments and office towers, are set to tap on its strategic location. It is situated just along the KL-Seremban highway and right next to Besraya highway where it enjoys a ready population catchment as well as high traffic visibility.

3) Pulai Indah, a township development of 477 acres, in Johore.

4) Bandar Universiti Seri Iskandar, a 838-acre township development in Perak.

For more, go here.

Outstanding Corporate Proposal

Huayang has proposed a bonus issue of 1-for-3. Last year, Huayang had a bonus issue of 1-for-5 which was completed in September.

Recent Financial Results

Huayang has just released its results for QE30/6/2011, where its net profit increased by 37% q-o-q or 134% y-o-y to RM11.5 million while its turnover dropped 7% q-o-q but rose 66% y-o-y to RM62 million. It attributed its better performance to better sales, steady construction progress & the sale of a parcel of land measuring 215,186 sq ft in Bandar Universiti Seri Iskandar to Tesco for a sum of RM3.2 million.

Why did the sale drop q-o-q? Is it due to slowing sales or delay in construction work? We need to keep a close look-out on this item in the next quarterly result.


Table: Huayang's last 8 quarters' result



Chart 1: Huayang's last 16 quarters' result

Financial Position

Huayang's financial position as at 30/6/2011 is deemed satisfactory. Current ratio stood at 2.3 times while debts to equity stood at 0.3 time.

Valuation

Huayang (closed at RM1.76 yesterday) is now trading at a PE of 6.1 times (based on estimated EPS of 29 sen, which was in turn arrived at using the average net profit of RM8 million for QE31/3/2011 & QE31/12/2010). For a medium-size developer, I think Huayang is trading at its fair value. Thus, upside potential may be limited unless investors are prepared to raise the PE multiple.

(Note: I believe that a developer with sizable land bank which was built-up earlier at lower cost, would be able to sustain its current level of profit. Huayang may fall into this category. I think the market should accord Huayang a better PE multiple than 6 times. On the other hand, if the developer used up its cheaper land bank & it has to replenish it at current higher price, it won't be able to maintain its profit margin as seen in 2010-2011. This category of developers should trade at lower PE multiple.)

Technical Outlook

Huayang rose rapidly after breaking above its long-term downtrend line at RM0.75 in July 2010. It rose upward after breaking above its immediate medium-term downtrend line. Recently, it broke above a similar downtrend line at RM1.70. This could lead to another rally which could potentially hit the RM2.00 level. The impetus for this possible rally could be the issuance of the bonus shares in the next few weeks.


Chart 2: Huayang's weekly chart as at July 15, 2011_11.00am (Source: Quickcharts)

Conclusion

Based on good financial performance & position, Huayang could be a good stock for long-term investment. However, Huayang's upside potential is deemed limited as the stock is trading at its fair value [based on market PE of 6 times]. The outstanding bonus issue & technical breakout could be good reasons for getting into this stock.