• RMB 65b here we go!
• Policy risks manageable
• Lower FV of HK$10.52

Right on the Mark

Based on Jan-Nov’18 sales results, KWG Group Holdings Limited (1813 HK; KWG) has achieved ~91.8% of its full-year sales target of RMB 65b. After a more lacklustre Sep-Oct’18 for the group (or the sector, in general), there are indications that momentum seems to be picking up in NovDec’18 and to that end, we are confident that the 2018 pre-sales target should be an attainable reality.

Looking to 2019, assuming a 60% sell-through on ~RMB 150b of saleable resources, we believe that KWG could be looking at a full-year target of RMB 90b, representing a ~38% YoY growth. Given the macro conditions and moderating demand sector-wide, we believe that this represents a healthy growth rate.

Relief on the Policy Front?

Recent developments have shown that policymakers are open to selective loosening of property cooling measures on a city-by-city basis. In parts of Guangzhou for instance, we understand that the local authorities have done away with the dual-contract system for the purchase of properties. To that end, buyers should now be able to obtain larger mortgages against their property purchases, which should thus be supportive towards demand.

Given that KWG has a sizeable portion of landbank in Guangzhou, we think this should be helpful towards sentiment, at the very least. While we do not expect a nationwide relaxation of measures, we believe calibrated responses to prop up the property sector should be the norm moving forward.

No Major Funding Concerns

As 2018 wraps up, we believe that KWG should see its net gearing drop slightly from 77.3% in 1H18 to the 70-75% range as at end’18. The weighted average interest cost should however creep up slightly from 5.8% in 1H18 to slightly more than 6% as at end’18. In terms of the much-discussed puttable bond situation, we note that of the RMB 2.5b bonds that were eligible to be puttable in 2018, only ~10% were exercised.

Despite all of the positives, we are still acutely aware that a sharp depreciation of the RMB (against the USD) and continued volatility in the markets could put a lid on things. Thus, we opt for a conservative FY19 target P/E multiple of 5.5x, and together with our latest FX assumptions, our FV estimate drops from HK$12.50 to HK$10.52.

Source: OCBC Research - 2 Jan 2019