• PROPNEX (SGX:OYY) is poised for a strong 2H19 rebound, underpinned by higher OTP completions (ie overflowing from 1H19). Management alluded that some buyers are taking a longer 6-9 months’ lead time (vs 2-3 months) to exercise OTPs, in order to dispose of their existing properties to avoid the more onerous 12% ABSD (post-cooling measures).
• In view of stronger sales recognition in project marketing, we raise our FY19-20 net profit estimates by 12%.
• Upgrade to BUY with target price of S$0.56.

What’s New

Stronger 2H19 project marketing expected, as a result of delayed OTP completions.

• Management noted that since the Jul 18 cooling measures, some buyers (c.50%) are taking a longer lead time of 6-9 months to exercise OTPs (ie after paying 5% deposit), as compared to the usual 2-3 months (pre-cooling measures). They clarified that their revenue recognition policy is contingent on their clients exercising their OTPs (and earning the commissions). As a result, some of OTPs initially expected to complete in 1H19 will likely overflow (and boost 2H19 results).
• In terms of earnings visibility, 9M19 private new sales increased by 9% y-o-y in 9M19 (according to REALIS caveats downloaded on 11 Oct 19), but has not been fully reflected in 1H19 results for aforementioned reason(s).

Delayed OTarget Price completions are a transitional effect of Jul 18 cooling measures, due to the more onerous 12% ABSD.

• Management expects revenue recognition impact to be transitional, and to normalise after four quarters. They noted that some of the buyers do not exercise OTPs immediately, as they require some lead time to dispose of existing property to avoid the more onerous 12% ABSD (vs 7% before implementation of cooling measures on 05 Jul 2018).
• In our view, this is also compounded by a slowing resale market (ie 9M19 volumes declined 43% y-o-y), as buying sentiment has been slow for large ticket items (due to uncertain economic environment).

Market leadership in project launches (c. 47.7% of units sold in 2Q19).

• PropNex closed the highest number of units against other joint marketing agencies for almost all of the top 10 best-selling projects from Apr to Jun 19 (ie over 90% of the time). Some of the projects which PropNex has leading market share in include Sky Everton (39%), Amber Park (33%), and Parc Esta (41%).
• Project Marketing still has a long runway. At end-2Q19, there were some 39,413 unsold inventory, which is equivalent to 4-5 years of sales (assuming 8,000-10,000 units sold p.a.). Of these, PropNex has also been appointed for 45 projects (with 17,000 units) that are likely to be launched between 2H19-2020. Post-cooling measures, agencies are also seeing commissions upped to 2-4% (vs 1.5-2% previously).

Widest agent network to see further growth, amid industry consolidation.

• As at 11 Oct 19, PropNex has maintained its position as the largest listed real estate agency with 8,406 sales persons. Compared with 1 Jan 19, PropNex has grown its sales force by 13.6% (or 1,006 salespersons), which can be attributed to strong pull-factors like its top-notch training, development programmes, and strong collaboration culture.
• The group has also launched the PropNex Personal Assistant (PA) mobile application (which includes features like auto posting of listings, open house, Grab Tagger), which can help its agents stay ahead of competition in making clients' real estate experience seamless and efficient.

Regional expansion; target of becoming top 5 player in any chosen market.

• In terms of regional expansion, PropNex has been expanding to Malaysia via licensing (with licensee PropNex Realty Sdn Bhd), as well as Indonesia and Vietnam via franchising. More Southeast Asian countries are on the group’s radar (ie where it has registered its brand as a trademark across the 10 jurisdictions).

Earnings Revision / Risk

• Raised our net profit estimates by 12% for 2019-20, as we factor in higher completions of OTPs for new sales in both years, implying a shift in revenue mix towards the higher-margin project marketing segment.

Valuation / Recommendation

• Upgrade to BUY with raised target price of S$0.56 (previously S$0.50), based on 2020F PE of 12x with reference to its closest comparable, APAC REALTY (SGX:CLN) (c.11x), also predominantly Singapore-focused, and similar in terms of commission structure and operating segments.

Share Price Catalyst

• Positive newsflow on new launches and take-ups.

Source: UOB Kay Hian Research - 14 Oct 2019