• 1H22 profit of $71.3mn was above our estimates, at 60.5%. The beat came from Property Holding (PH).
• Housing policy relaxation measures in Dongguan drove sales higher. Sales accelerated in the 1.5 months after the implementation of the relaxation measures.
• 6mn (S$55mn) in net auction proceeds recovered from RMB330mn in defaulted loans. The potential disposal of Pudong Mall, which we estimate in FY23 could see a further recovery of the defaulted loans.
• Upgrade to ACCUMULATE from NEUTRAL with unchanged SOTP target price of S$1.39. Catalysts for a TP upgrade are a recovery in the Chinese property market and its China hotel portfolio.

The Positives

+ 1H22 profit of $71.3mn above our estimates, at 60.5%. The beat came from PH. PH’s profit was driven by the acquisition of the Dutch Bilderberg hotel portfolio it acquired on 2 May 2022 and the overall improvement in RevPAR of its hotel portfolio due to fewer Covid-19 restrictions. All of its hotel properties reported positive profits for 1H22. Interim dividend of 1.1 Singapore cents was in-line with our forecasts.

+ Housing policy relaxation measures in Dongguan drove sales higher. Buyer sentiment in the Dongguan residential market improved after two rounds of housing policy relaxation by the local municipal authorities in May 2022. 190 residential units of its project in Time Zone were sold in 1.5 months after relaxation measures were announced. 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 2H22, the Hefu project and Phase 1.2 of its Time Zone development, both in Dongguan.

+ RMB271.6mn in net auction proceeds recovered from RMB330mn in defaulted loans. The Group recovered a portion of the proceeds in April 2022 from the mortgaged properties (Figure 2). The estimated net proceeds of RMB271.6mn however, is insufficient to cover the outstanding loan principal, default and penalty interest and other fees, resulting in an estimated shortfall of RMB160.4mn, with a book exposure of RMB112.8mn left to be collected. The Group will continue to pursue the shortfall via the court process. In other words, if the Group fails to recover such an amount, the negative P&L impact on the Group would be RMB112.8mn.

– Potential impairment of hotels in 2H22 as rates soar. With inflation rates in Netherlands (+8.6% YoY) and Germany (+7.5% YoY) soaring in June and July respectively, management has guided for potential impairments arising from higher rates. The ECB recently raised rates for the first time in 11 years, with a larger than expected rise of 50bps. That said, we expect the impairments, if any, to be offset partially by the continued recovery of RevPAR and occupancy in Europe.

Source: Phillip Capital Research - 4 Aug 2022