Quality Houses

Quality Houses Plc (QH)
Operational turnaround.
We hosted a NDR for QH in Hong Kong: management
confirmed operational turnaround with intact growth path. Gross margin will improve
gradually, backed by cost control, new housing model and new construction
technology, with a switch to precast for SDH and tunnel for TH in the mid-low
segment. Revenue recognition will grow at a favorable rate of 30% this year and 20-
25% next. QH expects gross margin for new projects/model at 33-34%, giving an
average gross margin of 30-31% this year and 31-32% next, meaning upside against our
revenue growth of 27% in 2012 and 17% in 2013 with margin at 30.2% for 2012-2014.
Strategy change to bring presales below SCBS. From late 3Q12 QH is switching to
prebuilt for mid-low low-rise houses, and will launch condos only after completing the
EIA, rather than when it is 80-90% certain of approval. It will target only 30-40% condo
presales at the official launch and then stop presales, redesigning the marketing
campaign when the building nears completion – thus higher price and wider margin.
This has two implications: 1) new launches will be cut substantially from earlier plan of
Bt20bn in 4Q12; and 2) presales will reach Bt15-16bn, at or slightly above its full year
target, but slight below our earlier estimate of Bt17bn. However, this has no impact
on our earnings forecast since revenue recognition is based on title deed transfer.
Presales of Bt12.8bn in 9M12: Bt7bn low-rise and Bt5.8bn condo. QH expects lowrise
presales to meet its full year target of Bt9bn, as it needs to sell just Bt2bn in 4Q12,
in line with average monthly pre-built sales of Bt600-700mn. Condo presales will beat
target, already reaching Bt6.3bn including Bt500mn presales (30% of project value) for
The Trust Residence Hua Hin. For 2013, it looks for 20-25% presales growth.
End-3Q12 backlog Bt8bn. Bt2.8bn of backlog will be realized in 4Q12; this plus the
~Bt7.4bn booked in 9M12 secures 81% of our 2012 forecast. We believe that it can
meet this forecast when adding in the prebuilt sales. Backlog secures 24% of 2013 and
12% of 2014 forecasts. Its focus on prebuilt low-rise housing gives QH lower visibility
than peers who focus on condos, since by nature low-rise has a shorter business cycle.
Better performance in 3Q12. QH’s net profit is estimated at Bt1.1bn in 3Q12, tripling
YoY and more than doubling QoQ, supported by Bt750mn gain from asset spin-off to
QHHR, with Bt350mn from core business. Its net gearing is expected to improve to 1.5x
in 3Q12 from 1.8x in 2Q12. It will release results on November 12, 2012.
Maintain BUY and sector pick. QH is our favorite on its operational turnaround and
cheap valuation, trading at lowest PEG of 0.2X. Factoring in HMPRO’s dividend stock,
we raise our PT to Bt3.5/sh (Bt2.1/sh for investment and Bt1.4/sh for real estate) from
Bt3.3/sh. At our PT, QH is trading at undemanding adjusted PER of just 7x on mid-2013.
Maintain BUY and sector pick. QH is our favorite on its operational turnaround and
cheap valuation, trading at lowest PEG of 0.2X. Factoring in HMPRO’s dividend stock,
we raise our PT to Bt3.5/sh (Bt2.1/sh for investment and Bt1.4/sh for real estate) from
Bt3.3/sh. At our PT, QH is trading at undemanding adjusted PER of just 7x on mid-2013.