Quality Houses

Quality Houses Plc (QH) 

QH remains the leader in low-rise and is poised to grow profit 20% this year, helmed by a new CEO determined to improve the company’s profitability and reduce leverage. QH also has upside risk from Q. Sukhuvit that includes a wider margin. Valuation is undemanding, trading at a discount to historical average PER of 8.5x. We remain BUYers.  

2014: beat on revenue, but miss on presales. QH is believed to have transferred ~Bt20bn last year, +8% YoY, slightly above our forecast and its target. We leave this as an upside risk. On the other hand, the total presales of Bt19.3bn at end-2014 disappointed slightly, pulled down by condos. Low-rise presales bettered peers with good growth of 23% to Bt15bn versus the industry’s average of 10%. But sluggish condo presales (-48% to just Bt4.3bn) sank overall presales into a contraction of 5%, slightly below our forecast and 10% below its target. 

Growth of 20% in 2015. Matching our forecast, QH targets 20% revenue growth with emphasis on low-rise houses and on Chonburi province. It aims to raise revenue from the provinces to 20% of total revenue this year from 15% last year. We see Chonburi as better than other provinces in terms of demand, since it has a large number of industrial estates and a large service industry, providing real demand from those from other provinces working there. QH has exposure in Pattaya, which is an area in which one developer has seen cancellation problems, but this project contributes less than 2% of QH’s total real estate revenue. Presales are expected to grow at least 20%, with upside risk from presales of high-end Q. Sukhumvit.  

Q. Sukhuvit launch postponed. The launch of this large project will be put off to late 1Q15 or early 2Q15 as QH has decided to wait for a revised zoning law that will raise the floor area ratio (FAR) to 12:1 from 10:1 now. This would expand the project value to Bt10bn from Bt8bn and gross margin to more than 33-34%. In this case, we see the delay as a positive move. 

New CEO. Khun Chadchart Sittipunt took the helm on January 1, 2015. He is unlikely to make immediate changes in the company’s strategy, but will rather look for ways to build profitability, reduce unnecessary expenses and debt, and utilize his knowledge about infrastructure in future land acquisition. With his solid educational background and some experience in residential estate, we believe he will run QH smoothly.  

Khun Chadchart holds 1st Class Honors of Bachelor of Civil Engineering from Chulalongkorn University and Master of Science in Civil Engineering (Structure) from Massachusetts Institute of Technology and a Ph.D. in Civil Engineering from University of Illinois at Urbana-Champaign. He gained experience in real estate as an independent director for LH in 2008-2012, plus was the Minister of Transportation in 2012-2014. 

Cheap valuation. Despite last week’s share price rebound, it is trading at a discount to historical average PER of 8.5x. With a good 20% growth outlook, its TTR is attractive at 49%.