Quality Houses

Quality Houses Plc (QH)   

QH has set an ambitious 2015 presales goal of 25% growth and with revenue growth of 20%, lining up with our forecasts. We see this as achievable, underwritten by a 40% jump in new launches made possible by its aggressive land purchases last year. QH is trading on a cheap valuation of -0.5SD PER of 8.9x of 2015 and we BUY.   

 

Targets 25% presales growth in 2015. QH presented its 2015 business plan, which lines up with our forecast: presales of Bt34.1bn, with SDH at 52% (Bt12.5bn, +16%), condo at 25% (Bt6.0bn, +42%) and TH at 23% (Bt5.6bn, +37%). Though other developers are paring back, QH is moving against the tide, expanding its new launches by 40% to Bt33.0bn; Bt11.2bn of this is SDH (+84%), Bt17.5bn condo (+120%) and Bt4.2bn TH  (-55%). Backing this is last year’s active land acquisition despite political uncertainties; it may buy eight more land plots in 1Q15, which could open by 4Q15, giving upside. 

 

We see this high growth as achievable. We base this on the fact that most of the condo presales growth will come from Q Sukhumvit, with a reasonable take-up rate forecast of 15%, and that the low-rise presales growth of 22% implies take-up rate of 33% of total available stock (active projects plus new launches). Though this is higher than last year’s 28%, it is still below the record high of 37% in 2008. 

 

All eyes on Q Sukhumvit. QH will launch this very high-end project by March. It expects a 15% take-up rate or Bt1.5bn in presales (6% of total presales). It has already been granted a higher floor area ratio (FAR) of 12:1 (versus 10:1) based on the revised zoning law, raising project value to Bt9.4bn from Bt8.0bn and widening gross margin to 35% from 33-34%. This project will be completed and booked as revenue by 2018.  

 

Targets 20% revenue growth, in line with our forecast. The company expects growth to come largely from SDH and TH. It says the slow growth in condo revenue is off last year’s high base from faster condo deed transfers than expected. There may be some upside to net profit as it expects gross margin to widen to 34.0% from 33.0% vs. the 32.8% we expect and SG&A to come down to 15.0% from 16.0-17.0% vs. our 17.0%, but we prefer to leave this as an upside risk.  

 

Increase focus on mid to low end and upcountry. QH aims to raise its presence in the mid to low income segment to 77% from 75% of total revenue and expand upcountry to 23% from 13%. Outside of Bangkok, its revenue comes mainly from Chonburi and Rayong provinces, where there are a large number of industrial estates and a large service industry, providing real demand from those from other provinces working there. 

 

New CEO strategy. Khun Chadchart Sittipunt aims to leverage his knowledge of infrastructure and mass transit investment to QH’s future land acquisition strategy. He will develop new products along new mass transit routes to serve a new client group. He will work to improve the company’s profitability by reducing unnecessary cost and expanding margin on land, which can be done by buying the land a few years ahead of project launches. He promises to improve product quality and after-sales service.