Residential Property

Residential Property 

 

Aggregate profit of the seven largest developers fell both YoY and QoQ, largely because buyers put off transfers in hopes of incentives. The bright spot was a 100bps widening in gross margin from product mix. We expect 4Q15 to be better QoQ for both presales and revenue, with more new launches; backlog already secures 93% of our 2015F. We select LH and LPN as top picks on a good 2016 earnings outlook. 

 

3Q15 weak as expected, but gross margin improved. The combined profit of the seven leading property developers (AP, LH, LPN, PS, QH, SIRI, and SPALI) dropped 13% YoY and 5% QoQ to Bt7.5bn in 3Q15 as buyers put off transfers in anticipation of government incentives, which put the brakes on revenue. The bright spot is the widening of 100bps QoQ in gross margin as developers booked a lower portion of low-margin products, particularly PS (Chapter One Modern Dutch) and SPALI (Supalai Wilington). 9M15 net profit was Bt20.5bn, a slip of 2% YoY and accounting for 66% of our full year forecast and 70% of consensus. 

 

Backlog heading south, but quality still good. Aggregate backlog was Bt152bn (88% condo and 12% low-rise) as of September, -20% YoY and -8% QoQ. Adding in the revenue recognized in 9M15 shows that backlog secures 93% of our 2015F and 29% of 2016F. Forecasts for 2015 are already fully secured at LPN, PS, and SIRI. LH’s and QH’s backlogs increased QoQ, indicating greater revenue recognition to come. The deposit/backlog ratio was stable at 8.5% as of September.  

 

Reducing new launches and presales targets. All of the top seven except SPALI cut their 2015 launches a total of 23% to Bt188bn (-20% for low-rise and -27% for condo),  -8% YoY, in recognition of weaker market sentiment than expected. However, aggregate presales was sliced only 6% to Bt184bn, +17% YoY, largely from QH and SIRI. We raise presales and revenue for LH in response to the better take-up rate than anticipated at recent launches, but cut both presales and revenue for QH. We lower SIRI’s presales by 10% but maintain revenue forecast.   

 

Better presales QoQ in 4Q15…  We estimate presales growth of 35% QoQ to Bt51bn in 4Q15 backed by more launches of both condo and low-rise. Condo presales will be amplified by new launches by AP (Aspire Pinklao), LPN (Lumpini Township Rangsit Klong 1 phase 2, Sukhumvit 76, and Bang Wak), PS (Plum Condo Central Station phase 2), SIRI (The Line Ratchthewi) and SPALI (The Loft Kaerai, Supalai Riva Grand). The rise in low-rise presales QoQ in 4Q15 will come from LH.   

 

… and revenue recognition. With a tax incentive in place as of October 28, 2015 and lasting until April 27, 2016, we expect smoother transfers and revenue growth of 23% QoQ to Bt58bn in 4Q15. LH and QH will have the best revenue growth both YoY and QoQ in 4Q15 backed by strong low-rise presales and condo backlog.   

 

Top pick: LH and LPN. We like LH for its turnaround story in 4Q15 and its growth outlook for next year. Adding to its attraction is the one-time gain of ~Bt800mn from an asset spin-off in 4Q15. We continue to like LPN for its good 2016 growth outlook.