Quality Houses

Quality Houses Plc (QH)

QH shares are up 13% YTD – against a much higher 31% jump in value of investments in the same period. QH is thus still cheap, trading at 23% below its investment value – the widest gap since January 2014. Low-rise presales are on track and we leave forecast unchanged. There is a near term share price catalyst in the extra gain it will book in 3Q16 from the LHBANK deal. We have rolled TP over to mid-2017, raising it to Bt3.8. BUY.

Low-rise presales on track. Low-rise presales were Bt7.7bn in 1H16, +7% YoY, despite launching only four projects worth Bt4.6bn in the period. This accounts for 45% of its full year target and our forecast. We expect presales to pick up in 2H16 on more new launches (six projects worth Bt9.3bn) and new products. New products will be introduced in both new and old projects; these will include more modern models with better and more functional designs, glassed roof and solar & LED lighting panels to save energy, better security, twin town home as an economy package, attic for limited TH (extra floor plan), and more outdoor space to create more of a community feel. Management said these products will provide good gross margin of 31-33% versus 28.9% in 1Q16, suggesting a better gross margin in 2H16.

But condo may miss. Condo presales reached just Bt640mn in 1H16, a huge fall from Bt3.2bn in 1H15 and only 13% of its full year target (Bt4.0bn). Behind this is no new launches and slow demand in the provinces, where QH has substantial finished stock of Bt2bn. It will launch a small condo -

Q House Chiangrai

 worth Bt582mn – in 3Q16 but

this will not boost presales much. We feel meeting its condo presales target will be challenging despite the re-launch of

Q Sukhumvit

, its high-end condo. It has hopes for

better sales after signing a contract with BTS that will allow it to connect the condo entrance with Nana station. 

Revenue unchanged. We maintain our revenue and core profit forecast of Bt3.3bn for 2016 (+7% YoY) and Bt3.7bn (+13% YoY) for 2017, since the lower condo presales than anticipated will not necessarily impact revenue recognition.

Q Sukhumvit

will secure income in 2018-2019. Current backlog of Bt11.7bn secures 57% of our 2016F. Our forecast is ahead of consensus by 5% for 2016 and 9% for 2017.

Booking extraordinary gain from LHBANK deal and maintain equity income recognition method. QH’s management intends to continue booking LHBANK via equity despite the dilution of its stake to 21.3% from 13.7% upon capital injection from its strategic partner, CTBC Bank. This is due to the fact that it has retained controlling power. We estimate an extraordinary gain of Bt818mn from the deal in 3Q16.  

Maintain BUY with new TP of Bt3.8. We raise QH’s sum-of-the-parts valuation to Bt3.8/share (Bt1.9/share for real estate business and Bt1.9/share for investments) from Bt3.3/share as we factor in the changed value of its investments and roll over to mid-2017. With attractive TTR of 52%, we maintain our BUY rating.