DXG [BUY +27.3%] – Stellar 1H15 and New Project Acquisitions Boost Prospects

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September 8, 2015.

Dat Xanh Group (DXG), Real Estate broker and developer

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Net revenue grew by 82% and NPAT (after minority interest) grew by 191% in 1H15 versus same period last year to reach VND384 billion and VND153 billion, respectively thanks to outstanding brokerage growth and extraordinary income from 2 new project acquisitions at under book value; normalized NPAT growth was still impressive at 111%. Revenue from real estate development was minimal due to slightly delayed hand-over of Sunview Town. In order to support DXG’s continued growth, six new projects were acquired in 1H15, of which TK21 (Luxcity – district 7) launched sales in late August and Tam Thong (district 8) is expected to launch in 4Q15.

We raise our target price to VND 21,000 from VND 16,800 to reflect stronger brokerage and construction business growth, as well as to account for the potential from the six new projects that have entered the pipeline and now provide some earnings visibility. Based on the revised target price and today closing price of VND16,500, the expected total return on this stock is 27.3%. We raise our rating to BUY

Brokerage revenues grew by 167% y-o-y and reached VND 324 billion in 1H15, which was in line with the continued strength of the rebound in the real estate market. While brokerage revenues surpassed our forecast by 17%, real estate development revenues amounted to only 4% of our forecast (VND 384 billion) as Sunview Town hand-overs shifted from June to August.

DXG has acquired six new projects, which are expected to supply 372,427 m2 of apartment GFA to the market. Total estimated GDC and GDV are VND 4,206 billion and VND 5,043 billion, respectively, and these new projects will support the Company’s revenue pipeline for the next three years, albeit generating lower margins than completely greenfield projects developed by the company.

The Company totally divested two of its associates (Dat Xanh Dong A and Dat Xanh Tay Bac) at a combined book value of around VND2 billion to an undisclosed party. This move is expected to minimise the risks inherent in non-controlling entities.

In light of the 1H15 result and potential from six new projects, we revise our forecast and valuation; consolidated net revenue and NPAT for 2015 are each being raised by 4.5% and 6.4% to VND 1,613 billion and VND 258 billion, respectively. Please refer to page 6 for our assumptions.

Company at a Glance

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Revenue from real estate development to surge in 2H15

All 1,603 units of Sunview Town project have now been sold and DXG started to deliver units to buyers in August. We expect 55% of all units will be handed over by the end of 2015 and around VND 846B of revenue will be recorded this year from these hand-overs. The remaining 45% of the project will be delivered in the first half of 2016.
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New project acquisitions strengthen the Company’s revenue pipeline

The Company acquired six new projects in the first half of 2015, which is consistent with its strategy to grow through M&A. This strategy is underpinned by DXG’s solid market insights gained through its extensive brokerage network. The Company successfully brokered sales of 3,437 units from January to August 2015, equivalent to a market share of circa. 24% in the middle-end apartment segment, as disclosed by management. This leading brokerage market share allows the Company to keep its finger on the pulse of the market and originate acquisition opportunities.

Among the six new projects, two projects were acquired by buying equity in project companies, namely Tam Thong Real Estate (project Tam Thong 1,2 – owned 98.7%) and Xuan Dinh Trading, Investment and Construction (project Tam Da – owned 75%). It is worth noting that the acquisition of these two companies were made at prices lower than their fair values. As a result, an extraordinary income of VND 54 billion was recorded in the income statement of 1H15. The other four projects are direct assets purchases and have completed the transfer process except for project CT15 due to some legal matters.

The total acquisition cost across these projects was about VND 735 billion and DXG has already paid VND 384 billion as of the end of 1H15. The Company plans to acquire another 4.2 ha land area with around 276,280 m2 GFA for apartment development in the second half of 2015; however, further information on these acquisitions is yet to be disclosed.

Project TK21 launched sales in late August under the commercial name ”Luxcity” and is located in District 7. The project comprises one office tower and two residential blocks comprising of a total of 380 apartments and 6 shop houses. DXG expects construction to be completed before year-end 2016. On the opening sales day, deposits were received for over 100 apartments. The floor area for apartments range from 65m2 to 73.5m2 for two-bed-room units and from 82.6m2 to 85.2 m2 for three-bed-room units, with a price per sqm of VND23 million to VND26 million (estimates), which places them in the “premium mid-end” segment of the market.

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Capital raising is unlikely to cause dilution

As approved in the 2015 AGM resolution, the Company will issue a maximum of VND 1,000 billion worth of straight bonds with a tenure of maximum 5 years in 2015. Thus far, there was has been no further disclosure on the status of this bond issuance although DXG management has indicated that the process has already been initiated.

In addition, in late August, DXG’s BOM agreed to call an EGM in October or November of this year to vote on equity-raising plans. Although there is limited information on this, the Company has explicitly stated that new issuance will be for all existing shareholders. This provides some comfort to assuage concerns around DXG continuing to propagate its past practice of making dilutive private placements to selected shareholders. However, the jury is still out on this and so we apply a 10% discount to our RNAV valuation. We estimate that the Company will look to raise another VND500 billion in addition to the VND1,000 billion raised through debt issuance to fund the development of newly acquired projects.

Key assumptions

Previous assumptions for existing projects:

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Revised assumptions for existing projects:

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Assumptions for new projects:

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Valuation summary

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Recommendation history

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Financial Statements

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Quarter Results

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P&L Forecast

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VCSC Information

VCSC Rating System & Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.
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Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.
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Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3)Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.

Disclaimer

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