Tiong Seng Holdings - Tighter margins hitting bottom-line (DBSV)

BUY S$0.19

Price Target : S$ 0.24 (Prev S$ 0.31)

At a Glance

• 3Q11 PATMI of S$6.8m below; 9M11 forms 58% of our FY11F

• Construction orderbook of S$1.0bn provides strong earnings visibility

• BUY, TP lowered to S$0.24 based on 45% (35% previously) discount to RNAV

Comment on Results

Results in line. Tiong Seng reported a 41% y-o-y increase in topline to S$127.3m on the back of (i) higher recognition from its sales of development projects (S$48.0m, + >100% y-o-y) in China (phase 1 City Residences, totaling 440 units, 51,915sqm and 9 additional units at Tianmen Jinwan Building); and (ii) increase in sales of goods segment (Cobiax). Strong performances from the above 2 segments offset an 11% drop in construction revenues to S$75.6m due to decrease in volume of work completed with projects in Singapore and Papua New Guinea almost completed. Gross profit, however, fell 14% to S$10.5m due to tighter margins in China (which we reckon included certain upfront project costs) and lower margin construction projects in Singapore. Due to completion of JV projects during the quarter, the group also saw higher associate income. Taking the above factors, net profit declined 8% to S$6.8m.

Unrecognized revenues in China/Singapore to flow through in subsequent quarters; strong orderbook of S$1.0bn underpins earnings visibility over 2012-2013. While 3Q performance was below forecast, we note that Tiong Seng has yet to recognize (i) an additional 80 units from phase 1 City Residences and 9 units of Tianmen Jinwan Building that was sold; and (ii) a further S$20.2m from recently commenced construction projects in Singapore and PNG that should flow through in subsequent quarters. We adjust our FY11-12F earnings by 12-24% to account for lower margins for its City Residences project in China, and term out our construction recognition estimates.

Recommendation

BUY, TP reduced to S$0.24. Looking ahead, the group continues to offer strong earnings visibility supported by a construction orderbook of S$1.0bn. Our TP is reduced to S$0.24 as we widen our discount to 45% to RNAV (from 35% previously), in line with Singapore property peers.