Question

Question 1

Based on the article below, suggest the possible implicationsof Hua Yang Bhd’s gearing situation on the company’s:

1.Current borrowings

2. additional borrowings in the near future

HUA YANG ACQUIRES FOUR PARCELS OF LAND IN KAJANG FOR RM70MILLION

Hua Yang Bhd (Dec 28, 60.5 sen)

Upgrade to market perform with a lower target price (TP) of 63sen: Yesterday, Hua Yang Bhd announced that it is acquiring fourparcels of freehold land measuring 19.8 acres (8ha) for a totalconsideration of RM70 million or at RM81.3 per sq ft (psf). Theland is adjacent to the Kajang 2 development and is accessible viaJalan Reko via the Kajang SILK Highway.

We were surprised with Hua Yang’s land banking move as we werenot expecting any land banking activities for the year, given itshigh net gearing of 0.70 times (as of second quarter ended Sept 30,2017 [2QFY18]).

Hua Yang’s management estimates a gross development value(GDV) of RM800 million for these four parcels of land, which webelieve is fair as it would translate to an average selling priceof RM300 psf derived from four times plot ratio, enabling them toposition its product below RM500,000 per unit in the Klang Valleyfor the affordable segment. In terms of land cost, we deem that itis reasonable as the land cost to GDV ratio of 8.8% is still withinour comfortable range of 15% to 20%.

While we are positive with its land bank replenishment, weremain worried about its high net gearing of 0.70 times (as of2QFY18) which is set to reach 0.82 times upon completion of thedeal.Going forward, we are not expecting any more major landbanking activities as we believe that Hua Yang needs to focus onrealising their pipelines and also future plans with Magna PrimaBhd.

Considering its unbilled sales, which have fallen to ahistorical low of RM209 million, which is only sufficient foranother one to two quarters, we opine that Hua Yang should be moreaggressive driving its sales from launched projects that received aslow response from the market, inspite of its positioning as anaffordable housing player (more than 50% of products priced aroundRM550,000 per unit) in the Klang Valley, Penang and Johor.

As we believe that the average selling price of RM300 psf forits Kajang land is reasonable in the long term, we think that HuaYang will need to step up its marketing efforts, as it is set toface stiff competition from other developers in Kajang, given thatthe current pricing for condo/apartments ranges between RM240 psfand RM260 psf.

Following its land banking move, we maintain our financialyear ending March 31, 2018 (FY18)/FY19 earnings for now as we areonly expecting the earliest launch from these four parcels of landto take place in FY20.Risks to our call includeslower-than-expected sales, higher-than-expected administrativecosts, negative real estate policies, less conducive lendingenvironments, and lower-than-expected dividend payout. — KenangaResearch, Dec 28

Extracted from The Edge Financial Daily, on December 29,2017

Retrieved from:http://www.theedgemarkets.com/article/hua-yang-acquires-four-parcels-land-kajang-rm70m

Question 2

Based on the article below, tt has always been companies’ aimto have a favourable receivables turnover ratio. Discuss differentstrategies that Midas Holdings can implement in order to reduce itsreceivable turnover in days.

HOT STOCK: MIDAS UP ON S$7.7 MILLION MARRIED DEAL

Wed, JAN 24, 2018 - 11:11 AM

SHARES of Midas Holdings - a maker of aluminium parts used intrains - surged on Wednesday, following a S$7.7 million marrieddeal of some 44 million shares at S$0.175 a piece, two traders toldBT. The buyers and sellers remain unknown, the sources said.

The stock rose 1.1 Singapore cents to S$0.171 in early morningtrading, or up nearly 7 per cent. More than 200 million shareschanged hands as at 11.24am. It was the most actively tradedcounter on the Singapore Exchange (SGX) on Wednesday morning. Thetrading volume on Midas on Wednesday is about five times itsaverage three-month volume.

This follows news earlier this month that Midas' associatecompany had clinched 2.68 billion yuan (S$552 million) of newcontracts. CRRC Nanjing Puzhen Rail Transport Co, in which Midasholds a 32.5 per cent stake, secured the contracts to supply metrotrain cars in China.

The first contract is worth 1.15 billion yuan, and was awardedby MTR Technology Consultation (Shenzhen) Co for the third phase ofthe Shenzhen Line 4 project. Delivery is set between February 2019and September 2020.

The second contract, for the first phase of the Hangzhou MetroLine 6 project, is worth 1.09 billion yuan. The third contract,worth 440 million yuan, is for the Hangzhou-Fuyang Inter-city MetroProject. The second and third contracts were jointly awarded byHangzou Metro Group Co and Hangzhou Hangfu Rail Transit Co. Bothcontracts are due between September 2018 and August 2019.

For the three months ended September 2017, Midas reported thatrevenue rose 11.5 per cent to 458.5 million yuan, and net profitrose 6.6 per cent to 24.1 million yuan.

Trade receivables, however, rose 8.7 per cent to 2.4 billionyuan over the same period, drawing a query from the SGX. Inresponse to the regulator's questions, Midas said that averagetrade receivables turnover was 268 days as major customers in Chinahave been slow in payment since the railway accidents in2011.

Extracted from The Business Times, 24 January 2018