OCBC Report - 02 Jan 2008

Pan Hong Property Group Limited: Panning out well in China's lower tier cities

Summary: Pan Hong Property Group Limited's (Pan Hong) development projects are mainly in Tier 2 and Tier 3 cities, and these are currently enjoying rising economic growth prospects, soaring urbanization, growing annual disposable incomes and a lack of quality housing.

Pan Hong's substantial land bank of 3.5m sqm ranks starkly higher than its two SGX-listed peers, suggesting a more visible run of projects over the medium term. Nanchang Honggu Kaixuan (NHK) is expected to account for the bulk of Pan Hong's FY07 and FY08 revenues.

Phase 1's over 90% take-up rate should translate to higher ROE, lower gearing ratio, highly certain earnings visibility and growth.

Phase 2 is expected to follow Phase 1's optimistic demand upon its launch in mid-08. We are positive on the growth story in China's lower tier cities, and believe that Pan Hong is well positioned to ride on the sustainable demand for middle to upper-middle residential developments in China.

We initiate coverage on Pan Hong with a BUY rating and a fair value estimate of S$1.15, based on 5% discount to our estimated NAV of S$1.21. (Brandon Lee)

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NEWS HEADLINES

• PM Lee Hsien Loong said on Monday that the Singapore economy grew 7.5% in 2007, marking the fourth straight year of strong growth.
• The Income Tax Board of Review has ruled that a serviced apartment operator's rental income should be treated as normal recurrent business income and not as income from property investments, allowing operators to claim deductions on expenses and capital allowances beyond the actual income for the year.
• Air China parent, who owns more than 12% of China Eastern's stock, called SIA's US$920m investment unfair and too cheaply priced in the first formal expression of its views.
• China's State Council publicized a new policy aimed at cushioning the impact of the unified corporate income tax law that took effect yesterday. The cabinet said that the new law would be phased in over 5 years. Companies that currently face a 15% income tax will pay 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012.
• SingTel said on Monday that it would record an exceptional gain of around S$118m and post a S$96m loss from the disposal of a stake in a Taiwan company.
• UOB plants to up its stake in Vietnam's Southern Bank from 10% to 20%, pending approval from the State Bank of Vietnam.
• Babcock & Brown Structured Finance Fund will acquire a beneficial interest in 35% of the shares in Babcock & Brown Rail Invts Ltd from Babcock & Brown Grp for S$11.94m, funded by its corporate debt facility. It is also acquiring additional music copyright catalogues for US$24.3m funded with debt of US$13.0m.