Niche property developer in China’s lower tier cities. Based in Southeastern China, namelythe provinces of Jiangxi, Zhejiang and Guangdong, Pan Hong Property Group Limited (Pan Hong)is a niche residential property developer. Targeted at the middle to upper class-middle incomelevel residents, Pan Hong’s strategy is to focus on China’s developing cities, or lower tier citieswith immense growth potential.

Proven track record in Zhejiang province. Since 1999, Pan Hong has completed theconstruction of eight residential cum commercial developments in the cities of Huzhou andHangzhou, covering total GFA of 477,000 square metres (sm). To date, all of these projects havebeen fully sold. These historically healthy take-up rates reflect the quality of and consistentdemand for Pan Hong’s developments. In the same vein, this has boosted Pan Hong’s reputation,in turn giving it the confidence to venture beyond Zhejiang province.Commanding presence with sizeable landbank.

At present, Pan Hong has a substantiallandbank of 2.9m sm in GFA, spanning across seven different cities. A total of nine residentialprojects would be borne out of Pan Hong’s landbank, of which 59% are already in thedevelopment stages, while the remaining 41% are still undeveloped. We deduce that these ninedevelopments would be completed and realisable within the next two to four years, implying avisible run of projects over the short to medium term for Pan Hong. Using its historical projects’take-up rates (90 - 100%) as a benchmark, they should serve as an evident source of Pan Hong’sheadline numbers until 2012.

Favorable macroeconomic fundamentals, but risks are not non-existent. While favorablemacroeconomic fundamentals underpin the growth potential of Pan Hong’s lower tier cities, suchas robust economic growth, rising urbanization and increasing annual disposable incomes, as wellas a lack of quality and affordable housing, risks are not non-existent for the company, especiallyin the near term. For one, Pan Hong has a lumpy revenue model, which is not mitigated by stableincome-producing investment properties. It is also subjected to the cyclicality of the propertysector, as well as the ongoing credit crunch. Recent moves by competitors to slash selling pricescould also lead to Pan Hong to inadvertently cut prices as well just to match the lowered prices.

Initiate with NEUTRAL – S$0.25. With a current net gearing ratio of 0.33x and cash position ofRMB111.9m, Pan Hong is equipped with a relatively strong balance sheet. More importantly, itscash and undrawn facilities of RMB80m are more than sufficient to meet its ST loan obligationsdue in Jun – Jul 09. While we are confident of China’s medium-long term real estatefundamentals, especially within its lower tier cities, we admit that the sector’s near-term outlook isplagued with unfettered challenges and uncertainty.

The credit crisis and macroeconomicslowdown have now spread their claws over countries worldwide, and given the intrinsic linkage ofthe property sector to these two key elements, it is certainly not music to the ears for mostproperty developers. In view of the above, we have taken on a conservative stance in deriving ourbase case RNAV for Pan Hong, assuming a further 5% decline in selling prices for the remainingof 2008, 20% dive in 2009, with a slight recovery of 2% in 2010 and steady growth of 4% p.a. forthe subsequent three years. Applying a further 50% trough discount, we arrive at our RNAV-pegged fair value for Pan Hong at S$0.25. Initiate with NEUTRAL. Share price catalysts includefurther expansionary policies in China and recovery of global and China’s property sector.