[NLG VN] Company update — Inside a circle of safety

NLG VN

BUY

TP upside +33%

Close 16 Jun 2019

Price VND 24,900

12M Target VND 33,200

Previous Target VND 36,200

Change -9.0%

NLG’s new unit launches have been slow in the two most recent years, whch is also the general situation of the industry. Consequently, we expect very few units to be delivered this year. Additionally, earnings from Mizuki Park are only recognized as income from joint ventures. Thus, NLG’s 2020 revenue guidance of VND1,520bn would represent a 40% YoY decline in revenues from 2019A, but its guidance for net income of VND820bn would only represent a decrease of 15% YoY.

Financial income to be the main earnings driver in FY20 due to the accounting impact of project transfers to JVs. NLG plans to transfer partial ownership of the Waterfront and Paragon Dai Phuoc projects to third parties. These deals are now in the due diligence stage, but management expects the ownership transfers to be completed by 3Q20, resulting in a gain of around VND620bn.

New units launched have been delayed due to the pandemic. NLG still plans to launch the Southgate, Mizuki Park, VSIP Hai Phong, and Waterfront projects in the near term. However, management now expects the launch dates to be delayed by one or two quarters due to the impact of efforts to control COVID-19. The company now plans to launch only two projects (i.e., Southgate and Mizuki Park) in 2020E, with the remaining two projects to be launched in the first quarter of 2021E.

Our view: We believe that NLG has been overly conservative in past cases in which it has transferred ownership in relatively centrally-located projects to JVs. However, this might be the appropriate strategy for the Waterpoint, Waterfront, and Dai Phuoc projects given their lack of compliance (in our view) with the first rule of real estate: “location, location, location.” Cooperating with foreign partners to develop these far-from-CBD projects should help to limit NLG’s operational and financial risks.

NLG also maintains a strong balance sheet, which is a key attraction especially in the current macro environment. Given the unclear potential of suburban real estate projects, we have changed some of our valuation assumptions to adopt a more cautious approach. Our per-share fair value estimate for NLG thus falls by 9.0% to VND33,200, which offers 35% expected 12-month total shareholder return. We thus maintain our BUY recommendation.

For the complete report, please access here: Company update-NLG-Inside a circle of safety