China slowdown an overhang

■ 1HFY5/22 net profit of S$3.8m (-42% yoy) was impacted by weaker China operations, with lower volumes and credit loss provision during the period.
■ Nevertheless, we expect further growth in Singapore’s logistics segment, with continued optimisation of warehouse yield and contribution from new M&As.
■ Reiterate Add, with a lower SOP-based TP of S$0.16.

1HFY5/22 dragged down by weaker China operations

GKE Corp’s 1HFY5/22 net profit of S$3.8m (-24% hoh, -42% yoy) was below our expectations, at 27% of our FY22 forecast. Excluding effects of government grants, 1H net profit declined 12% yoy. The miss was mainly due to weaker-than-expected China operations, which was hurt by lower ready-mix concrete (RMC) volumes, delayed commercialisation of its Cenxi plant, and a credit loss provision of S$0.9m. Meanwhile, its operations remained strong in Singapore, as warehouse utilisation remains optimal and
demand for transportation services strong.

Logistics segment continues to enjoy industry tailwinds

Logistics segment’s 1HFY22 revenue/PBT rose 16%/19% yoy, driven by continued tenant mix optimisation and positive rental reversions. GKE’s warehouses remain fully utilised, and management is currently converting some open yard space into chemical storage areas to further optimise yield. We like the recent acquisition of Fair Chem (to be completed end-Feb 22), as it provides GKE with: 1) deeper technical expertise in the tolling and specialty chemical manufacturing business, 2) revenue synergies through cross-selling, and 3) expansion in warehouse capacity. The earnings-accretive S$12.5m acquisition was
funded by cash, and we believe valuation is attractive at 7.4x trailing P/E.

But we see tougher operating environment ahead in China

We turn more cautious on the infrastructural materials segment in China and now forecast segment PBT to decline 45% yoy in FY22F, as we believe the near-term tight liquidity environment will impact the construction industry’s supply chain. GKE mentioned it is carefully monitoring the situation and has taken active steps to minimise credit risk exposure. GKE’s other initiatives in China are starting to contribute positively in 2HFY22F, including its waste material recycling plant (commenced operations in 2021 and contributed S$0.1m in share of associate profits in 1HFY22; likely to further ramp up in 2HFY22F) and limestone mining rights.

Reiterate Add at a lower TP of S$0.16

We lower our FY22-24F EPS by 16-41% to reflect lower revenue and margin assumptions on the China infrastructure materials segment. Nevertheless, we remain optimistic of GKE’s longer term prospects in China, given its continued urbanisation plans in lower tier cities. Reiterate Add, with a lower SOP-based TP of S$0.16, implying 11.7x CY22F P/E. Potential re-rating catalysts include faster recovery in China’s construction activity. Downside risks include higher-than-expected credit losses.