Slowdown in China to remain an overhang
? We see slowdown in GKE’s RMC operations due to weak sentiment in
China’s property sector and tougher macroeconomic conditions.
? Positively, warehouse utilisation and rates in Singapore should remain strong
in 2HFY22F due to strong demand for storage spaces.
? We project a weaker 2HFY22F net profit of S$3.0m (-22% hoh, -41% yoy).
Downgrade to Hold as slow China operations likely to remain an overhang.
Tight restrictions to negatively impact China RMC market
We expect GKE’s ready-mix concrete (RMC) operations to remain suppressed by weak
sentiment in China’s property sector. We believe developers may have slowed down
project executions in Wuzhou in 2HFY5/22F given near-term tight liquidity in the
construction sector. As such, we see weaker-than-expected volume sales from GKE’s
RMC plant in Wuzhou. In addition, we believe slow government approvals have delayed
the commencement of GKE’s new RMC and waste recycling plants in Cenxi. Accordingly,
we lower our FY22-24F infrastructural logistics PBT by 24-42%.
Warehousing remained strong in Singapore
Positively, Singapore’s logistics segment continues to perform well. We believe GKE’s
warehouses remained fully utilised in 2HFY22F following favourable industry trends. We
estimate GKE’s 2HFY22F logistics revenue was further boosted by contribution from
specialty chemicals subsidiary Fair Chem, which was acquired on 28 Jan 22; we see
potential cross-selling synergies from the acquisition (e.g. cross-pollination of customers)
in the medium term. We understand the group is still in the process of converting some of
its yard space into higher-yield chemical storage areas, which we now expect to only
commence contribution in 1HFY23F.
2HFY22 preview: a likely weaker hoh performance
We believe GKE’s 2HFY22F net profit was weaker both hoh and yoy due largely to a
sluggish RMC market in China as well as delayed commencement of its new initiatives
(both in Singapore and China). With our new assumptions, our FY22-24F EPS is reduced
by 19-29%, bringing our FY22F net profit forecast to S$6.8m (-41% yoy). We cut our fullyear DPS estimate to 0.2 Scts, assuming a dividend payout ratio of 25% and indicating
FY22F dividend yield of c.2%.
Downgrade to Hold at S$0.10 TP on near-term challenges
We downgrade to Hold due to near-term weakness for its China operations. Our SOPbased target price is lowered to S$0.10, mainly due to weaker earnings contribution from
China and lowered P/E multiple for the group’s infrastructure segment. Potential re-rating
catalysts include quicker government approval of new Cenxi plants, and faster recovery
in China’s construction activity. Downside risks include higher-than-expected credit
losses, and prolonged tight pandemic measures in China.