China improvement not apparent yet
1HFY24 net profit of S$1.9m (+90% yoy) missed on weak China contribution. New DG business in SG had started to contribute positively since Nov 2023.
We expect China RMC revenue to remain weak in the near term as property sales could continue declining in 2024F, hindering RMC sales volumes.
Reiterate Hold at a higher SOP-based TP of 8.0 Scts as we roll forward our valuation year to CY25F.
1HFY5/24: earnings recovery weighed by credit provisions
GKE Corp’s 1HFY5/24 net profit of S$1.9m (-35% hoh, +90% yoy) came in below our expectations, at 32% of our FY24F forecast. The miss was driven by weaker-than-expected business recovery for its China ready-mix concrete (RMC) business, resulting in: 1) lower than- expected revenue growth, and 2) credit loss provisions of S$1.2m made.
Singapore remains the sturdy pillar
1HFY24 warehousing and logistics revenue grew to S$45m (+2% hoh, +5% yoy), on the back of: 1) stronger chemical business contribution (both Marquis and Fair Chem), 2) warehouse rental reversions (c.+3-5% yoy), and 3) new contribution from dangerous goods (DG) storage services. Warehouse occupancies remained close to maxed out in 1HFY24, while tenant optimisation efforts were continuously ongoing. Management shared that its recently converted DG yard had commenced operations as of Nov 23. As DG cargo likely commands higher rental yield (compared to normal cargo), we expect FY24-25F Singapore PBT growth to be driven by improvement in DG occupancies.
China operations looking lacklustre
Revenue from GKE’s China RMC business remained lacklustre in 1HFY24 (-3% hoh, flat yoy), as construction activities in Wuzhou saw little improvement, in our view. Credit loss provisions narrowed yoy, but still came in at S$1.2m (+371% hoh, -36% yoy), which we think reflects GKE’s guarded sentiment towards domestic developers. GKE shared that building activity levels saw little growth YTD, reinforcing our view that RMC volume recovery in FY24F would likely be bumpy. Our China property analyst expects property sales to remain weak and continue declining in 2024F, though we do see green shoots with policymakers becoming more proactive in helping the sector in a bid to prevent further deterioration. We lower our FY24-26F PBT contribution from the China RMC business, as we adjust our assumptions on: 1) higher credit loss provisions, and 2) slower-thanexpected pace of revenue recovery.
Reiterate Hold as China recovery is still uncertain
We lower our FY24-26F EPS by 3-14% on account of lesser contribution from China. We roll forward our valuation base year to CY25F, raising our SOP-based TP to 8.0 Scts. Upside risks: a quick recovery in China construction activities, and stronger margin expansion from DG contribution. Downside risks: prolonged turmoil in China’s property market, and higher credit losses.
