but retain our Buy rating. Housing demand remains firm, in contrast to what we had
anticipated just after the March 11 earthquake, and we think concerns about FY3/12
earnings have receded. Daiwa House is scheduled to announce FY3/12 guidance
on June 10, and we expect it to guide for growth in both revenue and profits.
Although earnings momentum is likely to slow in FY3/13 and out as gains on real
estate sales and some China business earnings drop out, we still think earnings will
be high and stable thanks in part to condominiums. The shares are trading on an
end-FY3/12E PBR of 0.85x and so continue to look significantly undervalued.
Valuations — Although we raise our earnings forecasts, we lower our target
EV/EBITA to 6.5x from 7.0x to reflect a decline in overall market valuations and a
likely slowing in earnings growth going forward. We previously based our target
price on our FY3/12 estimates, but now we base it on the averages for our FY3/12
and FY3/13 estimates.
China — Over the next three years the firm expects to post sales from the Suzhou
and Dalian Yihe Xinghai projects, but we think FY3/12 will be the peak in terms of
RP contributions. Sales of the portions of these projects already on sale are strong,
but there are concerns the real estate market could slow as the government has
launched measures to tighten credit. Accordingly, sales trends bear watching going
Development — Daiwa House has clear exit strategies in the housing J-REIT BLife
and a private logistics facility fund it set up, and this has resulted in stable gains on
sales of real estate projects it has developed. However, the pipeline of projects
available for sale from FY3/13 and out is somewhat lacking, and we think gains on
sales will decline.
Limited catalysts near term, but valuations still look low
Over the past year, Daiwa House shares are up 14%, and they have outperformed
TOPIX by 7% over the last month, 11% over the last three months, and 23% over
the last year. We think the market is starting to take into account the positives we
have been noting for some time, such as improvement in housing business margins
and the start of an earnings contribution from China.
While the shares have done well of late, we think earnings momentum will slow
from FY3/13 as 1) gains on real estate sales expected for FY3/12 and 2) some
earnings from the China business drop out. While we think earnings will remain high
and stable thanks to contributions from the condominium and existing homes
businesses, we see little in the way of positive catalysts in the near term.
We expect earnings will remain high and stable, with FY3/13E RoE of 7.6% and OP
of ¥95.7bn. However, the shares remain significantly undervalued, in our view, at an
end-FY3/12E PBR of 0.85x. We lower our target EV/EBITA to 6.5x from 7.0x to
reflect a decline in overall market valuations and a likely slowing in earnings growth
going forward. Also, we previously based our target price on our FY3/12 estimates,
but now we base it on the averages for our FY3/12 and FY3/13 estimates. We trim
our target price to ¥1,200 from ¥1,300 as a result, but with ETR above 15%, we
maintain our Buy rating.
China condominium business
Daiwa House is currently engaged in five condominium projects in China (Figure 5).
However, most of the units in the Dalian Yihe Champs-Elysees project had been
sold by end-FY3/10. Two projects, Suzhou and Dalian Yihe Xinghai, are scheduled
to be posted to sales over the next three years, but given expected completion
times we think peak contribution to RP will be in FY3/12 (Figure 3). We note that the
Dalian Yihe Xinghai project is handled by an equity-method affiliate in which Daiwa
House has a 50% stake, while the Suzhou project is handled by a wholly-owned
subsidiary. This means that proceeds from the Dalian Yihe Xinghai project will be
posted to equity in earnings (non-operating income) while the Suzhou project will
contribute at all levels, from sales to NP.
Sales of units in the two projects are strong: the contract rate for the portion of the
Suzhou project that is already on sale is 81%, and the rate for Dalian Yihe Xinghai
is 68%. However, there are concerns the real estate market could slow as the
government has launched measures to tighten credit. Accordingly, sales trends bear
watching going forward.
Domestic real estate development
Daiwa House has a clear exit strategy from its projects in the housing-related JREIT
BLife and a private logistics facility fund it set up (assets of about ¥100bn, little
equity participation by Daiwa House, with large domestic financial institutions as the
Daiwa House has posted stable gains on sales of real estate thus far, with total
sales of ¥44bn in FY3/11 and gains on sales of ¥8.8bn (¥3.8bn from housing
projects, ¥5bn from business facility projects). In FY3/12, the firm expects sales of
¥40bn and gains on sales of ¥10bn (¥4bn from housing projects, ¥3bn from retail
facility projects, and ¥3bn from business facility projects).
As of end-FY3/11, the book value of real estate in development was ¥30bn for rental
housing (including both real estate held by the parent and that held by SPCs),
¥88bn for commercial facility projects, and ¥49bn for business facility projects.
Investment has been restrained from FY3/10 as well, so the project pipeline for
potential sales of housing and commercial facilities that could generate unrealized
gains is likely to be somewhat lacking from FY3/13. We estimate gains on sales of
development real estate at ¥9.5bn in FY3/12, ¥6.2bn in FY3/13, and ¥6.2bn in
Daiwa House is scheduled to announce FY3/12 guidance on June 10, and we
expect it to guide for growth in both revenue and profits. This is likely to reassure
the market. We model sales of ¥1,736.9bn (+3% YoY) and OP of ¥94.7bn (+8%).
We note that we assume ¥60bn in sales of temporary housing (17,000 units),
producing zero OP.
We think the gross margin on subcontracted construction will decline 1ppt-2ppt YoY
due to a rise in product prices, but we think OP will rise thanks to 1) a contribution to
profits from the Suzhou project in China (in the others segment) and 2) a dropout of
the ¥8.4bn in valuation losses posted in FY3/11 (in the single-family housing
Although we think the built-for-sale condominium gross margin will rise 1.2ppt to
15.7% as the sales weighting for low-profit projects declines, we think sales volume
will fall 487 units YoY to 2,200 due to construction delays stemming from the
earthquake. As a result, we think condominium OP will fall 7% YoY to ¥5bn. As for
the health & leisure segment, we think the domestic resort hotel business (which
accounts for the majority of segment earnings) will be sluggish due to the
earthquake. Accordingly, we model a decline in revenue and operating loss.
For FY3/13, we model sales of ¥1,737.6bn (flat YoY) and OP of ¥95.7bn (+1% YoY).
The others segment looks likely to see a decline in earnings due to a smaller
contribution from the Suzhou project, while the commercial facilities segment should
see profits decline on a dropout of gains on sales posted in the previous fiscal year.
However, we think the condominiums segment will help drive profits up due to a
higher gross margin for built-for-sale condominiums and an increase in units sold.
Non-operating income looks set to rise ¥3bn YoY to ¥14.4bn, as the Dalian Yihe
Xinghai project handled by an equity-method affiliate begins to contribute to
Daiwa House Industry
We rate the shares of Daiwa House Buy/Medium Risk (1M) with a target price of
¥1,200. Despite an FY3/13E RoE of 7.6% and FY3/13E OP of ¥95.7bn, end-
FY3/12E PBR is 0.85x, which looks low from an historical standpoint. The company
is slated to announce FY3/12 guidance on June 10; we expect it will guide for
revenue and profit growth, and that this may well reassure the market.
We use adjusted EV/EBITDA to value the two housing majors. We calculate this as
(market cap + interest-bearing debt – cash on hand)/(OP + depreciation + interest
and dividend revenue).
We adopt EV/EBITDA for two reasons: 1) it measures real profit generating
capabilities as it strips out the impact on profits of extraordinary gains and losses
and 2) it reduces the impact of different accounting standards for things like
Our target price of ¥1,200 is based on an EV/EBITDA of 6.5x (Daiwa House has
ranged between 4.0x and 11.0x over the last 10 years) applied to the average of our
estimates for FY3/12 and FY3/13. In addition, our target price equates to a FY3/13E
PER of 13.3x (10x-30x over the past ten years) and a PBR of 1.03x (0.6x-1.8x over
the last ten years) based on our end-FY3/12 BPS forecast.
Risks to our target price are 1) a collapse in real estate prices, resulting in lowerthan-
expected external sales of development projects; 2) a lack of recovery in
housing prices, keeping margins for the built-for-sale land and condominium
businesses flat; 3) prolonged order weakness for commercial and business &
corporate facilities as companies remain cautious about capex; and 4) a reduced
earnings contribution from the overseas operations on a slowdown in the Chinese