April 28, 2022

INITIATE COVERAGE

Market Leader Set To Benefit From Strong Growth In The Construction Sector

With a dominant position in the distribution of electrical products, Choo Chiang has benefitted from the strong growth in demand for its products, with 2021 EPS growing 190% yoy. We expect Choo Chiang to achieve EPS growth of 13% yoy for 2022, driven by higher sales of its own brand products and tie-ups with contractors for better order visibility. Also, divestment of its existing investment properties could unlock value. We initiate coverage with a BUY and target price of S$0.56, pegged to 12x 2022F mean PE.

Dominant position in distribution of electrical products with robust earnings growth.

Choo Chiang Holdings (Choo Chiang) has established sturdy relationships with building contractors, renovation contractors and interior designers. Today, it has a 60% market share in Singapore, where it operates 10 retail branches and retails over 30 third-party brands along with its own proprietary brands CCM and CRM. As the construction sector recovers, Choo Chiang is well-positioned to benefit from the increase in sales of electrical products. Total units of Housing and Development Board (HDB) and private resale units sold rose 18% and 82% respectively in 2021, and we expect renovation works to be Choo Chiang’s key growth driver. For 2022, we expect Choo Chiang’s EPS to grow 13% yoy.

Divestment of investment properties could unlock deep value. Choo Chiang owns 12 investment properties whose occupancy rates have since fully recovered. Also, recentlyimplemented cooling measures have diverted more liquidity into commercial properties. As of end-21, we estimate the fair value of the properties at S$15m vs their carrying value of around S$13m. Upon divestment of these properties, Choo Chiang could enjoy a capital gain of at least S$2m, representing around 20% of 2022 earnings with net proceeds of S$15m, roughly 20% of its current market cap.

Initiate coverage with BUY and a target price of S$0.56, pegged to 12x 2022F PE (fiveyear mean PE). We think that Choo Chiang’s current valuation of 8x 2022F PE and 2022 dividend yield of 6.3% are attractive, given the group’s dominant market share, strong EPS growth and huge net cash of around S$22m (around 30% of market cap).

STOCK IMPACT

Delays in construction to fuel short-term demand. HDB resale flats, a main driver of revenue for Choo Chiang, are expected to generate strong demand for Choo Chiang’s electrical products. HDB resale demand is expected to stay elevated, boosted by delays in the construction of new BTO flats. According to the Ministry of National Development, 85% of BTO projects are about 6-9 months behind schedule. Given an average construction cycle of 4-5 years, potential buyers have shifted to resale flats to avoid longer waiting times. This industry shift has driven demand for home renovations and, in turn, for electrical products and accessories. Suppliers like Choo Chiang will benefit.

Beneficiary of rising number of BTO launches, which will drive longer-term demand for electrical products. The HDB plans to launch up to 23,000 flats per year in 2022-23, a significant increase from the 48,509 flats launched in the last three years (16,170 flats per year). As HDB housing forms a significant part of Choo Chiang’s demand, the increase in BTO supply would help support and boost Choo Chiang’s revenue moving forward.

Expect gross margin expansion. As Choo Chiang targets to increase the contribution of its proprietary brands’ products, we expect gross margin to expand gradually to 30.0%/30.5%/31.0% for 2022/23/24. Coupled with strong revenue growth of 10%/8%/8%, this gross margin expansion will drive earnings growth of 13.4%/11.7%/11.6% for 2022/23/24 respectively.

Risks include: a) Potential supply disruption of key electrical products; b) termination of supply agreements by third-party suppliers, and c) slowdown in the construction industry due to more property cooling measures.

VALUATION/RECOMMENDATION

Initiate coverage with BUY and a target price of S$0.56, pegged to 12x 2022F PE, its historical five-year average PE. Our valuation multiple is conservative as it is at a 20% discount compared with peers’ average of 15x 2022F PE. We think that Choo Chiang’s current valuation of 8x 2022F PE and dividend yield of 6.3% are attractive, given its dominant market share position and attractive EPS growth profile of 12% CAGR for 2021-24 and huge net cash of S$22m (around 30% of market cap). Compared with its peers, Choo Chiang offers higher growth, ROE and dividend yield.

SHARE PRICE CATALYST

• Better-than-expected property demand, share buybacks, earnings accretive M&As.

BUY by UOB Kay Hian Research.  Share price closed at $0.37.