Shares in Farglory Land Development Co (遠雄建設) yesterday plunged by the 7 percent daily trading limit, with analysts suggesting that investors avoid the stock until the result of a bribery case involving its chairman has been finalized.
While the scandal might only have limited financial impact on Farglory Land in the near future, the company faces the possibility of stalled momentum in the long term due to its business model, which relies on government-run urban renewal projects, analysts said.
Farglory Land shares dropped by NT$3.5 to close at NT$46.5, their lowest closing level on the Taiwan Stock Exchange since Feb. 6, after chairman Chao Teng-hsiung (趙藤雄) was detained by prosecutors a day earlier in connection with a case of alleged bribery during bidding for a public housing project in Bade City (八德) in Taoyuan County.
Farglory Land won the Bade project for NT$1.3 billion (US$43.2 million) in an auction in April. Because Chao is being investigated following allegations of a bribe of NT$16 million to former Taoyuan County deputy commissioner Yeh Shih-wen (葉世文) to win the contract, the county government decided on Monday to terminate the contract, which would have allowed the company to develop affordable housing worth about NT$7 billion, with the project scheduled to be completed in 2016.
“Although the monetary impact of the now nullified contact to Farglory is relatively limited, we still think the charges and uncertainty with management will severely weigh on Farglory’s share price,” PrimAsia Securities Co analyst Kai Chen said in a note yesterday.
Farglory Land is one of the nation’s leading real-estate developers.
Farglory FTZ Investment Holding Co (遠雄自貿港投資控股) also dropped by the daily limit, while other construction company stocks in the local bourse fell, causing property shares to fall 1.29 percent yesterday compared with the broader market’s 0.52 percent gain.
Compared with other construction stocks, Farglory Land’s investment risks are likely to increase significantly, especially in light of the firm’s focus on public urban renewal projects this year, Yuanta Securities Co (元大證券) analyst Chen Yen-liang (陳彥良) said in a separate note.
The company is part of four major construction firms that in 2011 won contracts from the Construction and Planning Agency to build affordable housing near a planned “A7” MRT railway station in New Taipei City’s Linkou District (林口).
The other three companies participating in the A7 project, which is expected to be completed next year, are Huang Hsiang Construction Co (皇翔建設), Lih Pao Construction Co (麗寶建設) and Advancetek Enterprise Co (名軒開發).
Because Yeh was director-general of the agency when the 3,960-unit A7 project was contracted out, there has been speculation that the government might also terminate that contract, which is forecast to cause an earnings erosion of NT$2.8 per share for Farglory Land next year.
Chen said that he does not see any signs that the government might nullify the A7 contract with Farglory Land.
However, the bribery case certainly increases risks for the company’s future urban renewal projects, he said.
Last week, the company won an urban renewal project in Greater Tainan for NT$100 billion. Overall, the company has a landbank of 34,570 ping (114,281m2) in New Taipei City, Hsinchu, Greater Taichung, Chiayi and Greater Tainan, according to company data.
“Once this business model gets stalled, the company’s earnings prospects over the next five years will be affected,” Chen said.
In the first three months of the year, Farglory Land reported NT$1.18 billion in net income, or NT$1.42 per share, on sales of NT$4.62 billion.
For the whole of last year, net income was NT$6.69 billion, or NT$8.66 per share, with total revenue of NT$25.12 billion.
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