PIK Group - Modular Facility Site Visit Key Takeaways

PIK Group held a site visit to production facilities for its so-called UNITS division in Moscow on Friday. They are located at the company's former Ochakov reinforced concrete product plant in southwest Moscow. The division now focuses on assembling bathroom pods with interior finishing and built-in toilets, baths, etc. In addition, several months ago it started piloting the production of whole housing modules there. During the site visit, PIK demonstrated the assembling process and gave an overview of the production plans for the division. The key takeaways are below.> PIK has two production shops for bathroom pod assembly at the Ochakov site with annual capacity of 50k and 100k units. The first shop was launched in 2017 and the second in the middle of this year. The assembly lines were created and built by PIK. Currently, the site can produce a total of 70k annually, while the company plans to reach the installed capacity of 150k by 1Q22, which will require more workers. The current staff is 2.3k people, and according to the company's estimates only another 800 more workers are required to double production. That is because the second line is more automated. In the long run, the company plans to make the assembly fully automated.> Most of the bathroom pods are consumed by PIK's development division, while external sales account for just 5% of total volumes. At the full capacity, PIK expects its sales structure to include 90k pods (60%) for its development division, 40k for the Moscow renovation program (PIK's commercial construction division) and the remaining 20k (about 13%) for sale to third parties.> The average cost of a typical bathroom pod is R120k and the average selling price to external customers R180k, though the actual cost and price depend on the configuration. Gross sales amounted to R3.5 bln including VAT (R2.9 bln excluding VAT) in 2020, while 2021 revenues are expected at R5.5 bln (R4.6 bln excluding VAT), up 57% y-o-y. (Only a small portion of these sales are reflected in reported revenues, as the bathroom pods are mainly consumed internally.) The development division acquires the pods at a price close to the production cost. According to the company's estimates, the use of assembled bathroom pods is 20% cheaper than finishing and equipping bathrooms in a built house. > The housing module assembly line at the Ochakov site was launched this past summer. Its current capacity is 680 modules per year. One typical module includes a one-bedroom apartment and bathroom. In November, PIK is planning to build the first pilot house of nine floors and 130+ apartments for its largest project, Ilyinskie Luga, in Moscow Region.> In May 2022, PIK is planning to launch one more assembly line of 6,800 modules per year (150k m2) at another production site in Moscow. The preliminary capex estimate is R10 bln (including VAT). In 2023, it is planning to build a large modular production cluster in New Moscow with capacities of 150k bathroom units and 500k construction modules, climate system modules and other products. The required capex for this project has not been provided. > According to the company's estimates, the switch to modular construction technology allows for savings of up to 30% on annual construction costs when the production volume exceeds 500k m2 (we use a 15% estimate based on conservative estimates of sector experts).> In addition, PIK is considering launching housing module assembly in the Russian Far East (a decision on the project is to be made in 1Q22) and will launch capacities in the Philippines in 1Q23 (PIK already has four projects there with a total NSA of 191k m2).> Our view: PIK Group has made the most progress among Russia's listed homebuilders in switching to modular construction (Etalon plans to start building modular housing in 2022; LSR has not announced any clear plans in this area), which we see as a promising technology, especially for the mass-market segment. If all of the announced plans are implemented, including for the Far East, we think the company will be able to deliver 900k m2 of housing modules by end-2023, as it targeted at its recent CMD (we use this assumption in our model). What remains unclear to us is the capex required, as the company itself is still calculating it. As we understand, the R10 bln capex estimate (including VAT) for 150k m2 cannot be used as a good indicative level for the rest of the capacity to be added due to differences in location, product mix and availability of buildings for equipment. Hence, we keep our financial forecasts for the UNITS division and for the entire company unchanged at this stage.