Gcorp @ M0.40

General Corporation Berhad


I am a staunch advocator of the much esteemed Low Keng Huat, so how can I possibly miss out on its grossly undervalued holding company – General Corporation. Several positive catalysts have since transpired and a rerating of the stock seems imminent and we will provide a meticulous breakdown of these determinants in our analysis.


Profile

General Corporation Berhad’s(GCB) principal activity is developing of residential and commercial properties. Other activities include manufacturing of tyres and other rubber products for industrial use, manufacturing of confectionery products, investment in associates, construction of buildings, quarry operations, provision of management services and investment holding. Operations are carried out in Malaysia, Australia, Singapore and other countries.





Balance Scorecard

Half Year 06 FY05 FY04
Net profit M$3,733,000 M$6,137,000 M$10,167,000
EPS M$0.0127 M$0.0207 M$0.0342
Debt/ Equity 0.0490 0.0681 0.1032
Current Ratio 2.13 2.17 2.00

Share Information

Date 31.01.05 29.07.05
Price M$0.51 M$0.47
P/E 24.6x 22.7x
Dividend Yield 5.4%
Adjusted NTA 1.338


Positive Catalysts- Cessation of loss-making Rubber and Confectionary Division


GCorp’s rubber products division, represented by Fung Keong Rubber Manufactory, has shut down its loss-making manufacturing activities since early this year. Moreover, its confectionery division whose products are marketed in Australia under the Simpsons, Charlie and Uncle Bills brand names have been plagued by high commodity prices and limited operating efficiency compared to global brands such as Cadbury, Hershey and Nestle.

Henceforth, for the past few years, GCB's rubber products division and confectionery business have endured acute haemorrhage. Thank god! The drain on the coffers has now been arrested with the cessation of Fung Keong Rubber Manufacturing, Vredestein FKR and English Style Confectionary.

However, the liquidation of both the rubber products and confectionery divisions will only benignly elevated its financial results from 2006 onwards and a net loss of about RM5.1 million will still materialize for FY06.


The Goose that lays golden eggs


Gcorp’s associate Low Keng Huat is shedding its mammoth baggage through its aggressive rationalization and divestment plans in order to capitalize on its core competency of property development(Refer to my earlier article to get a good grasp of LKH).

The causes for rejoice are aplenty -- the property market in Singapore has hit rock bottom and LKH is poised to book some hefty gains with the divestment of several non-core assets. Besides, LKH forging a strategic partnership with UOL/UIC by leveraging on each other comparative advantage will put both parties in good stead in time to come. The tie-up with Wee Cho Yaw is a match made in heaven as Gcorp will assist UOL/UIC to break into the Malaysian property scene. In return, LKH can tap onto UOL’s brandname/expertise and UOB’s financial clout to offer innovative financing for its home buyers.

The beauty of geographical diversification is finally bearing fruit -- with Malaysia experiencing a softening of its property sector, adverse operating conditions is bound to delicately dent its operating figures which will be opportunely offset by favourable operating results from its Singapore division.

According to my estimates, LKH is expected to register a profit of at least S$33.6 million for its 2nd half FY06, translating into M$36 million filtering down into Gcorp’s bottomline. However, its loss making divisions will most likely trim the gains to M$30millions, evolving into an alluring EPS of M$0.114 and undemanding PE of 3.5x at the current price level of M$0.4.

Over the medium term, with new launches in the pipeline commanding an estimated gross value of RM720 million, Gcorp is poised for a rerating by the investment community.



A blemish that smudged the masterpiece


Low Keng Huat outstanding shares is 120,953,000
General Corp owns 48.6% of Low Keng Huat
Net asset quoted outside Malaysia -- M72,773,000 (Low Keng Huat) Item 15 of AR
Book Value of Low Keng Huat – 72,773,000 + 37,110,000/(48.6% x 120,953,000) = M$1.87/share = S$0.841

In item 15 of the AR, the market value of quoted shares (Low Keng Huat) is M$58,366,000, whereas the net book value of these shares in GCorp’s balance sheet is M$139,080,000 indicating (M$139,080,000 - M$58,366,000) /297,084,626 = M$0.272 /share of its NTA is at best “illusionary” and not realizable in the immediate future.

Interestingly, General Corp. adopt an extremely aggressive stance of accounting(far more superior to marked to market valuation) that booked its associates’ interests at cost plus retained profits. At the time of inception, Low Keng Huat is trading at a mere S$0.43, yet the net book value of these shares is lodged at an astronomical high of $0.841 which will only sky rocketed further as long as LKH stays in the black. Retained profit is mere form and short on substance as a single bad investment decision can wipe out years of cumulative retained profits in the blink of an eyelid.

Burden with these lingering doubts, I made a call to Gcorp, hoping that they could shed some light on the true net book value of LKH. What could be more enlightening than a answer from the horse mouth. Their evasive posture of refusing to provide me with an actual figure confirmed my initial suspicions.


Merits


With its haemorrhage arrested, management is now poised to start afresh from a clean slate and embarked on its next phase of expansion – building up its land bank and zealously growing its bottomline through new property launches. The invigoration of new blood (Low’s descendents) into the management ranks seems to have injected a new lease of life into its business. Taking a cue from LKH”s AR which will smitten every investor who see this writings on the wall “priority was given to improve bottomline and shareholders’ returns rather than increase turnover at the expense of profitability.”

Although NTA was artificially inflated through some incongruous accounting methodology, however, at its adjusted NTA of M$1.338, Gcorp is only trading at a mere 0.30x of its NTA, coupled with a attractive forward PE of 3.5x, all these inherent ingredients primed GCorp for a stratospheric rise to the moon.

Low Keng Huat Update1

LKH is a value play( the kind of stock Peter Lynch would yearn for), hence the dearth of a exciting growth story. The catalyst is the divestment of non-core assets such as Chijmes, Duxton NZ and possibility Duxton Melbourne and Perth. In the foreseeable timeline of 1-2 years, cash/share net of debt could easily surpass the current share price of 68cents.

The attraction of LKH lies in its cash hoard, hence future earning streams that are likely to come online such as Twin Regency, Domain 21, Regency Suites etc are omitted from the analysis.

Recently, I called up the company to enquire about the possibility of providing me with a breakdown of their holding cost(net book value) and total borrowings of individual hotels under their portfolio. Thrilled by their response that they will answer all queries that is public information. I waited diligently for their reply.
To my dismay, the response by the finance director 3 days later was, the information can be partially gleaned from the Item 38 of the AR which is a geographical breakdown of their total assets and liabilities. However, as their assets are not marked to cost, it provide little or no value in computation of the net book value of their hotels.

Since management is not forthcoming with their disclosure of public information, I shall pursue the matter no further and wait fervently for the announcement of their FY financial statements out in March 06 to gain a more comprehensive picture of their financial standing.

I suspect LKH is raising cash to dole out some scrumptious dividends so as to utilize their S44 tax credit, however their reply got me so peeved that I will only raise the question at their upcoming AGM.

I had incorporated the liquidation of Duxton NZ into my above analysis, however a complete analysis of their cash and debt standing proved to be impossible due to the dearth of details from their Chengdu Amara and Chijmes divestment, henceforth my analysis contain a certain degree of conjecture and postulation.

Will go into seclusion till their FY financial statement is out, as vultures are spotted in both the “mother” and “son”.

Low Keng Huat

Low Keng Huat


Company Profile

The Group is engaged in building construction, property development and property investment. It is one of the biggest civil engineering and construction firms in Singapore in terms of capital employed.


Half year 06FY Jan 05FY Jan 04FY Jan 03
EPS$0.04977$0.02474$0.01221$0.03406
NAV1.18561.10231.10321.0052
Current Ratio0.5171.0430.4590.545
Debt/Equity 0.5460.8830.5380.829

NAV is calculated by shareholders equity/numbers of shares



Divestment of Duxton NZ


PROPERTY developer and construction company Low Keng Huat has divested its interests in three hotel properties in New Zealand.
The aggregate consideration for the shares is NZ$52.5 million (S$60.9 million) less shareholder loans extended by the vendors to the subject NZ companies and a bank loan which stood at NZ$11.9 million and NZ$24.8 million respectively as at Jan 31.
Net proceeds from the share sale are estimated at NZ$15 million. The debt consideration of NZ$11.9 million would be fully paid. LKH, which expects a gain of about NZ$11.14 million (excluding price adjustments) from the transaction, intends to use proceeds from the sale to reduce bank borrowings and to boost its working capital.



Cash and Cash equivalents Remarks

15675000 As of 31.07.05
33125000 Sales Proceeds of NZ15 millioEquivalent of S$17.45million


Before Sale After Sale
Total Debt 115180000 72500000
NAV 1.1856 1.2927



Divestment of Chijmes


Low Keng Huat’s 50 pct-owned associate Chijmes Investment Pte Ltd agreed to sell Singapore's historical landmark Chijmes for 128 mln sgd to Suntec Real Estate Investment Trust.
The acquisition, expected to be completed on Dec 15, will have a material impact on Low Keng Huat's consolidated financial results as Chijmes Investment expects to book an exceptional gain from the sale. Chijmes' book value as of Jan 2005 was placed at 90.80 mln sgd.


Cash and Cash equivalents Remarks
51019677 Sales Proceeds of S$17.89 Million($0.42/share)


Before Sale After Sale
NAV 1.2927 1.4406
Total Debt72500000 ???
Assumption that CIPL will return all the cash proceeds.


Since CIPL is a 50% associate, we should expect a figure of at least (90.8 /2= 45.5 )millions lodged under its associate column. However a peep at its latest financial statements suggested that the total value of its associates is only worth a mere 35.99million. Can any accountant shed some light on this gaffe?


Divestment of Duxton??


LKH had in the past place its chain of hotels in the open market but pulled the plug due to differences in valuations. This time, is it for real? The jury is still out and one might have to read between the lines and inconspicuous bits of information in order to form a holistic picture.
However, it was reported in The Age that Duxton Melbourne might be the next one to go under the hammer.(Article Attached below).


Hotels Market Valuation Bank Borrowings Acquired in Year

Duxton Melbourne A38.2million A15million 1998

Duxton Perth A$60 million A23.5million 1996

Duxton Saigon No mention No mention 1993

All figured are pluck from Annual Report 05
LKH only holds a 75% stale in Duxton Melbourne and Perth
LKH holds a 70% stake in Duxton Saigon
LKH estimated investment in Duxton Saigon is US$11.9 millions.



Merits


LKH is one of the last few remaining undervalued property counter on SGX. Assuming status quo remains, at its last traded price of 67cents and NAV of $1.4406 (A figure arrived at after incorporating the sales of Chijmes and Duxton NZ), it is trading at only 0.465 of its revised NAV.
IF LKH were to liquidate their Duxton portfolio, cash per share net of debt could easily amount to 65cents per share.

Meanwhile, management has agreed to provide a breakdown on the holding costs and total borrowings for the various hotels under its portfolio as long as it is public information. Still waiting for their reply and will update in due course.



Constant high demand in conventional Melbourne attracts hotel investment
HUGH MARTIN
326 words
14 September 2005
The AgeFirst8English© 2005 Copyright John Fairfax Holdings Limited.
www.theage.com.au Not available for re-distribution.

THE impending sale of Duxton Hotel to Singaporean-owned Rendezvous Hotels for more than $40 million is a further sign of improvement to Melbourne's long-suffering accommodation and leisure market. After a prolonged period of oversupply and competition from the serviced-apartment market, the long-awaited improvement in performance within the sector was stimulating investment demand, according to CB Richard Ellis director of hotels and leisure Scott Callow. "The market has shown increased strength through a lack of planned future rooms in Melbourne, and demand remains strong because we have an endless string of events and conventions here," Mr Callow said. He said the likely Duxton sale closely followed the $39 million sale of The Windsor Hotel to Halim Group and the purchase by Eureka Funds Management of nine hotels in Australia and New Zealand for $390 million earlier this month. However, Mr Callow said investment demand was being frustrated by a lack of buying opportunities. Jones Lang LaSalle senior vice-president of hotels Mark Durran said the Melbourne market had bottomed out last year, with room occupancy rates rising and room rates tipped to grow for the first time in five years. "The demand has stood up stronger than anyone has expected in Melbourne," he said. "We are seeing the oversupply absorbed and trading performance lift and recover." He said investors were paying premium prices for property and suggested the price paid for The Windsor Hotel was well above expectations of a year ago. Mr Callow said increased demand was being experienced in the pub sector, with hotel businesses selling for between 21/2 and three times profit, gaming businesses for about 61/2 times profit and pub freeholds for up to 11 to 12 times profit. The 350-room Duxton Hotel was reopened in February 1998 after being derelict for 20 years.


New players buy into top hotels
AFNR000020050703e1740001p
PropertyBen Wilmot
804 Words04
July 2005
Australian Financial Review
First
56
English
? 2005 Copyright John Fairfax Holdings Limited. www.afr.com Not available for re-distribution.


A new breed of investor is buying up hotels as sales activity at the top end of the hotel market gathers pace across Australia.
New names such as MFS, the Ray Group, Indigo and Rockford have struck deals against stiff competition in the past year.
The incumbents such as Thakral and Accor have also been busy, but the new group believe they can ride the pick-up in hotel trading and also make astute development plays. And another feature marks them out: they all love doing deals.
In the latest tie-up to be mooted, private Queensland developer Indigo and its partner the Rockford Hotel Group are believed to be considering a tilt at the two remaining Duxton hotels in Australia, in Melbourne and Perth. Their Singaporean owner is hoping a sale will reap $100 million.
The pair are understood to have chased the Duxton portfolio when it was marketed by Singaporean property group Low Keng Huat in one line last year.
However Tanapun Siriphatrawan's Amora Group grabbed the three New Zealand hotels ahead of them for $NZ52.5 million ($48.7 million).
They are now building an Australia-wide network of four-star to five-star hotels.
In November 2004, they teamed up to buy Darling Harbour's Novotel Century for $41 million.
Their hotel venture was only recently formed. It came about as interests associated with the Horbelt family, which controls the Rockford, sold the Clarion Resort at Palm Cove to Indigo for about $25 million last year.
Indigo has been very active in the northern resort haven. In February, it announced plans to build a $250 million residential subdivision on the Novotel Palm Cove's nine-hole golf course. It acquired the entire resort from private Singaporean group Daysun for $38 million.
Brian Ray is also looking for northern exposure. He bought the two Sheraton Mirage resorts in Queensland with Gold Coast fund manager MFS for $210 million last year.
The pair are now using the upmarket hotels to market associated luxury Bale villas. MFS also have a Bale development on Victoria's ski fields.
The timing of these developers-cum-fund managers is good and their luxury focus is spot on.
The latest Australian Bureau of Statistics tourism industry figures show that Sydney's five-star hotels enjoyed stronger revenue per available room (RevPAR) growth than their four-star rivals.
For the 12 months to the end of March 2005, five-star hotels in Sydney lifted both their average daily rate and occupancy levels, resulting in a 6.83 per cent lift in RevPAR yield to $159.09.
"This bodes well for the market which has successfully weathered years of insult including severe acute respiratory syndrome, war and the collapse of Ansett," Colliers International said.
The analyst said that Sydney's hotel market would enter new terrain this year, even with the impact of the renovated Hilton Hotel opening mid-July.
Even four-star hotels in Sydney lifted their RevPAR by almost twice the inflation rate. Sydney's four-star hotel RevPAR grew by 4.72 per cent to $106.19. This comprised 2.47 per cent growth in hotel room rates to $134.53 and 2.2 per cent lift in occupancy levels to 78.9 per cent.
"Sydney's four-star hotels are enjoying average occupancy levels not seen in the last 10 years," Colliers International said. The analyst forecast more good returns because of the tight outlook for the supply of new hotel rooms.
There are few new hotels being built, or even on the drawing board. Colliers International said that when developers reviewed potential hotel sites or building conversions, alternate uses continued to rank higher than hotel use.
Melbourne's four-star and five-star hotel market continued to surprise, Colliers International said. The analyst said Melbourne was performing its way out of a hole created by significant increases to supply.
RevPAR in Melbourne's four-star and five-star hotels increased by 5.66 per cent to $102.67 in the 12 months to the end of March. Surprisingly, this was almost identical to the growth at top-end hotels in Sydney.
Sydney, which is considered the gateway for four-star and five-star hotels, had RevPAR growth of 5.77 per cent.
Melbourne hotels have held room rates steady at $140.66 as the supply has been soaked up but the demand has remained strong, with occupancy rates up by 4.2 percentage points to 73 per cent.

My Thoughts on HoBee and Bukit Sembawang

I am in the midst of relocating my research articles which once were posted on sgstudent.com(another dot.com that bite the dust recently) to my newly established blog. The rationale -- despite the ravages of time, an occasional glimpse of my blog could help decipher my train of thoughts, past hits and misses which will be a refreshing reminiscence of old times.

Currently, I am vested in Hobee and Bukit Sembawang which were purchased way back in May 04. Each of my articles contained a yahoo price chart with a time stamp evidently stating the research was undertaken in May 04. Without a doubt, I am not here to brag about my success(attribute it to the fortuitous identification of a bottoming out of the property cycle) but to share my findings with the local investing community.

Ho Bee has embarked on a stratospheric rise and further additions may be imprudent though signs of a resurgence of a property boom are palpable. Furthermore, Ho Bee being a mid-scale property developer with a business model of swiftly flipping their newly acquired land parcels for a quick buck due to their dearth of financial clout substantially lowered their business risk. Henceforth, if consumer confidence were to deteriorate, the bulk of its NTA comprising of cold hard cash will cushion any substantial price decline . At current price level of 62cents that approximates its NTA, the impending risk is minimal, so is the reward.

Bukit Sembawang Estates is one of the few grossly overlooked property counter that remains on SGX. Few seems to appreciate its beauty other than Aberdeen Asset Management who accumulated it from at prices ranging from $13-$20 before it went XD and XR. Since the inception of my article, nothing much has changed and its revised RNAV should be closer to $20-25 after adjusting for the rights issue.

Bukit Sembawang Estates

Bukit Sembawang Estates

Company Profile

The company, set up in 1967 to acquire the Lee family's Bukit Sembawang Rubber Co, has its land concentrated in the established landed residential district of Seletar and Sembawang.The principal activity of the Company is that of an investment holding company whilst the principal activities of the subsidiaries are those of property development, property mortgage financing and the holding of properties and investments. The Group mostly developes landed properties around the Seletar and Sembawang areas.


EPS ($) *0.68379
NAV ($) **7.7351
Price $13.40
52 Weeks High16.50
PE19.597
Price / NAV **1.732
Dividend Yield) 3.358
52 Weeks Low11.10
Market Cap (M)321.600
Par Value ($)1.000
Issued & Outstanding Shares24,000,000
* Based on latest Full Year Results Announcement** Based on latest Results Announcement (Full Year, Half Year or Interim)



Hidden Assets


A quick glance at the fact sheet suggested this is one of the most expensive listed property development firm, trading at a ludicrous 73% premium to its NTA, something unheard of in SGX. However, there is more than meets the eye as there are plenty of predatory vultures prowling in stealth, accumulating Semb. Estates on the cheap. Every single item quoted in the Annual Report is at 1967’s cost of acquisition when the bulk of the assets were purchased from Bukit Sembawang Rubber Co. No endeavor is made to reassess the assets at current market value, thereby it proved almost impossible(for retailer) to put a definite price tag on their massive land bank when an independent valuation report isn’t conducted yearly.


Financial Assets

(Page37 of AR03)

Quoted Securities 2003 2002
At Cost 13.12 Millions 13.25 Millions
At Mkt Value 62.38 Millions 75.54 Millions


If these securities are re-quoted at market value, it will boost the NAV by a hefty $2.05 per share. Nothing is disclosed on the composition of these securities but I suspect these are scripts of either OCBC or Great Eastern as the Lee family owned around 40% of Bukit Sembawang. However Bukit Sembawang is not embroiled in the asset divestment fiasco mandated by MAS as the cross-shareholding webbing is non-existent.


King of Seletar Hill

Location Tenure Site Area(Sq M) Description

Seletar Hill
Lot13764 Freehold 12,356 Initial Site Area of 36,068. However
Phase1,2 and 3 has been completed.

Lot 9425 999 Lease 218,944 Development of 944 Units. TOP 2009
from 1879

Lot 12949 999 Lease 116,860 Non-residential Land
from 1879

Lot9934 Statutory 18,589 Non-residential Land
Grant

Sembawang Area
Lot2104 Freehold 21,585 Only 7 out of 67 units Of Straits Garden has Been sold as of 31 Mar 04.

Lot2099 Statutory 20,420 Proposed 48 units to be built. TOP 2008
Grant

Total Site Area 4.34 Million Sqft
Mkt value of Undeveloped land parcel
*(Total Site Area X $(510-300)Sqft X 1.4) $1.27 billion
Cost of Land Parcel ($80.29 million) Item 4 of AR
Estimated Gains $1.20 billion

Landbank information is accurate as of 31 Mar 04

*1. 1.4 refers to the conservative estimated gross floor ratio
2. $510 psf refers to the conservative avg. selling price of properties in the Seletar Area.
Mimosa Terrace selling at around $585 psf
Mimosa Gardens selling at $744 psf
3. $300psf refers to development fees and costs.


Factoring in the unrealized gains of the equity securities and revalued landbank, RNAV per share works out to a staggering $47.80 per share. Assuming a prudent valuation by marking down the RNAV by another 20% due to adverse market conditions , we arrived at $38.20 per share which is a unfathomable discount of 285% over the current share price of $13.40.

Analyst Report

According to an ABN Amro report dated May 99(unfortunately I don’t possess that report, these abstracts are leeched from Business-times), the revalued net asset value of the company is as much as $ 30 a share, assuming the most conservative scenario of zero value for non-residential land.
Back in 1999, Bukit Sembawang’s landbank amounts to 4.7 million Sqft which stands at 4.34 million Sqft as of 31 Mar04 with 33% being classified as non-residential property. One might queried that the outdated report holds no relevance as things are no longer the same as before. However, except for the diminution of landbank from 4.7million Sqft to 4.34 million Sqft, landed property prices had in fact inched up by 7.6% since early 99(refer to chart below) when the analyst report was drafted.
After some tweaking of $30/share derived by ABN Amro through accounting for its non-residential land parcel, Bukit Sembawang’s RNAV should be around $44 which is pretty much in tune with my pseudo analysis.



Figures stolen from URA

Non-residential Land- Cause for worry

On 27th Jan 04, Bukit Sembawang Estates received provisional permission for a 138-unit terrace and semi-detached project on a sprawling 901,961 sq ft site in the Seletar Hills location. However I am unable to pinpoint the exact land parcel cited as the site area do not concur with the existing landbank. However, it should belong to one of the two remaining non-residential land parcels as they are the only properties yet to received provisional permission.

Ho Bee

Ho Bee Group

Company Profile

The Group is principally engaged in business of real estate development and investment in Singapore and London. The Group has a diversified portfolio of investment properties comprising residential, industrial and commercial properties in Singapore as well as residential properties in London. The group has over the decades carved out a niche in the luxury property market with its quality finishings but it is far from a property titan due to the dearth of a substantial landbank.


Q1 Mar 2004 FY Dec 2003 FY Dec 2002 FY Dec 2001 FY Dec 2000
EPS $0.0150 $0.02094 $0.00433 $0.02766 $0.04229
NAV 0.446 0.4317 0.4134 0.4156 0.3986
Net Earnings 112.8% 31.259 % 3.096 % 5.974 % 13.250 %
Margin
Debt To 0.926 0.599 0.670 0.520 1.152
Equity

* The huge leap in Debt to Equity ratio was a result of $115million forked out for the acquisition of Sentosa Cove.



EPS ($) *0.02094
NAV ($) **0.4464
Price $0.265
52 Weeks High 0.290
PE 12.655
Price / NAV **0.594
Dividend Yield (%) *2.830
52 Weeks Low0.160
Market Cap (M) 164.973
Par Value ($) 0.050
Issued & Outstanding Shares622,540,000
* Based on latest Full Year Results Announcement** Based on latest Results Announcement (Full Year, Half Year or Interim)



Undemanding Valuation

Ho Bee chalked up earnings of S$13.03million for FY03. Q1 2004 earnings was already a spectacular S$9.32million and comparing it to the whole of FY03 was a hefty 71.5%. The substantial rise in earnings arose after accounting for the share of profit of $9.8million in the group joint venture project, Rio Vista, which obtained TOP in Feb 2004.

Another relatively steady stream of income to the bottom line is its property investment division which mainly comprises of rental income from its stable of properties both locally and overseas. Rental income for Q1 2004 was S$1.7million and if we adopt a conservative projection with a error margin of 10%, rental contributions for the next 3 quarters could amount to S$4.59million. To sum it up, just merely tallying the profits of Q1 2004 and rental income for the next 3 quarters coupled with the apportioned contributions from Amaninda and Sentosa Cove, Ho Bee could stand to reap S$16.15million, easily outstripping profits of S$13.03million registered in FY03.



Projects in the pipeline

Amaninda

Ho Bee has recently launched the condominium project, Amaninda at Thomson Road. Within a period of one month, 85% of the total 70 units had been sold. Construction work is expected to be completed by the end of the year and this will result in a fair source of contribution to the Group’s earnings for the current year.

Details

Total No of Units 70
Expected date of completion : mid 2005
Sale Price Avg $650 psf
Total Floor Area 68,509 sqf
Revenue S$445,530,850
ΨEstimated Profit(Margin 5%) S$2,226,542
@Estimated contribution(FY04) S$2,226,542 x 20% = S$445,308


Ψ Profit margin for their previous Rio Vista project was about 5%.Property developers usually demand net profit margins of 10-20% before embarking on any projects. Another reason for their hefty profit margin is their rich landbank built up over the years which they are able to tap into. In this aspect, HoBee failed miserably as they do not possess the financial might to acquire land on the cheap and tapped into them when the time is ripe. Moreover, HoBee is pretty gungho in their acquisition thereby resulting in the razor thin profit margin.
@TOP in mid 2005 which falls into FY05 which means the bulk of the earnings will be recognized in FY05. However, assuming earning recognition of 20% for FY2004 as management is usually more prudent in the early stages.


Sentosa Cove

Having successfully tendered for two plots of prime land parcels in December 2003, the Group will be developing a condominium of about 200 units and 8 terraces on these plots in Sentosa island. Marketing launch is targeted for the second half of 2004.


Details

Total No of Units 200 condo. 8 terrace
Expected date of launch 2nd Half of 2004
Expected date of completion NA
ЭEstimated Sale Price Avg 700psf
Total Floor Area 337,245 sqf
Revenue S$236,071,500
ΨEstimated Profit(Margin 5%) S$11,803,575
@Estimated contribution(FY04) S$11,803,575 x 10% = S$1,803,575

Э Dearth of historical sales price on properties in Sentosa as it is a first of its kind. Similar comparison is Le Ka Shing’s flagship Costa Del Sol at avg S$820psf and other numerous developments in the East Coast area at avg 600psf.
Ψ Cost of acquisition for the land parcel amounts to 342psf, coupled with a development cost of 200psf, cost of sales translates to 542psf. Therefore, HoBee’s profit margin is a hefty S$158psf(22.5%). Numerous assumptions is undertaken into the projection, thereby a more prudent of 5% is more tactful at this juncture.
@Marketing launch is expected to be in the second half of 2004 and we can expect the bulk of the earnings to be recognized in 2005 when it achieved TOP.


Chang Yuan

The development is strategically located at the junction of Jiangsu Road and Yu Yuan Road, next to Jiangsu Road Mass Rapid Train Station. It is also surrounded by well established educational institutions such as Ladies School of the Virgin Mary, Changning International School and Communications University. Ho Bee's purchase of the 68 units in the development marked it's first foray into the China property market. The development is expected to be completed by mid 2003. Total consideration for the purchase amounted to RMB126,917,552 (approximately S$28 million) after deducting a bulk discount of 8% from the developers listed price for the apartment units.

Details

Total No of Units 68
Units Sold(As of 31 Mar 04) 9
Expected date of launch Late 2003
Expected Contributions S$2,434,782

The central govt. high-handed measures to curb the growth of the “evil” sectors has sent consumers interests waning. To date(30 Mar 04), only 9 units had been sold, a reflection of lacklustre sales. The contributions from Chang Yuan will not be factored into the projection as outlook remains uncertain and whether they could dispose off the remaining units at a profit.


Acquisition of Mount Sinai Site

The Group has entered into an agreement to acquire all 45 apartments in Yang's Garden Village, situated at No. 63 Mount Sinai Drive, Singapore.The development is located within the prestigious District 10, in a popular residential enclave about 600 metres away from Dover MRT Station
Details

Total No of Units 110
Expected date of launched : NA
Sale Price Avg $550 psf
Total Floor Area 153,944 sqf
Revenue S$84,669,200
ΨEstimated Profit(Margin 5%) S$4,233,460

Ψ Cost of acquisition for the land parcel amounts to 338psf, coupled with a development cost of 180psf, cost of sales translates to 518psf. Therefore, HoBee’s profit margin is S$32psf(5.8%).


Management

It appears that management is a tad too aggressive in their acquisition of land parcel, as evidenced by the razor thin profit margin of around 5%(Rio Vista).

As a property developer, what is even more startling is their speculative purchase of 68units of Chang Yuan in China. It seems that they are no different from the average Joe rushing to grab a piece of the apartment during the marketing launch and disposing off the asset when TOP is attained.

Clearly, the signs reminiscent of the excesses of a property market are there, GLCs are increasing bullish on the Chinese property front and charging full steam ahead . Even a consumer staple conglomerate has contemplated venturing into a US$2billion real estate development in Beijing.

What is praise-worthy is their share buy-back programme which is value creation: spending twenty odds cents to purchase forty odd cents worth of assets.



Outlook

Ho Bee is likely to see a surge in their FY04 earnings due to the numerous projects in the pipeline. FY05 will continue to remain exhilarating due to the apportioned contributions from Sentosa Cove and Amaninda. However, the prospects for FY06 appeared muted for now as their most probable cash cow is the Mount Sinai land parcel that could potentially bring in earnings of S$4.23 million.


Recommendation

For FY04, Ho Bee is expected to book record earnings of S$16.19million. My target price of S$0.31 is derived by applying a PE of 12X and this is a 20% discount to the last traded price. However, the myriad of real estate developers with the likes of Capitalland, Keppel land, HPL, Gucco land etc are all trading at varying PE 10-30X and Price/RNAV of 0.6 -0.7. There doesn’t seems to be any definite valuation yardstick entrenched for property counters, therefore my strategy is to abide by the market’s pricing and positioned my exit timeline between FY04-05 whereby earnings will likely peak. Vested interests of course.