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An incomplete analysis of Wing Tai Holdings Limited.

Wednesday, October 22, 2014


Wing Tai Asia.

Someone asked me that since I bought into OUE Limited at a 50% discount to NAV, why not Wing Tai? Wing Tai's NAV/share is $3.78 and it last traded at only $1.74. That is a massive 54% discount to NAV.

Well, both OUE Limited and Wing Tai might be in the real estate business but they are not exactly the same. Wing Tai makes most of its money from property development, more than 80%, in fact. On the other hand, OUE Limited keeps its exposure to property development to a smaller 20% or less.



Of course, we know that in the current day environment with all the cooling measures in place and also an impending increase in interest rates, property development business is really not as promising as it was a few years ago.

We could say that Wing Tai also develops properties in Malaysia and China but are the residential real estate markets there insulated from rising interest rates? I would think not.

In an environment that makes building and selling residential real estate difficult, it is the property companies which have strong recurring income streams that will weather the downturn better. In this area, Wing Tai is rather weak as its investment properties are a small fraction in value compared to its development properties.

Undeniably, for Wing Tai to do well, its development properties will have to sell well but it seems unlikely that this is going to be the case.

Revenue has dropped significantly in the last 12 months and the decline could continue for some time to come. Although Wing Tai's boss said that they are not dropping prices to move stock, I would not be surprised if he should eat his words in the next 12 to 24 months.



Unless some of the earlier cooling measures should be removed by the Singapore government, things are unlikely to look up for the property sector. Unless interest rates stay low in future, investors are more likely to avoid investing in properties.

Wing Tai will have to pay extension charges for development properties which have not been sold two years after receiving their TOPs. It will be a percentage of the respective sites' purchase prices. 8% in the first year, 16% in the second year and 24% in the third and subsequent years.

To avoid paying these charges, Wing Tai could do a SC Global and privatise but with only slightly more than 50% of the issued shares in their control, it would cost the Cheng family quite a fortune to do so and Wing Tai's boss has already said that there is no plan to privatise.

I am not an expert analyst on the property sector and I am not sure how well Wing Tai's properties will sell in future but I am willing to bet that conditions will continue to be difficult. Revenue could continue to decline and if Wing Tai should drop prices on its development properties, revenue could receive a boost but earnings might be flat.



The question now is really what is Wing Tai worth on a per share basis?

Well, I am more sanguine about its investment properties than its development properties. Those are worth about 72c or 73c a share. These properties are recurring income generators. Income could be increased by improving occupancy levels or increasing asking rents or rates where possible.

As for its development properties, the only way for them to make money for Wing Tai is if they were sold. Otherwise, even if we were to assume further write downs in value, they are just dead weight if they remain unsold. With the extension charges payable 2 years upon receiving their TOPs, they will become liabilities until they are sold. Therefore, to be very conservative, taking into consideration possible bigger write downs in future, to me, they could be worth $1.50 a share.

Wing Tai has cash on hand but not enough to pay off all its borrowings. They are short of some 58c per share. However, unless things get seriously bad, Wing Tai is in no danger of going belly up. It could always sell a fraction of its development properties cheaper to raise cash. At the moment, with the cash that it has, Wing Tai is at least able to reduce borrowings further in case interest rates should go up in order to avoid higher finance cost.

So, based on this incomplete analysis of Wing Tai Holdings Limited, to me, a fairly good entry price would be $0.72 + $1.50 - $0.58 = $1.64, give or take a few bids.



Technically, $1.64 looks like it could be tested as a support while in the short term, we could see a rebound in share price as the MACD formed a higher low.

See: Full Year 2014 Financial Statements.

Related post:
OUE Limited: A nibble.

Formerly Wing Tai's headquarters.

21 comments:

boonchin.ng said...

Hi AK,

What about another incomplete analysis for Ho Bee? Also huge 50% discount to its NAV. And recent result shows no income from properties development, pure recurring rental income. The Metropolis, together with 2 commercial building in London (Rose Court and 1 St Martin's) should be the main rental income generator.

AK71 said...

Hi boonchin,

Seems like you have done your analysis of Ho Bee already. Would you like to do a guest blog? ;)

Solace said...

Some share price has difficultity reaching its NAV. We should study the reason why and not think that it is severely undervalued.

This is nice reading :)

Next time, try do one analysis on another Company like haw par, very interesting business. With tiger balm, aquarium, properties business, links with UOB, UOL all in the mix. Severely undervalued or not? Does it have to chance to reach NAV and unlock value? It baffles investors haha.

Don't ask me to write :)

AK71 said...

Hi boonchin,

I took a quick look because I couldn't resist it. LOL.

It seems that Ho Bee's NAV/share is $3.40 (correct as of 30 June). 50% would be $1.70. Recent low was $1.91. So, not quite there yet. ;p

Since Ho Bee is having such a difficult time selling the properties it has developed, if we want to be ultra conservative and focus only on their investment properties, each share should be worth about $2.70.

Ho Bee's debt per share is about $1.16. Their cash on hand is very little in comparison. Not enough to make a dent.

$2.70 - $1.16 = $1.54 might interest me as I would be getting their development properties for free. ;p

AK71 said...

Hi Solace,

I think with Haw Par, it is hard to think of value being unlocked because Uncle Wee is using it like his private treasure chest to keep a strong hold on his business interests. LOL.

So, anyone who wants to invest in Haw Par could be disappointed if he thinks that it could be an asset play.

On the face of it, it is an asset play but to avoid disappointment, it is better to think of it as a steady dividend payer. ;p

Sillyinvestor said...

Low Keng huat recurring income from westgate, hotels and Paya Lebar retail is enough to pay 3 cents dividends, which yield almost 5%.

I did the same calculation for ho be metropolis, I cannot Rember the numbers, because I did it quite quickly, but I remember it is not enough to sustain dividend payout due to that enough.

I value dividends a lot, which is why I give OUE a miss, most probably wrongly. But I can live with that wrong.

I wanted to buy LKH for its bumper dividend this year, which I think market overlook. I was waiting at 60c.

Which will give me a 5 % yield as I wait for the next property cycle wave...

Some companies are still able to sell very quickly like CES, which is why it discount is very small, or if I rememebr red correctly, is actually trading at a premium.

Go a bit further, Amara hotel properties also seem
Undervalued, but dividends again is too low...

Ok, enough waving axe at Ban house.
Waiting for guest blog or AK blog post!

AK71 said...

Hi Mike,

You mustn't tell only a bit of the story and leave us craving for more. Very bad. LOL.

So, to make things right, please do a guest blog on LKH, CES and Amara Hotel for us. Thank you. ;)

boonchin.ng said...

I did my calculation for Ho Bee recurring rental income: The Metropolis ~ S$77mil, 1 St Martin’S London ~ S$20mil, Rose Court London ~ S$9mil, that's about S$106mil. And few more smaller properties (e.g HB Centre) should bring it up to ~S$120mil ...

Also, if I read the news correctly, their properties development in Gold Coast and Melbourne are selling quite okay

Sillyinvestor said...

Aiyo AK,

If I discover anything I will sure share with u through a guest blog.

But all the info can be found in valuebuddies forum and respective threads, I calculate the potential recurring income from LKH and I posted it there too. It is justs potential as west gate is just 60% leased ( TOP soon). There are more gurus there talking about LKH, Amara, I do not want to be broken recorder and claim their research mine.

As for CES, read Sumer posts at Nextinsight. CES is a painful lesson for me. It is giving 8% yield when I bought it. It return 50% in a matter of months, and I sell it off for a quick gain. Had I hold it till now, I would be my first bagger including dividends. And got such big MOS to hold...

Nvm, lessons learnt ... Anyway, although they are selling well at Australia too, I not very comfortable with their build as high as possible, even when getting into disputes with town councils approach... Sour grape ... LOL

That's why this recent correction, I never add, never sell. Good boy finally... LOL

AK71 said...

Hi boonchin,

So, net of costs, without selling any development property, a full year EPS of 7c to 8c is realistic. If we were to believe that a PE ratio of 12x is fair for Ho Bee, then, we are looking at a fair value of 84c to 96c a share.

AK71 said...

Hi Mike,

Haha... OK, I understand. Thanks for the heads up, anyway. ;)

These stocks you mentioned are not on my radar. Can't possibly check on every single stock available. So, if I don't know what I am missing, I don't feel anything. ;p

Bruce said...

Hi AK,

could you elaborate a bit why keeping a counter's price low so as to prevent the unlocking the true shareholder value, and it then becomes not a asset play, such as Haw Par? won't someone else will see the oppty and jack-up the price?

AK71 said...

Hi Bruce,

I am not sure if I understand you correctly but this is how I look at it.

If the major shareholders are not motivated to realise the full value of the assets and are holding on to their stakes for other reasons, then, there is a chance that the asset will continue to be undervalued. :)

Sillyinvestor said...

Hi Ak,

allow me to kaypo regarding Bruce's Question.

It is highly unlikely (Not impossible) for a outsider to try to unlock value especially with companies that are majority owned by owners and their affilates. e.g. close to 70%

Assume 50 cents for $1 asset, free float is only 30-40%, you scope for 15 % become substantial shareholder, price is perhaps much higher than 50 cents now due to your scoping...

Who can you sell it to?? You can sell a few times to some greater fools but the news of you selling would have undone the pump action in the begining.

No way you can do a privatitisation since owner will say no.

And if you cannot get more than half of the shares to made big changes to the board, such that you can sell assets and return profits to shareholders, how are you going to unlock assets?

So most raiders will not raid companies that are majority owned by owners, for Haw PAr, the wee family control more than half, can't get the actual due to the complicated structure, by the top 4 shareholders should all be afflifiated to wees

AK71 said...

Hi Mike,

Yes, I view Haw Par as Uncle Wee's personal playground. ;p

Buy at a more reasonable price and think of it as a regular dividend payer and we will not be disappointed. :)

boonchin.ng said...

Ho Bee Land has bought a freehold property, 60 St Martin's Lane, in London's Covent Garden district for S$89.6 million.

The premises have been fully leased until 2026, producing a current annual rental income of approximately S$3.4 million.

boonchin.ng said...

Hi AK,

Wing Tai Holdings (SG) has 34.55% stack in Wing Tai Properties (HK). Looking at the most recent half-yearly report, the investment properties is valued at HK$20,364.4million. (HK$20,364.4 / 6.1 * 34.55% = S$1,153.4mil), and investment properties value for Wing Tai Holdings (SG) is S$576mil. So agar-agar, investment properties is worth S$2.1 per share.

AK71 said...

Hi boonchin,

Thanks for providing your perspective. So, I guess you bought some Wing Tai already? ;p

Valuation is a subjective exercise. As long as you feel that your data and methods are right, then, you will act with conviction. :)

AK71 said...

Singapore REITs are better placed than local developers in servicing their near-term debt, according to Barclays.

REITs are generally in better financial shape as they have fewer short-term refinancing needs and are supported by recurrent income, said Barclays analysts Tricia Song and Zita Qin in a note today.

Property developers, on the other hand, have more to worry about, especially at a time when the residential market is slowing down, according to the analysts.

Citing Bloomberg data, they noted that the 42 developers listed in Singapore had total short-term borrowings of $13.7 billion, up 45% y-o-y and a 10-year high, as at June 30.

With property sales volumes down 52% y-o-y so far this year, developers, especially those that rely most on the Singapore residential market, could face more funding pressure than before, they said.


Source:
http://www.theedgemarkets.com/my/node/167334

AK71 said...

... Qualifying Certificate (QC) charges are calculated: at per annum rates of 8 per cent of the land purchase price for the first year, double that (16 per cent) for the second, and triple that (24 per cent) for the third/subsequent years of extension. The amount is pro-rated according to how many units are unsold.

The huge jump is also due to more projects completed (ie received their temporary occupation permit) in 2014 compared to 2013. Since "foreign" developers are required to sell their units within two years of completion, more would be incurring these charges in 2016, compared to 2015.

"From the policy angle, the intention was to allow developers to build and sell, thus contributing to the housing supply and hopefully a reduction in prices," said KPMG Singapore principal tax consultant Leung Yew Kwong. "Otherwise, developers might simply hold onto their unsold units and wait for prices to go up, or for the cooling measures to be dismantled."

Among the developers who could incur considerable QC charges these two years are CapitaLand, City Developments (CDL), Wheelock Properties, Wing Tai, Heeton Holdings, and foreign multinational conglomerate China Sonangol.

CapitaLand's QC-bearing projects include Urban Resort at Cairnhill Road (which will incur about S$1 million by end-2016); The Interlace at Depot Road (S$20 million by end-2016), and d'Leedon at Leedon Heights (S$13 million by end-2016).

Nouvel 18, a luxury project along Anderson Road, a 50-50 joint venture between CDL and Wing Tai, has not been launched yet and so has no sold units. It has until November 2016 to sell the units. In the worst-case scenario where all the units remain unsold, the JV will have to pay up to S$38 million in extension premiums. This amount is pro-rated based on the proportion of unsold units in the project.

Wing Tai has another upscale project nearby, Le Nouvel Ardmore, which remains 91 per cent unsold a year after completion. It will incur about S$15 million in charges if sales continue to be dismal.


Also in the vicinity is Wheelock's Ardmore 3. The 96 per cent unsold translates to about S$14 million in QC charges by end-2016 if units remain unsold.

As for China Sonangol's TwentyOne Angullia Park, 83 per cent was unsold at last count, which means it may incur up to S$19 million in extension fees by end-2016.


Source:
http://www.businesstimes.com.sg//real-estate/developers-face-hefty-extension-charges-over-unsold-units-amended

AK71 said...

Wing Tai FY6/15 net profit declined by 41% to SGD150m with lower development profits and wider losses for its retail segment. Profitability improved for its investment properties.

It lowered DPS payout to 3.0 SGD cts from 6.0 SGD cts with payout ratio at 48% of net profit (excluding revaluation gains).

NTA per share increased by 8% to SGD4.07 and net gearing improved to 0.10x due to debt repayment.

Although the high-end residential market remains challenging, management does not intend to lower prices as it continues to see good value in its projects. There is also no need to take impairment charges as market prices are still above cost.

In view of the challenging retail environment, it will look to rationalize its portfolio of stores.


Source:
Maybank Kim Eng, August 2015.

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