A Go or No for $GuocoLand(F17) ?
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This article is jointly written by @fayewang, @calvinwee and @gordon_ong.

1. Brief Background
Guocoland is a leading property developer and investor with business interests in Singapore, China, Malaysia and Vietnam.

Its core businesses include:
1. Commercial properties
2. Residential properties
3. Hospitality properties
4. Retail properties
5. Integrated properties

2. Recent News and Events
April 24, ‘GuocoLand to launch Martin Modern condo project in 2H 2017’, refer to the news at http://www.businesstimes.com.sg/companies-...

April 20, ‘Higher sales lift Q3 profit at GuocoLand’, refer to the news at
http://www.straitstimes.com/business/compa...

April 3, ‘GuocoLand scaling up in UK, Australia while keeping tabs on core markets’ refer to the news at
http://www.businesstimes.com.sg/real-estat...

April 5, ‘Singapore: GuocoLand expands to UK & AUS; Ascott expands business in Brazil’ refer to the news at
http://www.dealstreetasia.com/stories/guoc...

November 29 2016, ‘GuocoLand reports 46% rise in Q2 earning GuocoLand's China unit wins tender for 4 land plots at 3.64b yuans, refer to the news at http://www.businesstimes.com.sg/companies-...

October 7, 2016, Guocoland’s annual report of FY2016, refer to the report at: https://www.guocoland.com.sg/Documents/Ann...

3. Performance Summary
GuocoLand was facing declining revenues and profits, if not for the increase in earnings from disposal of subsidiaries. The company managed to improve their cash and debt positions, but not in a sustainable and organic manner. Hence, we find that the firm produced a less favourable operating performance and holds a weakened financial position. Based on segment weightage and historical stock performance, we would like to reiterate that Guocoland share price is essentially a proxy on the Singapore housing market. Fed rate hikes and any further relaxation of property cooling measures are two of the most vital factors influencing that market.

4. Financial Highlights
a. Operating performance

In the financial year 2014, GuocoLand observed a surge of revenue from $677.442m to $1,251.350m, which was mainly driven by sales of the Goodwood Residence condominium in Singapore and the Seasons Park residential development in Tianjin, China.

Since then, as mentioned in the previous article, the Singapore government’s cooling measures have brought negative impacts to private luxury condominium sellers who target upmarket consumers. The downward trend in revenue post-2014 was a result of declining demand in both the China and Singapore markets.


In the financial year of 2016, GuocoLand’s net profit soared 155.32% compared to that in 2015. However, it was the disposal of subsidiaries relating to the integrated mixed-use development in Beijing that lead to the sharp increase. The profit margin edged up to 55.52% , which is the highest number over 5 years, due to the greatly increased profit.

b. Financial and Cash Position
It is interesting to find that GuocoLand’s inventories reduced to half in 2016. Before 2016, GuocoLand held a stable balance of inventories worth around $4500m. For a property developer like GuocoLand, inventory is mainly comprised of development properties.
At the same time, GuocoLand’s cash and cash equivalents more than double, in concurrence with a sharp drop in loans and borrowings. Based on all these information, it is not difficult to surmise GuocoLand was selling their inventories in exchange of cash, which they used to pay back its debt.

For GuocoLand, cash and cash equivalents at the end of 2016 skyrocketed from $411.152m to $1429.038m, which was jointly contributed by the disposal of subsidiaries and the sales of inventories. Though the company held abundant cash, the method they gained it is not organic.

However, there were improvements in liquidity and solvency. Leverage ratio (Total debt / Total equity), which shows the degree of using debt as a financing source, kept decreasing during the past five years. Current ratio (current assets/ current liabilities), which indicates a firm’s ability to pay back short-term debt has increased in 2016.

c. Segment Performance

For 3Q-4Q 2016, Singapore is responsible for almost 90% of revenue (from progressive billings for condominiums and Guoco Tower). Guocoland’s revenue streams are hence incredibly sensitive to the Singapore residential market. While management has communicated their intention to diversify into the UK and Australian markets, Guocoland Ltd (SGX:F17) for now will essentially be a pure play into the Singapore residential housing market. Guocoland has land-banked for residential developments in Singapore (Martin Place) and China (Chongqing), sources of future revenue.

For Singapore, the focus is on luxury condominiums, with an auxiliary focus on commercial/retail rental for recurring income. Take-up rate for these properties are generally very positive, benefitting from the market trend of increase in sales of luxury condominiums since mid-2016.

For Leedon Residences, the high-end condominium in District 10, the take-up rate as of Q1 2017 is 328/381 units or 86%. One area of concern is that Guocoland’s TOP is ending on June 15 2017, and it may be forced to pay an extension fee.

For Sims Urban Oasis, the take-up rate is 670/1024 units or 65%. This sales figure is obtained way before TOP (estimated Q3 2018), and hence surpasses expectations for this stage of the project.

Mixed development TPC is Guocoland’s main driver to increase its base of recurring income. They have managed to secure about 90% commitment for the office and retail components. Wallich Residences will soon have its official launch in Q2 2017. While Wallich Residences face stiff competition from relatively new condos located in Tanjong Pagar (Dorsett Residences, The Lumiere and 76 Shenton), Wallich’s small number of 181 units and Guocoland’s domestic record of achieving high take-up rates mean that it should face limited trouble in acquiring property buyers.

The recent acquisition of Martin Place residential project at River Valley at $1,239 psf (a record for GLS residential site) may be an area of concern for investors, given the estimated breakeven price at $1,910 psf and projected profit margin of around 10%, which is razor-thin for Singapore property developers in general, especially for historically volatile luxury condominiums. Their aggressive bid to secure the prime CCR site may affect their profitability going forward.

For Malaysia and China, the focus is instead on development projects with higher profit margins.

Oversupply in the Malaysian property market is contributing to lower revenues in Malaysia’s residential projects in 2017. Number of launches and sales performance of property developers are generally declining, with Guocoland being no exception. Considering the current environment, Guocoland’s significant landbank in Malaysia in KL and Selangor may become stranded assets. Guocoland is reportedly currently exploring options to dispose or utilise their excess land to improve ROE.

Guocoland’s foray into the China market has been more successful. Amidst the competition from large local property developers, Changfeng’s current take-up rate of 61% is encouraging, and bodes well for the recent acquisition of a predominantly residential project in Chongqing.

d. Stock Information

Declining Revenue and EBIT over the past 5 years were mostly driven by lower demand for luxury condominiums in the primary market, as well as declining commercial and retail rental yields. This has justified lower valuation based on key multiples such as P/Tangible BV and P/E TTM.

P/FCFE multiple is significant for property developers due to large depreciation charges affecting FCFE. However, due to very uneven FCFE for Guocoland, this analysis will not be using the multiple.

e. Peer comparison

Guocoland’s main competitors in Singapore are Capitaland and City Development Limited. Capitaland is one of Asia's largest real estate companies with a diversified global real estate portfolio that includes integrated developments, shopping malls, serviced residences, offices and homes. City Development Limited is one of Singapore's biggest commercial landlords and leading hotel owner with more than 30 prime commercial buildings and a stable of 101 hotels.
(a) Profit Margin

Across all the financial years since 2013, Guocoland has improved its profits margins with a large increase in 2016 because of the sale of its assets in Beijing, China. From the chart, we can see that CapitaLand’s profit margins has remained relatively stagnant apart from 2014 where it experienced a slight increase in profit margins. Also, City Developments profit margins fell below 20% for the first time since 2013, which may signal an erosion in their earnings power.

(b) Cash Position

As shown in the chart, GuocoLand recorded positive cash flow for the first time since 2013 because of the sale of its assets in Beijing, China. Moving forward, it will be interesting to observe if GuocoLand is able to maintain the positive cashflow especially with its overseas expansion plans and the generally cautious sentiments of consumers. CapitalLand recorded an impressive yoy growth in free cash flows since 2013 while City Developments has seen large fluctuations in its free cash flows since 2013.

(c) P/E ratio

P/E ratio in FY16
GuocoLand: 3.43
CapitaLand: 12.99
CityDev: 15.25
Property & Construction Industry: 10.535
Real Estate Development Industry: 8.904

Data source: http://www.shareinvestor.com/fundamental/f...
In 2016, GuocoLand recorded the lowest P/E ratio among the three companies. GuocoLand registered a sharp decline its PE ratio from 2013 to 2014 and has been on a downtrend since then, reaching a new low in 2016, likely due to the one-off earnings from the sale of their assets in Beijing, China. CapitaLand has a declining P/E ratio as well while City Development’s P/E ratio has remained relatively consistent for the past 4 years.

5. Key takeaways
GuocoLand is an established property developer with an impressive portfolio of residential properties. Considering that it derives close to 90% of its revenue (as of 4Q 2016) from its business operations in Singapore, it is very sensitive to the overall sentiments of the consumers with regards to the property market. As mentioned, the property market in Singapore is on a downtrend and is unlikely to recover in the short run due to weak market sentiments . However, it is important to note that the long term fundamentals for real estate in Singapore remain solid and GuocoLand will definitely benefit when the economy recovers. Lastly, with the company’s recent strategic investment in Chongqing’s prime land parcels, it will provide another source of healthy revenue when the land is developed.

6. Related Estimates from community users
@Spinning_Top, https://www.investingnote.com/posts/95931
@ernest33, https://www.investingnote.com/posts/95931
@freako89, https://www.investingnote.com/posts/92245
@weiwei, https://www.investingnote.com/posts/86796
@billybobba, https://www.investingnote.com/posts/86356

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28 likes 43 comments
Fries

good value, big discount to Nav. will continue by adding more

ThumbTackInvestor

Reply to @billybobba : can't help much here, I dunno anything about Guocoland.
But specifically for developers, I think the key points that I'll look out for are:
1) Multi year, long term data on execution. Do they have loss making projects periodically?
2) Any parameter that measures efficacy. Things like ROE, ROIC, GPM, NPM.
3) In the space that they are in, do they have competitive advantages?
4) Debt!
5) Long term FCF generation
6) As for assessment of value, the whole band of being "cheap" has to be shifted down. Meaning a 0.8-0.9 P/B ratio is considered average, not exactly cheap.

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Smallcapasia

nice combined effort on this write-up!

thosai

May I ask based on IN's analysis, what is the fair value? Thanks!

gordon_ong

Reply to @thosai : Sorry! As of now, our inhouse policy is not to provide a fair value or target price of the stock. IN analysts aim to help our beloved community and promote discussion. Towards that objective, we strive to share in-depth information about a company's finances and prospects, and shed light into both the positive aspects as well as the risk factors. We do not provide investment advice, nor do we take a position as to whether a stock is currently undervalued or overvalued. We leave that to our users' discretion.

smurfy

what would be a good value to hold for this counter?

ozxinvest

referring to pt 4.c, may I know where did you get the revenue recognition for Guoco Tower in q3 &4 2016? Don't think they have booked any significant revenue (rental income) yet from Guoco Tower, there was no mentions in q1/2 results 2017, I can't find it even in q3 results 2017. TOP for office and basement retail components was obtained in Oct 2016.

ozxinvest

Reply to @gordon_ong : Thks for your clarification. I guess we will have to wait for FY results for more clues.

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Spinning_Top

Just to add on, being an average at best at FA, since you mentioned a bit on the debt equity, maybe it might be helpful to give a figure on the debt to equity ratio.
Nevertheless a good comprehensive writeup. Thanks again!

Spinning_Top

Reply to @fayewang : Thanks, I did not clicked on the graph earlier. I saw jt now. Cheers.

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lynlynnakamori

avoid this stock.....

Spinning_Top

Thanks for detailed analysis, will mull over this counter over the public holiday. Appreciate it!

TheSignalBlog

Please feel free to ask @fayewang, @calvinwee or @gordon_ong if you have any questions...just by commenting below! They'd be glad to take your questions!

robson

Reply to @gordon_ong : Yup, agree that there is no direct link between debt and revenue. Probably a correlation but it's highly dependent on what and how the company utilize the debt at the end of the day.

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Recommended & Related Posts

Quick review of 3 stocks’ fundamental situations and Your stock vote!

This column is jointly written by @fayewang and @calvinwee.

Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning. Calvin is a fundamental analyst at heart and an ardent disciple of value investing. He relishes the process of searching for undervalued stocks and enjoys collecting dividends from his stocks.

If you like this column, please start voting which of these 3 stocks you would like them to write on in her next article! This is your chance to interact with them and they will write on the most voted stock of your choice!

How to vote: Comment the stock of your choice: either GuocoLand, ST Engineering or 800 Super. The most number of likes/comments by the end of the day will be chosen. It’s that simple!

Voting starts now and ends when the market’s close on today (5 May) at market’s close (5pm)!

Disclaimer: this article simply provided analysis on stocks from the fundamental perspective, it does not represent any buy/sell recommendation from Investingnote. *All the dollar unit ($) in this article refer to SGD.
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1.$GuocoLand(F17)

a. Brief introduction
As a brief review, GuocoLand Limited is an investment holding company based in Singapore. The principal activities of the Company and its subsidiaries include investment holding; property development and investment; hotel operations, and provision of management, property management, marketing and maintenance services.

b. Company Structure

Data source: GuocoLand official website, https://www.guocoland.com.sg/corp_str.shtml
GuocoLand in this article refers to the GuocoLand limited that listed in Singapore exchange and owned by Hong Leong Group. GuocoLand targets the upmarket residential developments and competes with distinguished quality.

c. Overall Performance

Data source: GuocoLand financial reports, refer to all the reports at https://www.guocoland.com.sg/fin_fs.shtml
From the chart, it is obvious that GuocoLand suffered from decreased revenue since 2014. It is interesting that net profit surged from $216.452m in 2015 to $588.425m. However, this is mainly due to the $560.94m gain on disposal of interests in subsidiaries. In other words, the amount of net profit would has dropped without the disposal gain.

d. Segments Break Down


It has five segments based on geographic categories including:
GuocoLand Singapore, 2) GuocoLand China, 3) GuocoLand Malaysia, 4) GuocoLand Vietnam and Others.

Since the amount of revenue of others segment is negligible when compared to other segments, data of this part is combined with the Vietnam segment.

Based on data of financial year 2016, Singapore is the degment that contributed the greatest portion (61.46%) of operating revenue of GuocoLand. China segment took the second largest position in the business, which occupied 25.7% of the total revenue. Guoco Singapore and Guoco China jointly contributed 86% of GuocoLand’s income. Thus, the deteriorated performance of both Singapore and China market resulted in the downtrend of GuocoLand’s revenue since 2014.

Segment highlight - Singapore:

In 2014, the Singapore carried several rounds of cooling measure, which severely affect the sales of the upmarket condo. Sales in the core central region (CCR) suffered shrinkage of 300% on a yoy base, the drop in outside central region (OCR) also reach the number of 156%. (Refer to different region in Singapore at https://www.mingproperty.sg/region-map-sin... ). However, GuocoLand managed to achieve 84.7% growth in revenue and 665.57% growth in net profit, which is mainly driven by GuocoLand’s project of Goodwood Residence in Singapore and Seasons Park in Tianjin, China.

In 2015, with the continuous cooling measure and further price correction, the property investment sales crash to six-year low, and GuocoLand observed a drop of 7% in revenue, but the firm held a strong portfolio that includes tanjong Pagar Centre, Goodwood Residence in the orchard Scotts area and Leedon Residence.

In 2016, the property price decline further with higher volatility in the industry, sales of private residential house decreased 16% on a yoy base at the beginning of the year, and reached the lowest number in January since 2009. Under the unfavourable market situation, GuocoLand has witnessed 8.63% drop in revenue, but net profit was more than doubled because of the disposal gain. However, GuocoLand gained 142.6% growth in cash flow from operating activities and generated $2229.7m net cash from the disposal of interests in subsidiaries, which made the firm abundant with cash for further expansion or projects.

e. Market outlook in 2017:
GuocoLand survived in the headwinds, and managed to delivered solid performance in 2014. Though the company slightly suffered from the unfavourable market in 2015 and 2016, GuocoLand had the return on equity ratio of 18.476% in 2016 and paid stable dividend of $0.05 during the five years. GuocoLand’s net profit edged up 58% in 2017Q2, but the half-year profits nosedived 84%. While kept focusing in the core market of Singapore, GuocoLand revealed their expansion plan to UK and Australia though joint venture (JV). Given the strict policy in Singapore, development projects in China and Malaysia market might be the solution to the downtrend business.

2. $ST Engineering(S63)

a. Brief Description
ST Engineering (Singapore Technologies Engineering Ltd) is an integrated defence and engineering group headquartered in Singapore with four main business segments: aerospace, electronics, land systems and marine sectors. It has global presence with offices in Asia, the Americas, Europe and the Middle East.

b .Overall performance for the past 5 years

ST Engineering performance could have been better despite winning numerous contracts in its aerospace and electronics business segments. This is partially due to the underperformance of its land systems and marine business segments. Therefore, ST engineering only managed to deliver a 5.5% increase in revenue yoy in 2016. Net profit decreased by 13% while return on equity (ROE) ratio and return on assets (ROA) decreased by 10.5% yoy to 22.2 and 5.79 respectively in 2016. On a brighter note, its cashflow position improved tremendously by 147% yoy to $512 million in 2016 partially due to the divestment of its assets. It is interesting to note this is still lower than the free cash flow of $647 million recorded in 2012.

c.Business segments overview
The main bulk of ST Engineering’s revenue come from the aerospace and electronics business segments.

The electronics business segment remain the crown jewel of the company with strong growth in revenue of 9.6% y-o-y, maintaining the profit before taxes margins at a high 10.9%. The segment focus on smart city initiatives is expected to be their main revenue driver in the long run, especially in Singapore, where the government is building up infrastructure and formulating specific policies for it.

The aerospace business segment surged by 19% y-o-y due to the consolidation of its key European subsidiary, however its PBT margins fell by 1.3% to 12% in 2016 due to lower margins from its new passenger to freighter programs.

Moving forward, there will be potential headwinds but there will opportunities in new markets, hence the future of the aerospace business segment will depend
on how ST Engineering choose and execute its new projects

The land systems business segment had lower profits due to the loss from its closure of their operations in China. Excluding that loss, PBT will have increased
by 3% y-o-y. The prospects of the land systems business segment appear to be bright with higher infrastructure spending under the Trump administration.

The marine business segment continues to pull down the total profits margins of ST Engineering. With the lackluster demand of new ships globally, the marine
business segment’s fortune is not expected to improve in FY17. Nonetheless, further cost reductions may give it a small boost that will be most welcome.

d. Stock information
ST Engineering has a earning per share (EPS) of 0.155 which is the lowest since 2012. On the other hand, it has a PE ratio of 24.32, which is the highest since
2012. This PE ratio is slightly lower than the average PE ratio of the environmental services industry (25). Therefore, it seems that ST Engineering is fairly valued as compared to its peers in the industry.

e. Conclusion
ST Engineering does not seem to have strong revenue drivers in the short run but its long-term fundamentals remain intact. Therefore, we can expect to see
growth in the electronics business segment a few years down the road as it is aggressively building up its digital capabilities and its presence in the smart city
scene.

3. $800 Super(5TG)

a. Brief Introduction
800 Super is a one of the pioneers in providing environmental services provider for both the public and private sectors in Singapore. Its business segments
include waste disposal, cleaning and conservancy, and landscape services.

b. Overall performance for the past 5 years

800 Super continued to deliver a stellar performance in 2016 with an 11.5% increase in revenue yoy in 2016. Net profit more than tripled between 2013 and 2016 and profit margins increased to 12.5% due to the revenue from the extension of their cleaning contracts and its various productivity initiatives that drove cost down. 800 Super reported a very respectable return on equity (ROE) ratio of 26.9 and return on assets (ROA) ratio of 13.6. 800 Super has a healthy
cashflow position $10.2 million in 2016, a remarkable considering that it posted a negative cashflow of -$11.1 million in 2013.

c. Business segments overview
800 Super’s revenue come predominantly from the waste disposal and cleaning & conservancy business segment. For its waste disposal business segment, the revenue is derived from the contract signed with the Ang Mo Kio – Toa Payoh where it is the designated waste collection service provider for the residential and trade permises in the area starting from 1 January 2014 for a period of 7 years and 9 months. Under its cleaning & conservancy business segment, it was awarded 2 contracts to provide integrated public cleaning services for the Northwest and Southwest region of Singapore for 6 years and 7 years respectively in 2014.

d. Stock information
800 Super has a trailing earning per share (EPS) of 0.111, and a PE ratio of 13.03 which is the lowest since 2012. This PE ratio is lower than the average PE
ratio of the environmental services industry (18.397). Therefore, it is worthwhile to have a closer look at this stock as it is undervalued as compared to its peers in the industry. EPS tripled from 0.0321 to 0.096 in 2016.

e. Conclusion
800 Super is a reliable stock in a predictable industry, the consolidated playing field of the waste management industry allows it to deliver sustained growth in
revenue and profit margins. Overall, 800 Super does not seem to be affected too much by the volatile economic climate and has initiated expansion plans into a new business segment which is to convert waste to energy. Also, it has expanded its presence overseas by setting up a plastic recycling plant in Batam.

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