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
April 3, ‘GuocoLand scaling up in UK, Australia while keeping tabs on core markets’ refer to the news at
April 5, ‘Singapore: GuocoLand expands to UK & AUS; Ascott expands business in Brazil’ refer to the news at
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
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