Hiap Hoe

In my "Stock Picks for 2010" posted on 23 Dec 09, I had picked Hiap Hoe and Q&M. I am putting Hiap Hoe under a new thread so that I can update on this company's developments.

Here is what I wrote on 23 Dec: Hiap Hoe: Earnings and RNAV surge to come from projects built on cheap land:

1. Skyline 360: net saleable space: 123,192 sq ft, land cost: $756psf, other cost: $450psf, breakeven: $1,206psf, average selling price: $1,950psf, gross profit = ($1,950-1,206) X 123,192 = $91.65 million.

2. Waterscape: net saleable space: 213,437 sq ft, land cost: $609psf, other cost: $430psf, breakeven: $1,035, average selling price: $1,750psf, gross profit = ($1,750-$1,035) X 213,437 = $152.6 million.

3. The Aspine (60% stake in project): net saleable space: 79,800 sq ft, land cost: $1,870psf, other cost: $450psf, breakeven: $2,320, average selling price: $2,000psf, gross profit = ($2,000-$2,320) X 79,800 X 60% = $15.32m loss (60% share of total loss)

4. Hotel/SOHO project in Ah Hood Road (50% stake in project). Gross floor area = 426,000 sq ft. Company bought the land at $172 psf, compared to analyst estimate of fair value of $350-470psf.

To be conservative, we use a gross profit of only $250psf for this project. Gross profit = $250psf X 426,000 = $106.5 million, and Hiap Hoe's 50% stake in it is equal to $53.35m.

Total gross profit above = $282.28 million, compared with mkt cap of $166.4m. RNAV should surge to $1.08. Co will experience big earnings and RNAV growth next 1-3 years, with huge cash inflows in next 2-4 years. Co is one of the most exposed (in % terms of co's projects) to the Orchard Road vicinity, and if analysts touting growth in prime area prices are correct, then it will not have problem selling its Orchard area condos. Its hotel exposure will also benefit if the IRs take off next few years."

Updates on the company will follow in my next postings.

Skyline 360: Hiap Hoe previewed this condo at the Raffles Hotel last weekend. From what I understand, about 20 units out of a total of 61 units were sold. Most of the units sold were 3 bedroom units. Buyers bought without seeing any showflat, which is a positive. I am not sure if Hiap Hoe will try to publicly launch the rest of the units later. The company seems to lack an aggressive marketing strategy, compared to how Far East and CapitaLand bring their projects overseas to sell.

Far East is also known for aggressively advertising its projects and spending lavishly on its showrooms. Also, buyers for high quantum condo units have not really returned in substantial numbers.

Waterscape: I understand that less than 10 units are sold in this development, but perhaps the condo is still not officially launched (?). I believe the pricing was too aggressive (average of about $1,900psf compared to my estimate of $1,750psf to attract buyers). In addition, specu-investors have mostly been missing in recent launches, with new units mostly taken up by end-users. Despite this, the project's attraction is its smaller unit sizes (hence lower quantum), and perhaps in an improving market, may attract some specu-investors later.

What is positive is that management did try to soft launch both projects and sold some units, which means there will be some positive cash flows as construction begins. If Hiap Hoe has the holding power, and if interest in prime area condo can be sustained this year, the company may be able to slowly clear the remaining units. In fact, this seems to be the company's marketing strategy (although I think it's too taxing on an investor's heart) with all its projects so far (including Signature@Lewis and The Beverly) - taking its time to sell, and letting a recovering market move its units.

Hiap Hoe announced last night that its hotel project in Ah Hood Road will consist of a 390-room Ramada Singapore, and a 405-room Days-Inn, both managed by Wyndham Hotel Management. The total number of hotel rooms is 795.

I am not sure how Hiap Hoe and its sister company SuperBowl (each has 50% stake in HH Properties, the joint venture co) will package their hotels, but I would like to work on the assumption that the hotels are in the 4-star category. The location, while away from the main hotel belts, is still in a relatively central area, and is just next to the Sun Yat Sen Nanyang Memorial Hall, which may attract China visitors as guests.

HH said that its total investment in the project is $300m. I believe this includes the cost of the shopping/office space as well (no details are given yet). Previously, there was some indication that there would also be SOHO units for sale, but in yesterday's report, there was mention only of an adjacent office block.

Without more information on these other parts of the development, any calculation now of the potential paper profit of the project would be mere estimates at best. Regardless, assuming that the hotel portion of the development takes up $250m out of the $300m total cost (including land, as stated by the co), then the value of each of the 795 rooms is $250m/795 = $314,000 per room.

By comparison, CDL Hosp Reit values its Novotel at Clarke Quay at $665,000 per room, its Grand Copthorne Hotel at $683,000 per room, and its King's Hotel at $387,000 per room. While these hotels are sited at better locations, their remaining leases are 68, 73 and 58 years respectively. This compares with HH's approximate 94 years when the hotels open in 2014, and the fact that the hotel will be brand new and does not need refurbishment provision in the immediate future.

Hence, I would assume a $450,000 value per room for HH's hotels. Surplus to HH will therefore be $450k-$314k = $136k per room, and for 795 rooms, that will be $108 million. Even conservatively assuming there is no valuation surplus in the office/shop space being developed, this $108m excess valuation in the hotel development is in line with my earlier estimate of $100m excess valuation for the whole development (Hiap Hoe's portion being $50m).

Valuation aside, the development will provide Hiap Hoe with a recurrent income, and this will supplement its property development income in future. We will have to wait for further details as this development takes shape. Any sale of office or SOHO space will provide more immediate profits to the company.

Suffice to say that because Hiap Hoe got that parcel of land at a dirt cheap price last year when other developers were nervous about the market, the company is now able to own a huge project of 421,000 sq ft of gross floor area for a total of only $300m

Hiap Hoe\'s full year results are due to be announced after 5pm today. Stock price has rebounded to 58cts, close to its recent high of 62cts, probably in expecation of the good results.

Sumer, thank you for your posting. Managed to grab some during market close. 0.25 ct dividend plus 1 for 4 bonus issue!

As expected, Hiap Hoe announced sharply higher full year profits (+320%). EPS of 9.08cts. But because the co is getting very little cash inflow at the moment, it proposed only 0.25 ct dividend. Co has proposed 1-for-4 bonus issue to reward shareholders, instead. There was a run up of the share price before the announcement. Not sure how much of it is due to market getting wind of the bonus issue. Usually, I do not buy on news, but on expectations. So, sgmarket, I think buying so near to results release date is a tad risky.