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Tiong Seng: A Competitive Edge Through Technology Utilisation
Corporate Digest | 03 May 2013
By: Jade Lee
Articles (97) Profile
By: Nicholas Tan
Articles (71) Profile

Recent years have been testing times for construction firms. Sandwiched between policies on real estate control and foreign workers restriction, these companies are facing thinning margins. What are these construction firms doing to cope with such challenges? We speak to local construction firm Tiong Seng Holdings to find out more.

Roiling the property sector, governments in the region have taken an assertive but careful stance towards real estate control in cooling the red hot property markets. Tiong Seng Holdings, a local construction company operating in a labour intensive industry, with a large domestic business exposure has not been spared by these regulatory measures implemented by the government.

In an exclusive interview with Shares Investment, Tiong Seng chief executive officer Pek Lian Guan shared with us his thoughts about the impact of the measures on its business, and also its recent developments and future business outlook.

Least Affected

Any business caught in the political crosshair that leads to an increase in operating costs will certainly be temporarily affected. Notably, the margins of the projects secured prior to the tightening of the labour policy will definitely be affected in some way because the contract sum is fixed, and unfortunately in Singapore, a company does not have recourse in an event that unfavourable policies being meted out by the government affect the profitability of a project.

Thus, it is all about minimising costs and being the least affected among its peers, while riding through the economic cycle and awaiting a positive turn of events, in the words spoken by Pek. “Despite being affected, we want to be the least affected among construction companies. Our early adoption of technologies and construction methods such as pre-cast fabrication construction has enabled us to reduce reliance on labour,” said Pek.

The key here is the degree of impact; if Tiong Seng’s competitors continue to drive business growth through the use of conventional construction methods such as relying on cheap foreign labour as opposed to investing in capital expenditure on technological improvements, they will be exposed to greater regulatory risks and their costs will increase more than Tiong Seng’s in uncertain times.

Productivity Is The Key

Construction companies differ in size and specialty, but one common theme among them is the need to complete a project on time and within the budget to make a profit. And given that three industry-wide challenges – shortage of skilled manpower, stagnant productivity growth, and rising costs – continue to affect the construction industry in Singapore, Pek, therefore, expects Tiong Seng’s margins to remain tight for the next two years.

In a bid to fortify its profitability, Tiong Seng opened its flagship “Tiong Seng Prefab Hub”, the first and only automated pre-cast plant in Singapore, which allows the firm to reduce reliance on labour. At the same time, Tiong Seng Prefab Hub doubles the firm’s production output and reduces storage costs. Meanwhile, the firm has also been adopting the use of its proprietary cutting-edge concrete slab technology, Cobiax, which reduces the volume of concrete used in slabs by as much as 30 percent.  Cobiax has also increasingly gained acceptance within the construction sector.

Now, Pek has set his sights on a second pre-cast plant. The plant, to be constructed in Johor Bahru, Malaysia, is intended to cope with the increased market demand for precast that the firm is facing. “At full production, we target plant capacity there to be around 80,000 to 100,000 cubic metres,” said Pek. Tiong Seng’s existing plant in Tuas has a capacity of 100,000 cubic metres per year. “That said, we will also continue to look into expanding in Singapore if the government is coming up with more land for pre-cast businesses.”

China Division: Better FY13 Performance

Firm property measures carried out by the Beijing government have also affected Tiong Seng’s real estate development business in China. “Inevitably, the cooling measures affect our sales in the short term.  We do not expect the situation to persist, however,” claimed Pek.

For its Tianjin project – Tianjin The Equinox, sales has been affected and is quite slow. Tiong Seng does not expect sales to pick up this year, given that the cooling measures by the Chinese government are likely to remain for now, in light of the recent transition in leadership. On a brighter note, projects in less-developed Cangzhou – a third or fourth-tier city, have seen relatively good sales volumes compared to Tianjin because of the good location and higher demand.

For the past two years, Phase 1 of Tiong Seng’s project in Cangzhou was completed and fully sold. This year, the firm expects its property development segment to fare relatively better due to some recognition from two more phases.

Revenue And Earnings Growth

For the financial year ended 31 December 2012, Tiong Seng raked in revenue of $511.4 million, 23 percent year-on-year jump from $414.5 million a year ago. While this has translated into revenue compounded annual growth rate of 42.4 percent over the past three years, the earnings per share (EPS), however, has been in a decreasing trend from 3.8 cents per share, or $28.8 million in FY10, to 3.4 cents per share, or $25.7 million in FY12.

“For real estate development in China, revenue is only recognised upon completion of the projects and after the keys are handed over to buyers.  Most of our projects are still undergoing development, which is the reason why sales have not translated into revenue for the Group as yet.  At the same time, we have expensed the operating costs that have been incurred in the course of development,” explained Pek when asked about the culprit behind the drop of Tiong Seng’s earnings. “Not only that, the absence of profits from joint ventures, which contribute to the bottom line but not top line, also gave rise to the slight drop in earnings this year,” added Pek.

While Pek, like others in the construction sector, is affected by the increasing costs, he is generally sanguine. “Our adoption of construction technologies such as pre-cast and advanced formwork will enable us to mitigate some of the higher costs,” said Pek. Remarkably, Tiong Seng’s construction business, which took up more than 90 percent of Tiong Seng’s total revenue in FY12, has grown steadily, with new orders of more than $600 million secured in FY11 and FY12 respectively, and $200 million thus far in FY13.  As at 28 March 2013, Tiong Seng’s order book stood high at $1.5 billion, with majority of the contracts expected to be fulfilled over the next 12 to 30 months.

Above all, Pek is still optimistic about the local construction sector over the next 5 to 10 years given that there are still a lot of infrastructure and housing projects expected to be rolled out. “With our established track record and vast experience, we are well-positioned to benefit from the uptick in demand,” emphasised Pek.

 

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.


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