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Hiap Hoe: Can Diversification Stem Its Domestic Woes?
Corporate Digest, Featured | 08 October 2014
Related stocks:
5JK
By: Tan Jia Hui
Articles (82) Profile

Hiap Hoe is one of Singapore’s mid-sized property developers with a niche in high-end residential projects. In the past year, the company started to transform itself into an integrated developer with exposure to mixed development projects and properties both locally and in Australia.

With a slew of property cooling measures affecting demand in the local market and impacting local developers, can the company’s diversification plan help to tide it through?

Phenomenal FY13, Bad Start To FY14
Over the past five years, there has been a general uptrend in Hiap Hoe’s revenue and earnings.

In particular, FY13 had been stellar for the company, with revenue jumping 65.3 percent to $240.8 million and earnings rising 38.2 percent to $80 million.

Source: Company Annual Report

In contrast, FY14 had not started out as well for the firm. For 1H14, top line declined 46.7 percent to $59 million, in absence of revenue from the construction of the Zhongshan Park (ZP) development, which was completed in 3Q13.

The decline in the property development segment was offset by new contributions from rental, hotel operations and leisure business, generated by investment properties in Australia acquired in FY13, the commencement of the two hotels as well as retail and office spaces in ZP.

On first look, the firm’s 1H14 net profits seemed to have swelled by almost nine times to $348.7 million.

However, a closer inspection reveals that a large bulk of the increase comes from non-cash items in negative goodwill arising from acquisition and gain on remeasurement of investment.

Excluding these two items, 1H14 net profit reduces to $0.8 million, a significant decline from $39.5 million in 1H13.

Domestic High-end Residential Project Under Pressure
Singapore’s property market recent performance had been marred by the introduction of property cooling measures. Developers are starting to feel the pressure, particularly in the high-end residential segment.

While Hiap Hoe’s Waterscape At Cavenagh project, slated for completion by end 2014 was 75 percent sold by 31 December 2013, its other completed project Treasure on Balmoral (TOB) had been having tough luck finding buyers.

TOB, which has received its temporary occupation permit (TOP) in November 2012, has yet to record a sales to date (one sale was actually recorded, but later dropped).

This is a worrying situation as listed developers have to sell all the units in a project within two years of obtaining a TOP.

Failure to do so will result in an extension premium, which stands at 8 percent of the land purchase price for the first year of extension, 16 percent for the second, and 24 per cent from the third year onwards. The charges are pro-rated according to the proportion of unsold units in the project.

As such, under pressure to sell the project to avoid having to pay hefty fees, the firm had put the project up for bulk sales in July for $191.4 million.

Treasure on Balmoral was put up for bulk sale in July for $191.4m

The amount translates to $1,850 per square foot (psf), lower than the median prices achieved for units at two other projects on Balmoral Road: Goodwood Grand ($2,360 psf) and One Balmoral ($2,451 psf).

There has been report on interested buyers but till date, no deal has been finalised.

Diversification In Singapore And Australia
Hiap Hoe started its venture into the Australian property market last year, acquiring three assets in Melbourne.

The sites at 6-22 Pearl River Road and 380 Lonsdale Street currently have permits for residential development and mixed-use development (comprising residential, office and retail segments) respectively. However, the group plans to seek approval to develop both sites as mixed-use projects comprising both residential and hotel components.

The third asset, 206 Bourke Street, is a mixed-used retail and office asset in Melbourne’s Central Business District, which provides rental income. The property also comes with a planning permit for a 142-room hotel above the structure’s fourth level.

While I am not 100 percent positive about the firm’s foray into the Melbourne residential market which seems to be facing a supply glut that is depressing prices, the company’s proposal to develop the two sites as mixed-use projects adds some positive notes.

Locally, Hiap Hoe extended its reach to the hospitality and commercial segments with the completion of ZP, which the group has a 50 percent interest in. The two hotels, Zhongshan Mall and Hiap Hoe building located at ZP provide a stream of recurring income stream for the group.

Investment Merits

  • New hospitality segment doing fairly well (80 percent to 90 percent occupancy at both hotels), providing diversified recurring income.
  • Relatively attractive valuation at current price of $0.825 (Trailing Twelve-Month Price to Earnings Ratio: 1, Book Value per Share: $1.54).
  • Potential upside from Australian mixed-development.

Investment Risks

  • Limited upside in Singapore’s property market as slowdown could persist.
  • Possibility of having to pay extension premium for TOB could hurt profitability.
  • Limited earnings visibility and projects down the pipeline (Only one industrial development, HH@Kallang, expected to complete by end 2014).

SI Research Takeaway
Given the current environment, some developers have resorted to slashing prices for completed properties while some are still holding off.

But for Hiap Hoe’s case, as the deadline for the sale of TOB looms before the extension premium kicks in, the decision to hold on to the property may be rather costly.

That said, the group’s foray into the Australian market and the hospitality segment may provide some respite.

In the long term though, some visibility on the progress of the group’s projects and securing of new contracts would certainly be good to retain investors’ confidence.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

Hiap Hoe  -- -- --   
Business: Co is engaged in construction & devt ppties activities. [FY18 Turnover] Development properties (41.3%), hotel operations (37.5%), rental (16.7%), leisure (4.5%).

Insight: May-19, 1Q19 revenue slid 42.2% due to lower sales... Read More


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