Hock Lian Seng – The Deep Pocketed Construction Firm (B)

Hock Lian Seng is a civil engineering firm and property developer listed in SGX. As this is the first time we present Singapore stock in this blog, we need to clarify something.

First of all, investing in Singapore stock market, or any other foreign stock market for that matter, is not a decision made to take advantage of weakening MYR. We do not intend to predict currency movement, so we would not take credit for any favourable currency movement, neither would we take blame for any unfavourable currency movement in our foreign portfolio. However, we do think that every investor should have a diversified portfolio, and diversification can come in terms of currency.

Second, we do not believe there is one stock market that is absolutely better than the other. Value investing is equivalent to investing in good business (at good price). Differences in government policies, monetary policy, import & export duties, natural resources, business environment, culture and demographic would make certain business is more favourable to be conducted in certain country, but the bottom line is, there is always good business (or good investment opportunities) in every nation. Investing overseas can definitely open the gateway to more undervalued stocks. Sir John Templeton, the legendary investor and a pioneer of global investing once said: “It’s not easy (to find a company with low price and an excellent long-term outlook), but if you are going to buy the best bargain, look in more than one industry, and look in more than one nation.”

Business

Right, back to Hock Lian Seng (HLS), we first spotted the Singapore construction veteran through UOB Kay Hian research report issued on 16 February 2017. Established in 1969, HLS is now one of the leading civil engineering group in Singapore with wide range of expertise including MRT related works, Roads & Expressways, and Airport Infrastructure. The group ventured into the property development business at the end of 2012. The civil engineering segment and the property development segment is now the two major business segments of HLS. It used to have an investment property segment which mainly manage workers dormitory but have ceased operations since end-15. 

 Taken from UOB Kay Hian Research dated 16 February 2017 

Projects and Awards

As mentioned in our previous shortlist post, HLS, being major project contractor and property developer, is not our usual type of company because of the following reasons:

1) Non-recurring revenue and earnings

2) Distortion in revenue and earnings presentation (we will present the details in our next post)

3) Inconsistent cash flow

Due to the nature of the business, we must include the previous projects and current orderbook as part of our analysis. More importantly, we need to ensure the management has the capability to secure more projects in the future. 

Civil Engineering Segment

In its civil engineering segment, HLS has been a main contractor for both public and private sector. Due to its expertise, most of the revenue is contributed by customers in public sector, i.e. the government and government-related bodies in Singapore, such as the Land Transport Authority (LTA), the Housing & Development Board (HDB), PSA Singapore Terminal,  Public Utility Board and Civil Aviation Authority of Singapore (CAAS).

HLS listed out all its current and completed civil engineering projects in its official website. Philip Securities did a fantastic job by compiling and classifying all the completed projects.

Taken from Philip Capital Research Report dated 5 July 2016

 

 Taken from Philip Capital Research Report dated 5 July 2016

 

Following the latest Changi Airport mega project won by the Group on 15 Aug 2016, HLS’s orderbook is currently at record high. Excerpt below shows the current civil engineering orderbook of HLS.

 Taken from UOB Kay Hian Research Report dated 16 February 2017

According to the research report, with current civil engineering projects (worth approximately  on hands, we will be able to see good earnings from the HLS for the next three to five years. And there is a big likelihood that the orderbook could go up further due to the robust industry outlook (cover at later part of this article).

Besides looking at the completed projects and current orderbook, it is also important for us to check the awards and the status of the civil engineering firm.

 Construction Excellence Awards, taken from Hock Lian Seng official website

 Safety Awards, taken from Hock Lian Seng official website

ISO Certifications, taken from Hock Lian Seng official website 

With all the awards from Authority in Singapore over the years, we may rest assured that HLS’s experience, integrity and reputation would help it to secure more contracts going forward. HLS is also a GRADE A1 contractor in both the General Building (CW01) Category and Civil Engineering (CW02) categories which grant it the ability to tender for public sector projects of unlimited contract value in the respective categories.

Apart from the construction excellence and safety awards, HLS was also conferred recognition under the “Best Under a Billion” listing in June 2015 by Forbers Asia.

Property Development Segment

The Group ventured into property development at the end of 2012. Its previous three projects i.e. Ark@Gambas, Ark@kb, The Skywoods (joint venture)  have shown good results. Ark@Gambas and Ark @ KB was completed in 2014 and 2015 respectively, and The Skywoods is going to be completed soon, with most of the units sold and large porportion of its development profits have already been booked in latest quarter 4QFY16.

The only remaining property development project for HLS is the construction of industrial development property at Tuas (Shine @ Tuas South). COC method will be used in this method so we would not be able to see revenue contributtion from the project in recent financial reports.

Industry Outlook

Civil Engineering Segment

According to Building and Construction Authority (BCA), public sector construction demand is projected to grow to between SGD 20 billion and SGD 24 billion in 2017, up from about SGD 15.8 billion in 2016. Among the potential mega public sector infrastructure projects, the most notable ones are the second phase of the Deep Tunnel Sewerage System, North-South Corridorand Circle Line 6.

 

 Taken from Straits Times http://www.straitstimes.com/business/economy/public-sector-projects-worth-up-to-24b-to-boost-construction-sector-this-year

Looking beyond 2017, BCA forecasts average construction demand at SGD 26 billion to SGD 35 billion per year for 2018 – 2019 and SGD 26 billion to SGD 37 billion per year for 2020-2021. Public sector construction demand is projected at SGD 18 billion to 23 billion per year from 2018 to 2021. Coming mega infrastructure projects include Jurong Regional Line and Cross Island Line,  which in line with Land Transport Authority (LTA)’s target of doubling MRT network by 2030. There are also going to be various infrastructure developments for Changi Airport Terminal 5 as the terminal is set to be one of the largest terminals in the world. As the veteran in MRT projects and its current involvement in Changi Airport 3 runway system, HLS is definitely going to be benefited from the coming projects.

What excites the sector more is that, from recent Singapore Budget 2017 (announced in February 2017), we can see that Singapore government spending on infrastructure to remain strong in keeping Singapore globally connected and competitive. The government brings forward infrastructure projects totaling SGD 700 million to start in 2017-18. Another indication of the government emphasizing on civil engineering project is that, being a prudent budget, a 2% budget cut was announced for all ministries but transport (along with Home Affairs, Health and Defense) was placed as a priority.

Property Development Segment

The bleak and gloomy property sector in Singapore due to the government’s property cooling measures has received the first easing policy the first in more than 3 years. Effective 11th March 2017, the government lowered the Seller’s Stamp Duties (SSD) by four percentage points for each tier with the new SSD rates ranging from 4% (for properties sold in the third year) to 12% (for those sold within the first year). There is also a relaxation of the total debt servicing ratio (TDSR) for mortgage equity withdrawal loans with loan-to-value ratios of 50% or less and additional conveyance duty (ACD) on the transfer of equity interest in property-holding entities. 

While the adjustment might not have significant impact to the industry instantly, it marks the first significant easing policy measures and signals the beginning of the end of cooling measures.

A Little Note on Transparency

We can’t stress enough the significance of management’s role in deciding a business’s long term return. In area of Management, there is a subarea calledTransparency in our analysis. In Stockify, we always assess the transparency of a listed company and give credit accordingly. However, due to the limited post length, we are not able to include every aspect of our analysis in the post. 

In the case of HLS, we think very highly of the transparency of the company. The annual reports and financial reports of HLS highlight every significant change in account and explain them in details. Analyzing companies is like a private detective solving crimes, we need some facts, assumptions, imagination and deductions to reach a conclusion. Reports provided by HLS definitely make our life easier and totally an eye candy to us.

 Transparency checklist of Hock Lian Seng

Conclusion

Hock Lian Seng is a veteran in civil engineering with wide range of expertise in Singapore. Most of the customers of HLS are government-related bodies as they deal directly with the authorities in constructing Expressways, Bridges, Roads, MRT-related works and Airport Infrastructures. Investing in HLS is a proxy to Singapore infrastructure play, an area which will continue to see spending from the government in coming years. The property development segment could be a wildcard to the group as we are starting to see the uplift of property cooling measures in Singapore. 

As the title of this post suggests, in addition to its reputation, HLS is also a construction firm with deep pocket, which we will present in next financial analysis post.

References:

HOCK LIAN SENG Annual Report FY 2013 to FY 2016

HOCK LIAN SENG Financial Report  1QFY16-4QFY16, 1QFY15-4QFY15, 1QFY14-4QFY14, 1QFY13-4QFY13

Philip Capital Research Report dated 4 July 2016

UOB Kay Hian Research Report dated 16 February 2017

http://www.straitstimes.com/business/economy/public-sector-projects-worth-up-to-24b-to-boost-construction-sector-this-year

https://www.hlsgroup.com.sg/index.php

http://www.singaporebudget.gov.sg/budget_2017/BudgetSpeech.aspx

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