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
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
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 Corridor and 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
called Transparency 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
https://www.stockifyblog.com/single-post/hls-business
