Monday, March 26, 2018

The Counter That I Regretted Saying "I Will Ignore It"

Warning: This will be a slightly long post. But it will be packed with information.

I will like to apologize for the delay in putting up with this post due to the information I need to gather.

I will be writing on Singhaiyi Group Ltd (Singhaiyi) that I am currently already vested in and also on its industry.

I have wrote a few articles on Singhaiyi before – some good and some bad. Although in the last post, I already stated that I was going to ignore them. But I re-purchase them again recently.

Prior to me explaining why I did that, let me explain about what had happened over the last 12 months (Earliest to the latest)

1. Sold their stake in TripleOne Sommerset,
2. Did not exercise the rights to own OKH Global,
3. Owning 100% of the development of City Suites,
4. Acquire Sun Rosier via Enbloc Sales along with Haiyi Holdings
5. Acquire How Sun Park via Enbloc Sales along with Haiyi Holdings
6. Investing in Cromwell Property Group, the sponsor of Cromwell REIT.
7. Acquire Park West via Enbloc Sales along with Haiyi Holdings
8. Sold Entire Vietnam Town Phase II,
9. Then it issue rights at 10 cent per right share.

During the whole time, I did have my reservations over the management due to these thoughts:

Why did Singhaiyi acquire land bank using along with Haiyi Holdings - a company 100% owned by Gordan Tang, the executive director and Serene/Celine Tang, the CEO? Is there something I don’t know?

Furthermore, with their track record of not being totally upfront (please read my last post on them), I did not have the full confidence in them.

But why did I purchase them again?

1. Haiyi Holdings

I am always unsure of why the management always include Haiyi Holdings alongside Singhaiyi in all its investment/purchases.

Haiyi Holdings is a private company held by the management and I am unable to ascertain their motives.

Currently, I think I should apologize to the management for my short-sightedness. This is because a recent post on IN made me realised that Haiyi Holdings is placed there in order to support Singhaiyi when required.

Screenshot of Post from IN

To show their commitment, Haiyi Holdings actually scoop up over 1,048 million of rights shares – which translate to the management pumping in over $104 million into Singhaiyi. This also resulted in Gordan Tang increasing its deem ownership to 66.91% and Celine Tang increasing its deem ownership to 64.55% in Singhaiyi respectively.

The management actions over the last 12 months can also be viewed as positive, especially when it chose not to exercise Singhaiyi rights to purchase OKH Global.

With that, I concluded that the management actions have shown their commitment towards Singhaiyi and are in line with the shareholders.

2. Enbloc Sales of Sun Rosier and How Sun Park

When Singhaiyi bought Sun Rosier and How Sun Park, the reactions from the public were mainly negative. It seems that they paid too much for the 2 plots of lands. Some investors even went on to sell off their holdings. I was no different (Oh... I bought, sold, bought, sold and now bought again.)

I was sceptical about the purchases and wrote to the Singhaiyi IR. With their approval and blessing, I was able to attach their reply below.

A Portion of the Screenshot of The Email Reply From IR

Even with their reply, I was not fully convinced. Thus, I did a full analysis on almost all the Enbloc Sales over the last 12 months.

Information Grab from Tracygoh.sg, Business Times, The Edge, Straits Times

From the table, it is good to note that the total overhead cost psf (including construction) is estimated to be around $369 to $684 depending on the district. 

Expected selling price psf is always stated to be a 10% margin on top of total cost (Land + Overhead + Construction).

As indicated in the table, it seems like the overall enbloc sales has increased the land prices around Singapore significantly.

In my opinion, this could be caused by a few factors – FOMO from the perspective of developers, the continued vibrant property purchases, higher living standards and continued foreigner purchases.

Nevertheless, this table re-enforces the view that the prices Singhaiyi paid for the enbloc sales are not unreasonable.

However, for Enbloc Sales within district 19, it still seem like Singhaiyi still paid a bit too much.

But on a closer look, one should take note that other district 19 enbloc sales were (1) larger plot of land, as well as (2) occurred much earlier during May to July when enbloc sales were not as vibrant, and (3) those were 100+ years leasehold land as compared to the freehold land that Singhaiyi bought.

Therefore, with all the above information, I concluded that the prices that Singhaiyi paid for Sun Rosier and How Sun Park were, at least, within reasonable range.

3. Park West Enbloc Sales

Singhaiyi was able to purchase Park West condo – 1.3 million sf based on a plot ratio of 2.1 – at $741 psf in Clementi.

Based on the current sale of The Trilinq, an IOI Properties project that is 350 metres away, the average selling price of the units were $1,335 psf.

Therefore, I am quite positive that Singhaiyi will be able make a nice tidy profit on the sale of the development in this area.

4. The Calculation of NAV

The simple calculation of NAV determined that there is a certain margin of safety for this counter.

As per 3Q FY 18 report – The equity was $512,974,000 and the number of shares were 2,870,297,850.

If the rights issued were added to the equity and number of shares, the NAV will be:

(Equity + Cash Collected From Rights) / (Number of Shares + Rights Shares) = (512,974,000 + 143,514,892) / (2,870,297,850 + 1,435,148,925) = $0.152 per share.

Based on the current price of $0.097, that is a 36% discount to NAV.

5. Fair Value

I also did a fair value calculation based on these few plots of land. I decided that I will based the fair value back to the book value of Singhaiyi.

Nevertheless, my calculation will come with A LOT OF assumptions and could get a bit complicated.

But let me explain:

Firstly, I calculate how the Enbloc Sales will be financed by Singhaiyi. Do note that Singhaiyi only holds 50% of each Enbloc Sale.

Part 1 of My Calculation

In this assumption, all the cash, cash from rights, entire sale of phase II of Vietnam town, sale from City Suites (Est 56 units sold at $1 million each) and receivables will be used to finance the purchase of the 3 Enbloc Sales. 

Thus, it is deem that a loan of $127 million could be required.

Secondly, I calculate the present value of all the 3 Enbloc Sales. It is based on the following assumption:

- All enbloc sale will be redeveloped and sold in 4 years.
- Overhead + Construction Cost is $450 psf.
- Sun Rosier will have a 5% margin.
- How Sun Park will have a 10% margin.
- Park West have a 20% margin.
- Discounted at 10% over 4 years.

Part 2 of My Calculation

Next, I calculated the fair value of the current book value.

Fair value = New equity amount (including rights issue) – all the expected sources of financing the 3 enbloc sales + 50% of the estimated present value of the development value – the present value of the total overhead, including construction cost, of the development.

Part 3 of My Calculation

Finally, I arrived at $0.124 per share. This is much lower than NAV of $0.152 per share and only has 21% of margin of safety.

Is this margin too little for the significant assumptions used above?

My personal view is that I did not include the following in my calculation:

- Potential gain from re-developing of Park Mall which will complete by 2019, 
- Redevelopment of 5 Thomas Mellon Circle in USA, 
- Rental income from Tri-County Mall in the USA,
- Potential gain in staple securities of Cromwell Property Group.

All the above could potentially push the present value of Singhaiyi to greater heights. Thus, I believe the fair value of $0.124 was reasonable.

In Short

With the positive factors stated above, I believe the current price provide some margin of safety for retail investors. In fact, I believe 20% discount off the fair value at $0.099 will be a good entry price.

But do note that I have only stated the positive pointers. This purchase do come with RISK too.

The main risk will be the property industry did not rise as much and the property developments did not achieved the expected prices.

Another major risk is the Singapore government coming up with more cooling measures for the industry in the future. 

In addition, it is also important to note that the fair value is calculated based on the future value of the development 4 years later. Thus, if you purchase Singhaiyi now, you should be in it for the LONG TERM.

Therefore, only purchase this counter if you understand the risk and are prepared to hold for the long term.

Do note that the author is vested in Singhaiyi Group Ltd.

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