King Wan Corporation

King Wan Review

We have briefly covered King Wan (KW) previously with a 3Q update. At that time, KTIS has yet to be listed on the Thai Exchange. Fast forward to the present, with the completion of KTIS’s listing and the release of KW FY14 Annual Report, we take this opportunity to revisit our investment in the company. As our thesis was based mainly on asset value, the bulk of our analysis will be as such.

Screen Shot 2014-08-02 at 2.30.30 am

Screen Shot 2014-08-02 at 2.30.40 am

KTIS Holdings

Upon listing, KW received approximately SGD47.6m worth of shares in KTIS at a listing price of 10 THB each. Taking into account the recent fall in price (9.55THB), KW’s holdings are now worth SGD45.5m, of which SGD21.6m has been recognised in books. Therefore, we have revaluation gains of SGD23.9m.

Vessel Holdings

KW also owns a ‘Supramax’ Bulk carrier held through its 30% owned associate. Gold Hyacinth Development Pte Ltd.  This was originally purchased for USD21m, or approximately SGD26.25m based on an exchange rate of 1.25, during a period when the Baltic Dry Index was floundering near a post-crisis low level of 698. Based on DMG’s report in April, the vessel then commanded a market value of USD28m or SGD35m. Correspondingly, KW’s stake will be worth SGD10.5m, a gain of SGD2.6m. However, do note that the Baltic Dry Index in April was almost twice of its current level.

Dormitory Venture

KW recently ventured into the worker dormitory business via a 19% stake in a consortium. The land (in Tuas) has a lease term of 20 years and is to be developed to a facility with 9200 beds. It is anyone’s guess how much profits this will bring, but based on my research, the average rate for 1 bed will conservatively be around SGD250/month. Assuming an occupation rate of 80%, I expect the facility to generate about SGD4.2m in annual revenue for KW. If we use Centurion’s Holdings 3-year low net profit margin of 15% as a reference, we get estimated profits of SGD0.6m. Assuming a dummy discount rate of 10% (I have no confidence in my WACC calculation), terminal growth of 0%, we value the dormitory holdings at SGD5.5m

Pseudo-Sum-of-Parts Value

Adding all gains, totalling to SGD32m, to the current reported NAV of SGD86.4m, we arrive at a RNAV value of SGD118.4m. Based on the current number of outstanding shares, we therefore have a fair value of about SGD0.34, which is fairly close to its current share price.

Challenging M&E Industry

Due to public displeasure about the amount of foreign workers, the Singapore government has been steadily tweaking its policies to reduce the amount of foreign workers employed by companies. As a mechanical engineering company, KW relies heavily on foreigners for its labour. You can see that we are starting to observe the effects of the policies through the increased labour costs, with gross profit margins falling consistently from 23.8% in 2012 to 14.8% in 2014. While revenue has been increasing steadily, this hasn’t added much to the bottom line. If we discount KTIS’ contribution of SGD7.2m in 2012, net profit has from its core operations have actually been decreasing. In the past, the price afforded a margin of safety sufficient to offset this, but given KW’s share price increase, this is no longer something we can be certain of.  To put things simply, even if KW were to maintain its very impressive top line growth, profits would still be decreasing. To top it off (pun intended), with the slowdown in property markets, I think it would be a challenge for KW to continue its top revenue growth.

Property Developments

Things are not all bad for KW however; our fair value of SGD0.34 has been based on the assumption that we value its operations and its property developments at book value. Through its associates, KW has stakes in a number of properties in Singapore, Taiwan and China which are accounted at book value of SGD2.1m. The properties and their estimated values are as below:

Screen Shot 2014-08-02 at 2.31.09 am

The estimates are based on average transacted prices from Squarefoot Research multiplied by the net leasable area from the official condo websites, note that these values do not include the cost of development and percentage sold. Unfortunately, we do not have enough information to value the remaining properties in China and Thailand, but I think at book value of SGD2.1m, we are fairly safe from much downside, in light of the fact property sales in Singapore and China have slowed down considerably.

Conclusion

Upon KTIS’s listing and its current share price of SGD0.345, we think that our original thesis (value of KTIS) for KW has already run its due course given our targeted fair value of SGD0.34. Moving forward, we have identified downside risks to its operations, negated by upside potential from its property developments. Potential for future revaluation gains are definitely present, but since we are unable to place an estimate, we refrain from including them in our calculation of fair value to be on the safe side. One thing is clear that the margin of safety is much lower now, with future returns to be more uncertain than before given the volatile nature of KTIS shares and KW’s vessel holdings. Furthermore, given how KW is currently trading at P/E 17.9x, normalised EV/EBITDA 13.1x and normalised FCF yield of 3.23%, we have decided to exit our position in King Wan Corporation. We leave it to each individual to weigh the risks and potential gains based on your risk appetite..

Disclosure: The authors have no vested interest in 554.SI

Convictions Paying Off

(Posted on behalf of TL)

Currently interning in Shanghai in a real estate PE firm, hence, my posts have been pretty lagged, for that I apologise. However, it is due to my workload and China blocking most social sites. I find my work quite satisfying – surveying potential sites, researching on its potential, preparing investment pitches, doing research reports on the Shanghai property market etc. Only ‘miserable’ part being in Shanghai would probably be the unstable wifi connection I am having in my apartment, inability to constantly access the usual social sites (stuff we have pretty much taken for granted) and lack of friends. That said, after a while, I am pretty much getting used to not going online checking Facebook anymore. I guess in someways, without these social media, life goes on as per normal. However, blocking all my news sites like Bloomberg is definitely getting on my nerves.

Anyway, main purpose for uploading this post is really kudos to us all who remained invested in King Wan Corporation! Just saw the Annual Report, well have not really analysed the financials but management has declared a 1.5c dividend, an increase of 0.5c. 🙂 Will probably upload my research report on the Shanghai Office Market after I’m done with it.

Disclosure: The author is long King Wan Corporation

Convictions

(Posted on behalf of TL)

Sorry for the long hiatus. Previously, I was busy with exams and after exams my schedule had been pretty tight – rushing back to Singapore, packing for my internship in Shanghai and all. That said, over the past month or so, I have been meaning to blog about convictions.

Believe many of us have bought a stock and had our convictions tested when faced with some adverse news. Even I, despite all the research I have done in a stock, my convictions would be tested from time to time. Looking at King Wan Corporation, after the stock had rallied to 34c in May 2013 and started dropping till 25c in March this year, my average buy price excluding dividends collected. I started having thoughts about selling the stock in fear of it dropping further given that the Thailand economic conditions did not seem to be getting better.

kingwan

For the case of King Wan, it was much easier to remain calm as it was just a case of economic climate in Thailand, and not some news regarding the fundamentals of the company shifting. In another scenario, I was invested in Quindell (QPP.L), a stock listed in the London Stock Exchange. Basically, the huge drop in the price was due to a research report done by an independent blogger – Gotham City Research (GCR) claiming that Quindell has conducted fraud. Looking at all the evidence in front of me – GCR’s past track record in profiting from such scenarios (see BLINX) etc., I decided to do some ‘smart speculation’ and buy into the company at 26 GBp. Being my first time entering the London market, the whole experience was very new to me. I was flooded with news from FT, Motley Fools and a whole range of other news agencies, something we don’t see in Singapore where counters do not get such huge coverage especially those in the catalyst market. Secondly, people are able to short the stocks in London, hence, we see QPP under huge shorting pressures, which actually brought the price down to approximately 18 GBp. To be honest, my conviction this time was really tested especially with all the negative news, some of which I could not ascertain if it were true. Furthermore, despite the huge director buybacks, this did little to help push up the price.

QPP

To cut to the chase, I would like to just say that when faced with such scenarios, I always go back to the basics. I start from ground zero again, looking at all the information I have for my initial purchase of the company. Only in the event that something has changed for the worse, where the company’s fundamentals has changed would I decide it is time to cut losses. Hence, the reason for my second buy-in for QPP, averaging my buy price down. While it is still too early to start celebrating, however, I remain quite optimistic and we slowly start seeing the share price climbing back up after the dust has settled.

“Be Fearful When Others Are Greedy, Greedy When Others Are Fearful”

 Disclosure: The author is long QPP.L and 554.SI

SG Value Fund NAV Update April 2014

Image

Initial Net Asset Value (per unit): $10,000

Net Asset Value as of April 2014 (per unit): $12,386

Image

For the first quarter of 2014, the fund has returned 3.91%, translating to an outperformance of the STI by 4.84%. Going forward, I would not be including the holdings here but rather create a separate page for my current holdings. Within the first quarter, I have sold my stake in Silverlake Axis at $0.92 and ComfortDelgro Corporation at $2.01. Having identified new undervalued stocks, I have deployed the cash into buying HupSteel at $0.21 and New Toyo at $0.305. I believe 2014 would definitely be an interesting year for the fund.

Given how KTIS (An associate of KingWan Corporation) has finalised its IPO date (click here), it has resulted in King Wan’s price to start normalising. Furthermore, with the owners of New Toyo indicating interest of selling their stake in the company, I believe value would be able to be unlocked this year.

For this period, unless there is any significant chances in the fund, I would be taking a break from blogging given how my university exams are around the corner. 🙂

King Wan Corporation (3Q Update)

With the recent release in King Wan’s 3Q results, I thought I pen some thoughts down. With regards to King Wan, it is a strong company for the following few reasons:

  • Strong balance sheet, with minimal short term debt of approximately 50% of their current cash & cash equivalents and no long term debts
  • Strong core business with an healthy order book of $166mil with completion dates lasting until 2017
  • Strong management shown by how they are able to take advantages of opportunities that comes they way. (e.g. purchase of the vessel chartering business, which has actually offset some of the negative contributions from the Group’s property development segment)
  • While many might disagree, I like it when a company is still controlled by family members

However, what resulted in the initial spike in prices in 2013 would be due to the sale of the Thai Associates to KTIS. With the recent situation in Thailand, it has resulted in KingWan’s price to be slight depressed within the range of $0.27 to $0.285. Nearing the contracted deadline in August, I believe that if the listing of KTIS does not go through, KingWan’s price might take quite a hit. I have emailed their IR of what the company plans to do if such an event occurs, the reply is as shown below.

Image

Nothing really new to gleam from this email, more of just an update of what we already know.

Overall, KingWan is definitely a good company to have on our portfolios with a good dividend yield. Furthermore, with the strong relations they have with KTIS, I believe that even if the sale does fall through, a new one might be drafted. The only question I guess would be how long does it take, translating to the opportunity costs incurred from waiting. Being a value investor I would continue holding onto the company afterall the value of the company is indeed there. However, it might just be my own thinking and might be biased having invested in the company when it was just trading at $0.19. Would love to hear the views of fellow investors out there.