King Wan

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.

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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:

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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

Investment Indicators – For a sell

In investing, I have always found it much easier to buy a stock than determine when to sell it. When buying, it is just determining if the stock is undervalued, whether you like the business, whether you believe in the management. However, when it comes to selling, it’s always much more difficult. You ask yourself if it is the correct timing, if the company is really at its fair value, whether it will still continue climbing and there are the emotions of having to cut it off (especially if that was one of your first stocks). By deriving an intrinsic value for the company, I believe it is a good way to put a marker to indicate that it is time to actually sell the company. It also makes it more emotionless in some ways. Of course, everyone have various methodologies in coming up with an intrinsic value with all sorts of models. However, what I wanted to share is a list of reasons indicating a time to sell (even if it has yet to reach fair value) from a business school in USA. Over the course of my investing experience, I have added my own comments to it.

1) When the FCF has been negative for a couple of quarters. Having constant negative FCF for quite some time is a huge drain on cash reserves and we all know that cash is king. One example would be like QAF, a stock I owned previously but sold it off due to a couple of quarters constantly showing negative FCF.

2) A stock’s price rising so quickly in a short period of time, however, at the same time we have to evaluate the reasons for the increase in stock price. I would say an increase in 10% – 20% over a matter of days is a good time to sell. Some case studies:

  • King Wan’s initial spike in prices was due to a report by DMG with regards to the sale of the Thai Associates. (No reason to sell)
  • ComfortDelgro’s spike of 10% because of the purchase of a bus company in Australia. (I did not sell then when prices shot to $2.19, partly due to greed. On hindsight, I guess I should have evaluate exactly how much the acquisition would have improved ComfortDelGro’s bottom line profits)

  • Guocoleisure spike of approximately 10% due to the Quek family planning to take GuocoGroup (listed in HK) private. (Reason to sell. There is no explanation for why the parent company being taken private would actually affect its subsidiary in Singapore)

3) When you can improve your profits substantially. Such as if we are able to replace a stock that only has 10% upside to reach its fair value as compared to a company which still has 50% upside before hitting fair value. However, I feel this is subjected to the amount of cash available.

4) When the core business model of a company has changed. If the company we initially bought it for has started to deviate from its core business, it’s definitely time to evaluate the company again especially since they may not have the proper expertise in that area. One good way of evaluating would be talking to people within the industry, to understand the economic moats, barriers to entries, their opinions of the switch etc.

5) Stock has risen so much that it represents a high proportion of your portfolio and is well past its limit positions one sets for their portfolio. In my opinion this is something more relevant to portfolio management (asset allocation) something that I am not that knowledgeable yet as of now. Hence, I’m just listing it as a point here but do not have my comments about it.

These listed reasons are not hard and fast rules but just a form of guideline I have found it useful for myself. There possibly could be more reasons one can come up with, but I feel these would suffice. In my opinion, investing is really a simple art, just that some try too hard and overcomplicate it.