KSH HOLDINGS: Investor's estimate of upside from Gaobeidian project

"Outter" -- formerly an equity analyst in a bank -- contributed this article to NextInsight, following the announcements by KSH Holdings and three other listcos on a positive macro development in their property development project in Gaobeidian, China (See: OXLEY, KSH, LIAN BENG, HEETON: Issue identical announcements, explain why stocks firmed up today)

Assessing the Contribution of Sino-Singapore Health City to KSH Holdings' Equity Value Summary: It was interesting to see the share prices of KSH, Lian Beng, Heeton and Oxley jump as investors react to the news flow on China’s new special economic zone.  We hope to provide an analysis to assess whether KSH stock price has over-reacted to the news flow. KSH Holdings Share price:  66.5 c (5 Apr 2017) + 11.5 cts in past 2 days Our study suggests that the S$0.085, or 15%, jump in KSH stock price on Tuesday and a further 4.7% rise on Wednesday have not fully factored in the increased contribution from Sino-Singapore Health City or Gaobeidian project. Our positive scenario indicates an upside of nearly S$0.50/share on KSH's stock price. KSH has a 22.5% stake in the massive 533.3ha Gaobeidian township project in Hebei province. Artist's impression: KSH Holdings

Background: China is establishing a new special economic zone in Hebei, a northern province that has been hit by massive job layoffs, in an effort to boost domestic growth. The Xiongan New Area, about 100 kilometers from Beijing, will house "non-capital functions" moved from the capital city.

According to a Bloomberg report, “the move is seen as a historic milestone to power China’s growth for a “millennium to come” [as reported by] the official Xinhua News Agency.”

Impact: KSH has a 22.5% interest in a development project, Sino-Singapore Health City (SSHC), located in Gaobeidian. The Gaobeidian Project has a land size of 8,000 mu (approximately 5.3 million sqm) and approximately 3,000 mu has been approved by the PRC authorities for development.

According to KSH's announcement, “the Company believes that the new special economic zone reports in the media is likely to have a positive and favourable impact on the Gaobeidian Project”. We think the statement is a bullish comment as the SSHC is no longer a property project in the middle of nowhere with the development of the new Xiongan SEZ.

Based on data from The Edge Markets, the allowable gross floor area of SSHC is 1,234,006 sq m. Phase One consists a 40,000 sqm commercial belt, 3050 resident units. The estimated average selling price (ASP) of a mass market resident units is between RMB4000 to RMB 5000 psm. The ASP for the high-end units is between RMB 7000-8000 psm. In the light the of new Xiongan Special Economic Zone (SEZ) development, we believe that the original ASP are too conservative.

According to The Edge Markets, “The Chinese press reported that resale properties that used to sell for RMB4,000 psm ($811 psm) in nearby areas in Hebei have doubled to RMB8,000 psm. Properties in Baoding, Hebei, were reported to be selling at RMB18,000 psm”.

Sensitivity analysis: Compared to property prices in a number of other cities in China, we expect the future ASP in SSHC to easily reach between RMB10,000-15000 psm. While Gaobeidian is not a 1st tier city, it would not be unreasonable for property price near the new SEZ to reach levels seen in 2nd tier cities, such as Suzhou, Hangzhou and Nanjing, which are near Shanghai. In fact, we think that SSHC ASP could reach Baoding and Jinan levels of approximately RMB20,000 psm within the next 2 to 3 years when more details on the new SEZ becomes available.

We estimate the original profit margin of the SSHC project to be around 15-20%, similar to other China property projects in 2nd-4th tier cities. Our channel checks suggest that the developers’ typical budget for 15-20% net margin taking into account the land and construction costs of the project location. This estimate implies a net profit of approximately RMB600-1000 psm using the original ASP of RMB4000-5000 psm as reported by The Edge Markets.

If the ASP of SSHC were to rise to RMB10000 psm, the net profit margin could easily increase to RMB 4000-5000 psm. As land costs have been paid and construction costs been budgeted, we do not expect costs to increase as much as ASP, margin should expand sharply with higher pricing.

In the absence of specific details on the SSHC project, such as the costs of construction, financing, marketing etc, we have conservatively assumed net profit of just RMB 2000-4000 psm in our model.

Assumptions and risks
1. Assume saleable area of approximately 1.2mn sq m and SGD/CNY at 5
2. Launch price of the SSH may differ from our estimates.
3. We have not considered the specific timing of the project and apply the relevant discount rate and time period
4. Project may be launched in multiple phases and further dilute the present value of the contribution.
5. Our analysis and models are based on public information only.

For information only. Please do your own due diligence before undertaking any investment.