"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: )

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.

Gaobeidian4.16KSH 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.”

Singapore listco

Interest in Gaobeidian Project

Oxley Holdings

27.5%

KSH Holdings

22.5%

Lian Beng Group

10%

Heeton Holdings

7.5%

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.

Profit contribution under different scenarios

Conservative

Moderate

Positive

Net profit per sqm (RMB)

2000

3000

4000

Total net profit on SSHC (RMB mn)

2400

3600

4800

KSH's profit share based on its 22.5% stake
(RMB mn)

540

810

1080

S$ equivalent 

108

162

216

No of shares (mn)

456

456

456

Contribution per share (S$/share)

0.24

0.36

0.47

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.

 

Conclusion: Based on KSH's 22.5% share of the SSHC project, the incremental contribution from this project could reach between S$100-200mn or S$0.24-0.47 per share.

Our 
analysis suggests that the KSH share price increases of S$0.085 on Tuesday and S$0.03 on Wednesday have not fully discounted increased contributions from SSHC project. There is potential for the stock price to rise further when more details on the SSHC become available.



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


Comments  

0 #3 Adam 2017-05-03 17:40
Sincerity, thank you. It looks like you are relying on estimates given by the article author. I think the estimates are way too low.
Quote
0 #2 divads 2017-04-08 07:29
The EPS of $0.24 to $0.47 cents is based on the next 10 years of development and will only start contributing from year 2018.

The share price has risen the same amount of profit for the next 10 years. The share price has already been discounted for the next 10 years of profit from this project. Downside includes china authority determination to curb excessive speculation and some cooling measures/restri ction will be annouced to curb the excessive speculation in and around the special zone. Any such cooling measures/restri ction will cause share price to undergo major correction.
Is not a good idea to buy high. Infact the share price has already started correction on Friday.
It would have been better for the share price to rise an initial 10 cents and then consistently rise by 2 to 4 cents over the next 10 years. Now the share price is running ahead of fundamental.
Never a good idea to chase a stock and buy high.

For Oxley, the number of issued shares is about 3 billion. The EPS is thus way lower for Oxley, estimate to be $0.05 to $0.10 for the next 10 years

For Lian Beng, they only have 10% share of the china JV, so EPS is around $0.10 to $0.20 for the next 10 years of development which work up to be $0.01 to $0.02 EPS per year but the share price has already risen nearly the entire EPS for the next 10 years.
Quote
0 #1 Georgia 2017-04-06 10:31
Someone quick do an upside estimate for Oxley! Oxley has an even bigger stake in Gaobeidian than KSH.
Quote

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