Investor: "My take on KSH's share of Gaobeidian profit: S$1 billion over 10 years"

"Sumer" originally contributed the following article recently to NextInsight's forum. His estimates are substantially higher than another investor who, a month ago, wrote --> KSH HOLDINGS: Investor's estimate of upside from Gaobeidian project

KSH's share price surge recently is worth noting. After staying stagnant for a full year at around 54ct, news about China's third Special Economic Zone (SEZ)-like township near Beijing which led to a feverish rise in property prices in its vicinity has given the stock the fillip it needed to break out.

Below is a quick analysis of KSH's Gaobeidian (GBD) story:

As GBD was set out to be a 10-year project, it’s hard to accurately predict its earnings on a year-to-year basis. But if we just look at the overall figures, and make some reasonable assumptions, we see that if the project is fully completed without too many glitches, it will give much visibility to KSH over the next 10 years. This visibility is rather positive, especially among Singapore developers which can’t clinch land in Singapore for development.

Based on a moderately optimistic view that 48,000 units of residential units in GBD will be built and sold in total, each unit of 110 sq m in size (the original size of the first phase launch), an ASP (average selling price) of RMB14,000 psm (price is spread over 10 years, from as low as RMB10-12,000 psm in initial years to closer to RMB18,000 psm in later years), an ACP (average cost price, which includes land, construction, marketing, etc but excludes land value tax) of RMB5,000 psm (initially as low as RMB3,000), a 35% land value tax (estimated rate for land value that has surged over 100%), a 25% corporate tax rate, below is a simplistic estimate of the whole site’s earnings potential (based solely on residential units):

♦ Net earnings: 48,000 x 110 x ((RMB14,000-5,000)*.65)*75 = RMB23.166 billion, or S$4.633 billion.

KSH’s share of 22.5% is S$1.042 billion, spread over 10 years. That works out to $2.34 per share, which on average means more than 20ct per year. (Note that this is not far off from UOBKH’s analyst report of S$368m for Stage 1 alone (1.9million sq m out of 5.3m sq m total land size), which implies S$1.0265b for Stage 1 + 2, based on extrapolation).

I have not taken into consideration the time value of money and I have assumed a fully-sold scenario, but these can probably be offset by the fact that I have also not taken into consideration the commercial space that will be built and sold. If I am correct, Stage 1 will see 800,000 sq m of amenities and commercial space, some of which will be handed over to the government and the rest would be for sale/investment.

I am also assuming the land is fully paid for (KSH's share is only S$23m) and there is no further compensation to farmers to relocate, and that construction costs for facilities and infrastructure to be handed over free to the government as part of the deal would be covered by profits from the commercial space. Also, very little if any capex is required for the residential units as buyers pay 30% down payment, which is enough to cover construction cost.

Apart from this GBD venture, KSH has yet to recognize about S$200m worth of its share of sold properties, has shares in Aussie and UK ventures, a construction arm and some investment properties. These projects will help it sustain a 3.5-4ct dividend these 2 years before GBD's earnings kick in.

KSH executive chairman Choo Chee Onn owns a 19.43% stake in the company. Photo: CompanyWhile the above are rosy figures, it’s actually the qualitative aspects of KSH that seal the deal for me. By this I mean the management and major shareholders’ acumen, humility and generosity. These have been demonstrated by many years of consistently high dividend payouts and the humility and listening ears shown at AGMs. Note also that KSH is majorly-owned by 4 friends, with 19.43%, 14.5%, 14.5% and 12.18% stakes (total 60.6%) respectively. Compared to companies owned tightly by one family, it may be more rewarding for these friends to share the profits of the company through dividend payouts and bonus issues. When they do so, minority shareholders benefit. Few property stocks trade above NAV, and KSH is one of them. KSH's prospects at GBD and its generosity and acumen are definitely reasons for this.