"Outter" -- formerly an equity analyst in a bank -- contributed this article to NextInsight.

After a stellar performance from April to July, KSH's share price took a breather in the last 3 months. 

It is time to look at the stock again as the company would be launching the Sino-Singapore Health City in Gaobeidian (GBD) soon.

KSH’s breakout in the past few days indicates that investors are getting into the stock to ride on the optimism from the Xiongan new area as China outlines its vision for the new special economic zone and re-rating of KSH.

Sum-of-the-parts valuation

S$mn

Property development

 

Gaobeidian

344

Singapore development profit

29

Investment in associates & JV

186

Investment property

120

NPV of Rio Casa and Woodleigh development profit

92

Property related RNAV

771

30% Discount 

(231)

Discounted RNAV

540

   

Construction business (5x PE)

95

   

Net cash as of June 2017

97

   

Total value (S$mn)

732

No of shares (mn)

570

Value per share (S$)

1.28

Furthermore, KSH has added three new property projects to ride on the upturn in the Singapore property market.

Therefore, we update KSH sum-of-the-parts valuation model to reflect the new developments:

1) Three new property projects, adding roughly $92mn to KSH’s RNAV;

2) A lower RNAV discount, from 50% to 30%, in view of the recovery in the property market.

With these changes, KSH's fair value rose to $1.28.  We see further upside from phase 2 of the GBD, which we have not included the calculations.  

 
Key investment highlights

Gaobeidian - Game Changer:  GBD is a game changer for KSH, as the project’s value jumped significantly after China announced the Xiongan New Area special economic zone in Hebei.

In May 2017, Mr Eric Low, the Deputy CEO of Oxley, the major partner of the consortium for GBD, said after the recent announcement on the setting up of the Xiongan Special Economic Zone, some new properties in Gaobeidian went for RMB15,000-20,000 per square metre (psm).

In comparison, the Singapore consortium's land cost is only around RMB750 psm. See: 


KSH choocheeonnKSH executive chairman Choo Chee Onn owns a 19.43% stake in the company.
Photo: Company
UOBKH estimates KSH's share of the project net present value (NPV) at S$344 m, assuming an estimated average selling price of RMB 15,000 psm for GBD phase 1 and weighted average cost of capital of 7%. 

As such, GBD has now become the single biggest contributor (21%) in the KSH sum-of-the-parts valuation model.

According to Oxley's presentation in Aug 2017, the launch for phase 1 has been shifted from 2017 to 2018. 

The Edge Singapore (week of 23 Oct edition) reported that “the consortium plans to launch 3,000 residential units by year end out of a total of 18,000 for Phase 1. So hopefully when we launch, the price will be RMB 25,000 psm and above”

UOBKH expects KSH's profit to increase by S$31mn for every RMB 1,000/sqm increase. 

KSH indicated that GBD will launch upon receiving approval from Chinese authorities. 

While it is difficult to pinpoint the exact timing, the market appears to be discounting a launch within the next 6-12 months.  A successful launch would crystalise the strong earnings from the project in the next 5 to 10 years and offer significant return to shareholders.

About GBD: KSH has a 22.5% interest in Sino-Singapore Health City located in Gaobeidian (GBD). The project' land size is 8,000 mu (approximately 5.3 million sqm) and approximately 3,000 mu has been approved by the PRC authorities for development.  The allowable gross floor area is 1,234,006 sqm. 

Phase One consists of a total saleable area of 615, 527 sqm, which can be used to build some 5,540 residential units.

GBD is 40-50km from Xiongan New Area special economic zone. The Xiongan New Area, about 100 kms from Beijing, will house "non-capital functions" moved from Beijing.



New property projects: KSH has added three property projects in the last few months -- namely Rio Casa, Woodleigh and Serangoon Ville.  KSH’s participation is through consortiums where it holds effective stakes of 35%, 20% and 3.5%, respectively. We estimate these new projects could generate $128mn of net profit over the next 3-5 years and raise KSH's RNAV by $92mn. 

Earnings estimates
of new projects

Rio Casa

Woodleigh

Serangoon Ville

Total purchase price (S$mn)

783

701

694

Total saleable area
(sq ft)

1,109,447

631,211

831,356

Acquisition costs
(S$ psf ppr)

706

1,110

835

Average selling price (S$/psf)

1,300

1,750

1,300

Gross development value

1,442

1,105

1,081

Construction costs
(S$/psf)

300

315

300

Development profit
(S$/psf)

294

325

165

Total development profit

326

205

137

Other costs and tax
(S$ mn)

65

41

27

Project profit-S$mn

261

164

110

KSH effective share 

35%

20%

3.5%

KSH share of profit
(S$mn)

91

33

4

No of shares (mn)

570

570

570

Profit per share (S$)

0.16

0.06

0.01

 

Annual profit forecast & NPV

S$mn

2018

2019

2020

2021

2022

 

Rio Casa

9.1

22.9

27.4

18.3

13.7

 

Woodleigh

4.9

8.2

9.8

6.6

3.3

 

Serangoon Ville

0.4

1.0

1.2

0.8

0.6

 

Total

14.4

32.0

38.4

25.6

17.6

128.1

Discount factor

1.12

1.25

1.40

1.57

1.76

 

Present value

12.9

25.5

27.3

16.3

10.0

92.0

No of shares (mn)

         

570

Value per share-S$

         

0.16


Whilst our ASP assumptions are higher than the current transacted price in the Serangoon vicinity, the SingHaiyi led consortium's recent purchase of Sun Roiser at $1,325 psf, is supportive of a higher ASP in the area.  Galven Tan, director of capital markets at CBRE, said in a Business Times article that “the premium is decent, the bid (Sing Haiyi’s) still shows that developers are hungry for well-located sites”.


Recovery in the Singapore property market: Currently, big cap property names are trading at single-digit discounts to, or are on par with, their RNAVs.  Small-cap property names are trading at 20-30% discounts.  

With the recovery in the property market, we see room for KSH's discount to its RNAV to narrow.  Sell-sides analysts have been raising their price targets for property counters by lowering the RNAV discounts and assuming higher earnings on higher property price assumptions.

For example, according to Maybank KE, “the recent uptick in URA PPI marked a turning point Singapore property market and we expect RNAV discount for Singapore proxies to narrow”. 

Morgan Stanley report in April 2017 now applies upcycle valuations to the Singapore property big cap stocks, City Development, Capitaland and UOL, with “residential developments valued at par to RNAV”.

For an under-researched stock like KSH, we reduce the RNAV discount from 50% to 30%. We have conservatively set the KSH discount at a higher level relative to the Singapore names to reflect the risk associated with the project being in China. 

 

Risks: Delay in GBD, lower housing demand leading to weaker sales.


Disclaimer: The contents of this report are strictly for information purposes only. This 
report does not contain any investment, financial, tax, legal or insurance advice; you should always seek such advice only from professionals who are qualified, licensed and regulated in the respective relevant field. Do your own due diligence before undertaking any investments.


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