Details

22 January 2017

Excerpts from analysts' reports

RHB analyst: Jarick Seet

ISOTeam is a leading player in the building maintenance and estate upgrading industry in Singapore. (Photo: Company) ISOTeam is acquiring Rong Shun Engineering for SGD6.45m. We deem this exercise positive, as it comes with a PBT guarantee of not <12% of an existing orderbook that cannot go below SGD13.1m. This works out to a SGD1.6m PBT guarantee, implying just 4x P/E. Hence, we lift our FY17F NPAT by 12.6%, which results in our DCF-backed TP being raised to SGD0.59 (from SGD0.54, 48% upside). This implies 13.5x FY17F P/E. With SGD22.7m in new contracts boosting ISOTeam’s orderbook to SGD101m, we remain positive on this counter and maintain our BUY call.

Stock price	41.5c
52-week range	29.5c-43c
Market cap	S$116.7m
Price Earnings	12.9x
Price-Book	2.2x
Dividend yield	1.8%
Source: SGX StockFacts

• Complement the renewable energy business
  ISOTeam said the proposed acquisition of Rong Shun Engineering & Construction allows it to have tighter control over costs and work progress. This is given the latter’s in-house mechanical & electrical (M&E) capabilities.
  
  Additionally, the company said it would be able to also to generate cost savings from additional efficiencies, especially for its renewable energy business that involves the installation of solar panels for Sunseap Group.
  
  
• SGD22.7m worth of new contracts won
  These comprise a mix of repair & redecoration (R&R) and addition & alteration (A&A) projects, as well as the single-largest renewable energy installation job won by ISOTeam to date (SGD6.3m). 
  
  

  ♦ Myanmar Projects

  During our visit to Myanmar in May 2016, we noted that ISOTeam had tendered for a few local projects. We expect the results to be known soon and believe the firm has a high chance of winning some of these projects. -- Jarick Seet (photo)

  The latter involves solar panel installation works on 150 HDB blocks.
  
  These new projects are expected to be completed between Jan 2017-Jun 2018. With these new contract wins and the latest proposed acquisition, ISOTeam’s orderbook would likely be boosted to a record high of SGD101m.
  
  Going forward, we expect more projects wins to come from home improvement programme (HIP) projects as well as solar installation works.

For full report, click here.

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UOBKH analyst: Edison Chen

On 10 Jan 17, ISOTeam announced S$22.7m worth of new project wins, increasing total new contract wins to S$42.8m since the start of FY17. Notably, it has won its largest solar panel installation project worth S$6.3m for 150 blocks of HDB flats from Sunseap. While the win comes a bit later and smaller than what we had estimated (200 blocks), it nevertheless marks a good start and more should follow for the subsequent phases as Singapore continues its drive for green and renewable energy.

 

• Earnings-accretive deal is positive
  
  

  ♦ Earnings-Accretive Deal

  We opine the deal as a positive as it is earnings-accretive and done at an attractive price. -- Edison Chen (photo)

  We opine the acquisition is a positive as it is earnings-accretive (being a cash-and-treasury share deal) done at an attractive price (1.9x book and 5x historical PE on S$1.7m profit as of FY16).
  
  Other than the seller’s profit guarantee, management also shared its confidence on the subsidiary and its ability to perform going forward, given that Rong Shun historically wins and executes S$15m-20m of projects a year with pre-tax margins in excess of 12%.
  
  
• Earnings Revision/ Risk
  
  Maintain BUY and raise our DCF-derived target price to S$0.60, based on 10% WACC and 0% terminal growth.

For full report, click here.

Details

ThumbtackInvestor

21 January 2017

Republished from ThumbtackInvestor's blog with permission. ThumbtackInvestor, a Singaporean in his mid-30s, whose portfolio is valued at just over S$1 million, holds 630,000 shares of Dutech Holdings. 

This is a continuation of the earlier posts: Dutech Holdings – What’s Next? Realize $117k Profit, Hold Or Add More? (Part I) Massive FY16Q4 For Dutech Holdings – Digging Deep To Understand The Impact Of Metric Group Acquisition (Part II) In Part III, I will be sharing mainly on what are the happenings in the industry that would affect Dutech Holdings’ immediate – mid term prospects, as well as some of the potential risks/headwinds that the company may face. (Yes, every investment must be prospective. Only focusing on the good news and ignoring the potentially bad news, reminds me of the old radio advertisement “Hear only the good stuff”) As with all trilogies, the best part is always the last installment… Most of this stuff is new, as in I don’t think anybody has noticed or discussed it in detail, particularly in relation to Dutech’s prospects. Yet, if anything at all, this post is going to illustrate the major catalysts for Dutech going forward. It is, IMHO, revolutionary and illuminating. Do tell me if you agree or disagree after reading.

 

Merger Of Diebold And Wincor

In late Nov, Diebold and Wincor Nixdorf, the 2nd and 3rd largest safe manufacturers globally, combined in a $1.8-billion deal to form the largest player in the industry.

Prior to the merger, Dutech supplied >50% of the safe orders from Diebold and Wincor. Hence, this merger is of great significance to Dutech.

The merger has many synergies, the most obvious of which is geographical. Diebold dominates the US markets, while Wincor dominates the European markets. Post-merger, Diebold Nixdorf will have a 35% share of the global ATM market, while what used to be the largest player, NCR Corporation, will now have around 25% of the market.

Since Diebold and Wincor are 2 major clients of Dutech, I thought it’d be good to understand more about their merger, the happenings of the company and what the future plans are post-merger.

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Global Move Away From Hardware Towards Software And Services

Following the merger, Diebold Nixdorf has indicated that the company’s future direction would be towards providing the software and services, with less emphasis on the actual hardware.

This is reflected in their financials as well:

Here are Diebold Nixdorf’s latest financials. As we can see, under the financial self-service division, revenue from services has risen 41.7%, far exceeding the growth in products. The company has also recently announced new service contracts with several major banks in US to provide servicing and maintenance for their ATMs, including many ATMs that were not manufactured or installed by Diebold Nixdorf.

The retail division is something new, following the merger. Diebold Nixdorf now works with retail businesses to provide information machines in malls that enhance the retail experience.

This push into software related businesses is, on a net basis, good for Dutech as this means that Diebold Nixdorf will increasingly rely on Dutech to work on the hardware part.

Dutech’s low cost and efficient manufacturing facilities in China will thus likely be kept even more busy as Diebold Nixdorf subcontracts out more of the hardware manufacturing parts to them.

With Dutech being the main supplier for both Diebold and Wincor before their merger, it is highly likely that as the new company sub-cons out the hardware manufacturing part, Dutech will be the 1st in line to win new contracts.

Afterall, there are currently no other large players with Dutech’s UEL and UN certification, as well as Dutech’s low cost production facilities situated in China.

Increasingly, Diebold Nixdorf will focus more on the software that goes into operating the ATMs. This article describes how the company intends to make ATMs even more “high tech”. Expect retinal scans and smartphones linked ATMs in future.

https://www.ft.com/content/621f0f12-f738-11e5-803c-d27c7117d132

As retail space gets more expensive and valuable, Diebold Nixdorf is also focusing on making the actual ATMs or retail information machines smaller and smaller.

NCR Corporation was the largest player in the ATM space prior to the merger of Diebold and Wincor, and post merger, they are now the 2nd largest globally.

A quick look at NCR Corporation’s results tells me that they too, are focusing on services and software, with less emphasis on hardware.

Why are they all moving towards software?

A slide in NCR Corporation’s latest FS tells us the answer:

As we can see, the software division has a 51.1% (what!!) GM rate, followed by services with 21.8%, and finally hardware with 19.9%.

Consequently, software accounts for 64% of NCR Corp’s Q3 2016 Operating Income.

Dutech seems to have taken a leaf out of their playbook, and is growing in the same segment as well.

We can see revenue from the “High Security” segment falling gradually, while the revenue from the “Business Solutions” has grown >6 times in the past 3 years.

Their recent acquisition, Metric, will contribute further to the “Business Solutions” division via the Metric UK branch, which supplies and maintains carpark ticketing and management systems.

I’ve previously in Part II, spoken fondly of the services aspect of Metric UK. This is taken from Metric Group AR15, page 106:

Of total income generated on the performance of services, the UK subgroup earned a share of EUR 12,392 k (previous year: EUR 10,623 k). Essentially, this comprises repairs and maintenance work on car park ticketing terminals.

Despite revenue from services rendered for the entire group dropping from 2014 to 2015, Metric UK’s share of revenue under services rendered rose from EUR 10.6mil to EUR 12.4mil.

If Dutech can successfuly win more contracts, the benefits are magnified as they take care of the entire value chain for their clients: from manufacturing of the ticketing machines, to the software that controls the ticketing machines to the maintenance contracts, which provide a nice recurring income.

Currently, Dutech’s “High Security” segment still has higher margins than their “Business Solutions” segment, but a large reason for that is the depressed domestic coiled steel prices. I’m expecting Dutech’s overall margins to come down from these lofty levels, particularly so in the “High Security” segment such that “Business Solutions” will eventually enjoy higher margins than the “High Security” segment.

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Death Of Cash?

The other concern that some readers have brought up to me is that the world seems to be going cashless. The newer generation seems to prefer credit and other cashless way of making transactions. Will this mean that ATMs will become obsolete in the future?

I don’t think so.

There may be, probably will be in fact, reduced usage of cash in transactions, but ATMs will always be around. I’m guess they’ll evolve to be points of transactions and not just merely for cash related transactions.

It’s kinda like how they said that the dawn of the internet era would put retailers out of business, and that all businesses in future will be conducted online. Since then, sure some retailers are badly affected, but many have continued to succeed. Bricks and mortar malls continue to pop up.

So contrary to such opinion, I think the global ATM market will continue to expand, particularly in some of the less developed countries.

This study agrees with me.

http://www.paymentscardsandmobile.com/atm-market-expected-to-reach-21-9-billion-by-2020/

China, which is one of the fastest growing markets for ATM penetration, has seen a rapid increase in installed ATMs:

Large, New Order Contracts For Dutech Soon

OK, this is where it gets exciting for Dutech’s shareholders. There have been some of you who have indicated you’re worried about Dutech’s declining “High Security” revenue.

So was I. “was”.

So I did what I do when I’m worried: I start digging deeper. Otherwise I can’t sleep.

Aside from the fact that it is part of Dutech’s plans to focus on the “Business Solutions”, which by itself is an important point, I am also highly confident that Dutech will soon see new, large orders for ATMs and safes, now that the Diebold and Wincor merger is completed. (well, it's not 100% completed because I think there’s still some anti-trust issues to be cleared, but it’s pretty much taken as it is)

Skeptical? Don’t take it from TTI, take it from Diebold Nixdorf’s CEO himself.

This is his response to an analyst’s question during 3Q16 earnings call:

And I quote:

“….. customers were holding off just to make sure that they have a full appreciation of who is their account manager and who they are dealing with…”

“And you can see that a lot of that will come through as orders in Q4 and Q1….”

“…. product side alone, we are currently sitting on a backlog that is substantially north of $1 billion…”

“… I believe that the regional banks in the US will join the party towards the end of 2017, going into 2018…”

Note that this is in his response to a specific question about the ATM business.

How about this other reply from the CFO, also in relation to the most recent earnings call:

“… I would call it roughly $30 million of product revenue that has pushed out of 2016 into 2017 on the hardware side“

Note that this is in response to the North America business only, which is the largest revenue contributor as of 9M16, contributing about 40% of total revenues.

Europe, Middle East and Africa is the next largest component of revenues as of 9M16, accounting for 27%, Latin America accounted for approximately 18%, and Asia Pacific (which includes China), accounted for 15%.

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New Orders For NuVinci CVP Transmissions & Further Investments In R&D

Dutech is currently in the midst of securing new orders for manufacturing NuVinci CVP transmissions. The manufacturing is done for Fallbrook Technologies, and the client is reportedly a major European automobile company.

This is what the technology is about, roughly:

http://www.fallbrooktech.com/nuvinci-technology

Dutech’s collaboration with Fallbrook goes back to 2010, when Fallbrook chose Dutech as it’s manufacturer for this transmissions:

http://www.prnewswire.com/news-releases/fallbrook-technologies-inc-and-tri-star-group-sign-manufacturing-agreement-87642687.html

These niche areas provide Dutech with a know-how competitive moat. It is unlikely that lesser manufacturers in China without the engineering know-how can dislodge Dutech. Without the know-how, Dutech’s Chinese peers can only compete on price, which is moot as Dutech enjoys the same conditions as them.

And the company is not resting on its laurels. Dutech continues to invest heavily in R&D to be at the forefront of new technologies. Aside from investing in R&D, Dutech has shown that they’re willing to use their cashflows to buy patents that have potential.

This link shows their application to construct a new R&D facility:

http://kjj.tongzhou.gov.cn/KJJ/InfoDetail/?InfoID=e320c914-05b4-4a40-882d-7efaa58cd7a7&CategoryNum=011

(credit to wangnx in Investing Note for bringing this to my attention)

The facility is situated in the proximity of Dutech’s existing 2 production plants, just outside of Shanghai.

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Risks

I’m not oblivious to potential headwinds that Dutech may encounter. Thus far, there are almost zero instances where the outlook for a company that I have analyzed is so rosy that I can’t find any potential headwinds.

Life always prepares some curve balls around the corner for us.

Some of the more obvious ones have already been described in CIMB’s report, so I’ll just mention them in passing.

Forex is potentially a headache for Dutech, although the consensus currently is that it’ll be favorable. A strong USD and weak RMB is beneficial to Dutech, as it’s revenues are collected in USD while production costs are in RMB.

We all know Trump’s threat to label China as a currency manipulator. Trump wants a stronger RMB. I am not sure if he’d be successful. I don’t think the Chinese really allow any outsider to dictate what they want to do with the RMB. But it’s still a potential threat to note. If RMB appreciates substantially against the USD, that’d be a drag on earnings for Dutech.

On top of that, with their recent acquisition, the company will have increased exposure to the pound and euros, although I suspect the impact is still likely to be very minimal.

The other potential risk that’s been mentioned is the rising domestic rolled steel coil prices, which is a major component cost in the manufacturing of Dutech’s products.

As we can see above, particularly in 4Q16, China’s domestic hot rolled coil steel price has been on a tear and, as of the time of writing, is still rising. Since steel is a major cost component for Dutech, Dutech’s margins for the safes and ATMs will likely come under pressure.

On a bigger picture though, China’s coil steel price is still relatively moderate when you look at the multi-year data. I can see how forward quarters in 2017 will show stagnant or reduced GPMs due to this, though.

I don’t know if the company hedges its steel purchases. Someone on Investing Note told me that they do, but there’s no data that I can find. The company doesn’t announce its hedging strategies, if any, in the AR either. And that someone who told me couldn’t substantiate it either, except to say that he read it somewhere.

So I’ll just assess their material costs at spot prices. Anyway, all these prices, even if they are hedged, eventually flow down to their costs so for a long term investor, it doesn’t really matter.

What I will spend more time discussing here, and this is something that hasn’t been brought up thus far, is the negative impact of China as a risk factor.

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Negative Impact Of China’s Regulations On Global ATM Manufacturers

In 2016, China introduced new regulations that prohibit foreign ATM vendors from operating in the country, unless it’s done in collaboration with a domestic partner.

Yup, essentially the Chinese government supported domestic ATM vendors by putting insurmountable obstacles to foreign vendors.

This is taken from one of the articles I found regarding the regulations:

New state guidelines influence deployer choices

Domestic suppliers also had a strong year in the wake of guidance from the China Banking Regulatory Commission (CBRC) regarding “controllable IT”. Controllable IT means that a machine’s parts must be manufactured in China and data must be contained within the country at all times. The 2014 guidelines state that banks should increase the share of “controllable” IT equipment by at least 15% annually from 2015, to account for at least 75% of all IT equipment by 2019.

Gotta love the euphemism: “guidelines”

All these had a substantial impact on all the major ATM vendors: Diebold, Wincor and NCR Corporation.

This is taken from Diebold Nixdorf (the merged entity)’s latest 3Q16 results:

As we can see, growth in revenue in Asia Pacific is 28.7%, which looks like it’s not too bad, but it’s a substantial drop from previously. Previously, AP used to be the largest growth centre, with China showing the most rapid growth in ATM penetration.

Figures from the People’s Bank of China show a total of 866,700 ATMs online in 2015, up 41 percent from 2014. Since 2013, China has claimed first place as the world’s largest market for payment cards and ATMs, according to People’s Bank data.

Market share of the global ATM manufacturers in the China market was growing at a health clip as well before these new regulations halted their growth. In fact, they were all in the top 5 vendor list except in 2015 and 2016, when these new regulations came into play.

I’ll digress a bit. China is behaving like a big bully these days. Am I the only one who can see that in the various business I have analyzed that have exposure to China? They can terrex anything they like, ignore international court rulings on the South China Sea and whatever obligations they may have signed with WTO regarding free markets.

This move sure doesn’t look like a free market move to me.

The top vendors in terms of market share in China as of 2015 are:

• GRGBanking (27.85 percent);
• Hitachi (13.35 percent);
• Cashway (11.49 percent);
• King Teller (10.94 percent); and
• Yihua (10.82 percent)

I found out about these new regulations as I was looking at China as one of the growth areas, and this pie chart just didn’t make sense to me.

You’re telling me that Diebold, Wincor and NCR, the global leading players who have a relatively large portion of their profits put into R&D annually, with their experience and know how, can only garner 3.65%, 1.91% and 1.99% of China’s domestic market?!

It’s essentially an uneven playing field.

GRGBanking is the dominant player with 27.85%. So I dug deeper. Who exactly is GRGBanking?

http://www.grgbanking.com/en

From wikipedia:“GRG Banking is a Chinese listed state-owned enterprise, specialized in the financial self-service industry. GRG Banking is engaged in R&D, manufacturing, sales and service, software development for ATMs, AFCs and other currency recognition and processing equipment.”

State-owned enterprise. Right. No wonder. Talk about an uneven playing field.

It’s like a Man U vs Liverpool match… where the referee and linesmen are all Man U diehard fans.

BTW, since I’ve compared Dutech’s valuations to Gunnebo’s in Part I, I thought it’d be interesting to take a look at GRGBanking’s as well.

GRGBanking: PER (on 3rd Jan 2017) is 21.11, it’s P/B is 6.16 times.

Here’s the FSs to substantiate the figures above:

grgbanking-fy16q3

grgbanking-ar15

Crazily high valuations compared to Dutech’s. And they may have the Chinese government’s backing, but it’s hard to see how they can succeed outside of China whereas Dutech has a fast growing global footprint, with valuations that’s a fraction of the above figures. (P/B is 6.16x !)

Anyway, in response to these Chinese regulations, the global players started forming joint ventures with local Chinese companies so that they can continue to expand in China. These global players take a minority stake in a JV, hence putting the control of the JV in the hands of their Chinese counterparts.

Diebold formed a JV with Chinese tech company Inspur Group:

Wincor formed a JV with Aisino Corporation:

http://www.wincor-nixdorf.com/internet/EN/WincorNixdorf/Press/pressreleases/2016/aisinoen.html

This means that the merged entity Diebold Nixdorf, now has 2 JVs with 2 separate Chinese groups, in both of which they are the minority shareholder.

This sucks for Dutech, as it means that at least with respect to China, Diebold Nixdorf will have to send manufacturing orders to their respective JVs and not utilize Dutech.

From what I’ve read about the details and structure of the JVs, and trust me I have read it all, it basically confirms to me that Dutech will not be seeing new orders from Diebold Nixdorf’s expansion in China.

Digging deeper, this basically confirms my suspicions:

This does not mean that I’m expecting Dutech’s China business to decline. It means that Dutech will not win NEW orders in relation to the growth of Diebold Nixdorf’s ATMs in China.

Most of Dutech’s current sales in China are done in the Free Trade Zone, and the bulk of these are exported eventually anyway.

So in this regard, I’m not predicting a Chinese headwind. I’m predicting the absence of a Chinese tailwind.

CONCLUSION I intend for Dutech to be a long term core holding, and am not expecting to divest anything anytime soon. Of course, if Mr Market comes along and offers me a deal I cannot refuse tomorrow, I’ll be inclined to change my statement. Currently I own 630,000 shares, at an average purchase price of $0.291, having added 30,000 recently at $0.465 and another 30,000 at $0.445. As always, I welcome thoughts, opinions and anything else you know that I might have missed out. Happy Hunting!

Details

Jennifer Tan

21 January 2017

This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 28 August 2015. The article is republished with permission.

Capitaland CFO, Arthur Lang, will join Singtel as CEO International with effect from 1 April 2017.  (Photo: Company) Arthur Lang’s key aphorisms on life revolve around the quotidian – the gut, one’s consciousness, and a game of chance. The Group Chief Financial Officer of CapitaLand Ltd, one of Asia’s largest real estate developers, strives to stoke fire in the bellies of his son, 15, and two daughters, aged 10 and eight. “Many Singaporeans, including myself, like to be in our comfort zones, and as a result, I fear many do not have that fire in the belly, so this is something I teach my kids,” said Lang, who was appointed Group CFO in June 2011, after 16 years as an investment banker with Morgan Stanley. We cannot be all things to all people. Our core markets are still China and Singapore, and both comprise 80% to 85% of our total assets. Three to five years from now, that proportion will remain the same. - Arthur Lang CFO Capitaland “We tend to be less driven from within, compared to those I’ve encountered in the US, Hong Kong and China. We are inclined to do what others, including our parents, expect of us, rather than what we personally believe in,” he added. “This is worrying, because only passion and drive from within is sustainable.” Developing the right mindset is also critical. “You need to have both paranoia and a global perspective. Paranoia was very much a part of the psyche of our forefathers – the LKY generation – who were consistently afraid Singapore would become irrelevant,” Lang added, referring to the city-state’s founding father and first Prime Minister Lee Kuan Yew. “We need that sense of paranoia, or one day, we will wake up and realise someone has eaten our lunch.”

Play to Win

Gurney Plaza is a CapitaLand retail development in Penang.
(Photo: Company) Lang also highlights the importance of a grateful heart. This is encapsulated in the adage 饮水思源 (yin shui si yuan) – remembering the source when you drink.

“Life is like a card game – you play based on the cards you are dealt. Rather than complain, with the hand that you have, play to win,” said the affable Masters of Business Administration graduate from Harvard Business School. He also holds a Bachelor’s degree in Economics (magna cum laude) from Harvard University.

“I always tell my kids to be grateful for what they have, and to develop a sense of gratitude, not of entitlement.”

Looking back, the straight-talking 43-year-old remembers a source of inspiration at virtually every major milestone in his life.

 

I always tell my kids to be grateful for what they have, and to develop a sense of gratitude, not of entitlement. - Arthur Lang CFO Capitaland

His father, who passed away unexpectedly when Lang was 16, consistently offered good advice, and was the role model for bringing up children. His mother was a pillar of strength during those difficult times.

“Both my parents were the only non-graduates in their families, so I made it a point not to disappoint them. Dad taught me a lot about values. He had big dreams for me, and he always told me to study hard,” Lang recalled.

“When I was in primary school, he talked to me like I was a teenager, and when I became a teen, he spoke to me as an adult. I talk to my kids the same way now."

As a young adult, Lang learnt a key management principle from his colonel in the army. He told me, ‘When I give you a problem, don't come back to me with three other problems – come back to me with the solution’,” Lang recollected with a laugh.

“So now, when my boss gives me a problem, I make sure I go back to him with a solution, or, if there's no solution, I will at least give him alternatives.”

♦ Play for the Team

Lang's leadership style – both at home and in the office – revolves around building people. “Today’s leadership model has changed. Ten to 20 years ago, leaders were the most knowledgeable and capable – it was leadership from the front, just like a general leading troops into war,” he said. “Today, knowledge is no longer concentrated in a small group due to better education and the Internet, which is a big social leveller. Leaders must lead from behind – they should inspire and galvanise.” Capitaland Stock Price $3.12 Market Cap $13.2 bn 52-week High Low $2.82 -$3.26 Dividend Yield 2.88% PE Ratio 13.88 Source: SGX StockFacts (data as of 19 Jan 2017) Managers need to support their staff and remove obstacles, ensuring that members of the team perform to the best of their abilities and achieve their objectives, he added. “We cannot be there all the time, solving problems for them. This is the case for my team, and it's the same for my kids as well.” A good leader is also defined by his refusal to compromise on key principles, a maxim Lang learnt from his Harvard Business School Professor Clay Christensen. “One thing he said that stuck with me was ‘It's easier to stick to your values 100 per cent of the time than 90 per cent of the time’. If you start compromising, giving in a little at a time, one day, you will find that you do not know what you stand for any more,” he said. “This is important for today's leaders, who face many temptations and factors that can steer them off-course.”

Rock-Solid

Lang, who sees himself as “a very boring guy” with family and friends as his only passions apart from work, often obsesses about CapitaLand’s finances.

He was named Best CFO of the Year for listed companies with market capitalisation of S$1 billion and above at this year’s Singapore Corporate Awards.

The company’s balance sheet strength must be “beyond question”, given the cyclical and capital-intensive nature of the real estate industry, he said.

We should raise capital when we can, rather than when we need it. I have seen two very bad cycles in the banking and real estate industries – things can take a turn for the worse very quickly, and it's vital to make sure our balance sheet is rock-solid in these kinds of environments. - Arthur Lang CFO Capitaland

“We should raise capital when we can, rather than when we need it. I have seen two very bad cycles in the banking and real estate industries – things can take a turn for the worse very quickly, and it's vital to make sure our balance sheet is rock-solid in these kinds of environments.”

Another priority is making sure the company has the right scale. “Scale creates opportunities and gives you economies of scale. We can do a lot more with scale, and if our cost structure is lowered, that will help us withstand challenges in the industry,” he added.

CapitaLand's strategy remains two-pronged – focusing on geographies and products.

“We cannot be all things to all people. Our core markets are still China and Singapore, and both comprise 80 to 85 per cent of our total assets. Three to five years from now, that proportion will remain the same.”

 

♦ Morph and Evolve

The company will look selectively at Vietnam, Indonesia and Malaysia to grow its footprint, he said. Expansion into the US and Europe will be carried out through its service residences platform, The Ascott Ltd, with the aim of building a global network. Sometimes, restlessness sets in during the wee hours, with Lang fretting over how CapitaLand can remain relevant amidst rapidly evolving markets, technologies and trends. CapitaLand China is one of Asia's largest real estate companies with core businesses in homes, commercial developments, integrated developments and 8 real estate funds in China. Above: its residential development in Shanghai. (Photo: Company) “Technology can be daunting,” he said. “You can wake up one day and find that your company has become irrelevant.” “It's also happening in banking, and real estate has to wake up to this phenomenon. It's not just dealing with the known unknowns – we need to be aware of unknown unknowns as well.” Real estate, as a product, could also morph over time, Lang noted. “Five years from now, real estate may no longer just be a product, but more so than now, a service, one that we can use to capture the minds, and hopefully, the hearts, of shoppers, retailers and customers. So, the company needs to be thinking, evolving, and leveraging technology to stay ahead.”

Financial results

Year ended 31 Dec (S$ m)	FY2015	FY2014	FY2013*	FY2012*
Revenue	4,761.9	3,924.6	3,511.0	2,648.3
EBIT	2,316.0	2,436.9	2,258.6	2,190.8
Profit attributable to shareholders	1,065.7	1,160.8	840.2	908.9

*restated

Quarter ended 30 Sep (S$ m)	3QFY2016	3QFY2015	yoy chg
Revenue	1,373.7	1,076.0	28%
Operating Profit	345.0	318.9	8%
Profit attributable to shareholders	247.5	192.7	28%

Source: Company data

	Outlook & Risks
A well-balanced portfolio of investment properties and residential projects continue to generate recurring income and trading profits. Grow assets under management (AUM) through the use of funds, joint ventures, listed real estate investment trusts and various capital management platforms. Capital recycling continues to be an integral part of CapitaLand’s overall strategy. Well-positioned for future growth by leveraging its significant scale and strong expertise in integrated developments, shopping malls, serviced residences and capital management

Capitaland Ltd

CapitaLand Ltd engages in real estate development, invests in real estate financial products and assets, and provides investment advisory and management services. It also manages serviced residences in Singapore, China, Europe, and elsewhere in Asia. Its real estate portfolio includes integrated developments, shopping malls, serviced residences, offices, and homes. CapitaLand was founded in 1989 and is headquartered in Singapore.

The company website is: www.capitaland.com.

Click here for the company's StockFacts page.

For its results for the 4th quarter ended 31 Dec 2016, click here.

Details

Leong Chan Teik

19 January 2017

Best World International's share price has been moving up since CLSA Singapore last Friday (13 Jan) became the third and latest house to initiate coverage of Best World International.

13 Jan (Fri): $1.405 19 Jan (Thurs, noon): $1.62 CLSA target: $2.50

The stock has moved up 15.3% from $1.405 at the start of trading on Jan 13 to $1.62 at noon today.

CLSA issued a "buy" call and target price of $2.50, forecasting glowing performance by Best World in 4Q2106, leading to its 2016 full-year profit being a record.

And the record-busting performance continues into 2018, according to CLSA, driven by Best World's new direct-selling business in China.

Best World is due to release its 2016 results in late February (going by the timing of its release in 2016).

Note: Net profit in 2015 was $10 m, not $8 m.
CLSA's forecasts:

• Firstly, full-year 2016 net profit would reach S$31 million, a record. This implies that 4Q net profit was $8.7 million as $22.3 million was recorded in 9M2016.

• Secondly, the dividend for the year would total 4.7 cents a share, another record.

	Target price	2016F net profit	2016F dividend*
CLSA	$2.50	$31 m	4.7 c
Maybank Kim Eng	$2.11	$29 m	3.75 c
CIMB	$2.21	$30.25 m	3.6 c
* Includes 2 cent interim dividend paid prior to a bonus share issue

Similarly, this implies that CLSA expects the final dividend to be 2.7 cents a share, as Best World had paid 2 cents as an interim dividend.

CLSA's forecasts are the most bullish among the three houses that cover the stock (see table).

How much in absolute dollars will Best World be paying out as dividends?

	Per share	Issued capital	Total ($)
Interim dividend	2 c	220.184 million	$4.4 m
Final dividend (CLSA forecast)	2.7 c	275.229 million (post-bonus issue)	$7.4 m
			$11.8 m

The $11.8 m amounts to a payout ratio of 38% based on CLSA's net profit forecast of $31 m.