Keong Hong Annual Report (FY2011 - FY2016) Analysis

Keong Hong

I found Keong Hong is an interesting stock with huge potential. I studied the annual reports from 2011 to 2016 as well as its IPO prospectus which was published in 2011. Please take note that I already bought the shares with an average cost of 0.47, where the current price is 0.56 at the time of writing. So please DYODD if you want to chase the stock. 

Keong Hong listed on SGX since 2011. The IPO price was 0.24 and the all new issued shares were issued by placement. The group is a provider of broad range of building construction services to both private and public sectors for residential, commercial, industrial and institutional projects. The group possess more than 20 years of experience as a building contractor in the local construction industry. According to the latest list of contractors with demerit points provided by the Ministry of Manpower on 7 November 2017, none of the joint venture or associate or subsidiary can be found on the list. After OKP’s incident, I found that checking this list is very important for risk evaluation.   

The group’s business strategies and future plans stated in their IPO prospectus are stated as follows, I found that the strategies and plans are still relevant today:

1. Expansion of business operations in Singapore and overseas;

2. To enter into property development sector in Singapore;

3. Focus on projects with high complexity and value-add for construction business.

After 6 years of listing on SGX, let us review its performance. 

The company went into property development sector by incorporate joint ventures with other bigger property development. The group mentioned in their FY2016 annual report that they are the main contractors in all their joint venture residential projects. The group expanded their business operations into hotel industry, and they have 20% effective interest in two hotel investments in Singapore. The group also expended its business operations in Maldives, Vietnam and Japan. The group has 49% effective interest in Maldives hotel projects. They also incorporated a joint venture with 15% interest in Vietnam to develop residential project. The group acquired a freehold land and a commercial building in Japan for recurring income in 2016. The group mentioned in their various annual reports that they are interested in the Australia market too, but until the time of writing the group haven’t incorporate any joint ventures of associates in Australia to develop any projects. The group stated in their FY2016 annual reports that they recognised the limited upside on their growth if they remained only in building and construction, so they are planning to expand their business operations into projects that will generate recurring income. The group mentioned it is aiming to boost the property and hotel investment portfolio such that the contribution from these will form half of the net income in three to five years, to smooth out the cyclical nature of the building and construction business. I checked that both hotels in Singapore got very good rating on booking.com.

Keong Hong’s earnings increased substantially since IPO, as the graph shows below (I used post bonus share issued less treasury shares as the total number of shares):

The group’s NAV is also growing at a fast rate since IPO, as you can see from the graph below (I used post bonus share issued less treasury shares as the total number of shares):

I also noticed that the group is able to record a gain from disposal of the property, plant and equipment almost every year, and they never recorded any loss on disposal since IPO. They only recorded write down to value less selling costs once in the annual report. I noted that the group recorded the value of PPE at original cost less depreciation, and never revalue them. The depreciation rate is charged on the following bases, which I found might slightly overstated the depreciation charge, which will decrease the NAV, therefore I believed that the NAV is underestimated:

Building – 10 years

Office Equipment – 2 years

Furniture and Fittings – 5 years

Motor Vehicles – 5 years

Plant and Machinery – 3 to 5 years

I also noted that even though the group always has a high value of receivable in the financial statements, the bad debts are very low even though some receivables were past due more than 1 months. I noted that the group is able to charge the sub-contractors when they didn’t make the payment on time, and this ‘late charges charged to subcontractors’ are growing every year and is recorded under the other income. I found that if the group is able to charge sub-contractors with late payment, and most of them will eventually pay the debts off, the high value of receivable should not be a big issue. As mentioned in the IPO prospectus, some sub-contractors are appointed by the customers, so I assumed that they should have a better reputation and good credit. 

Keong Hong distributes dividend since 2012, so I calculated the total return if we reinvest the dividend back into the share every year. I extract the dividend paid from the annual report from 2012 to 2016. I assumed that the dividend collected during the year was reinvested at the closing price of the year. There was a 1 for 2 bonus issued in 2014, so I assumed that we reinvest the dividend collected in 2014 before the bonus issued. The reinvested quantity of share rounded down to the nearest ’00, and the transaction costs were ignored. I created the table below, which shows that if we invest 10,000 SGD since IPO, we will end up with 85,350 shares today, and the value of the shares is around 47,796 SGD (1 share = 0.56 SGD)! This is more than 477% return in 7 years! 

	2011	2012	2013	2014	2014 (Bonus)	2015	2016	2017
Qty of Shares (b/d)	41,000	41,000	42,500	44,900	47,100	70,650	73,150	80,750
Interim Dividend	NA	0.005	0.005	0.02	NA	0.005	0.005	0.0025
Final Dividend	NA	0.014	0.03	0.01	NA	0.0125	0.04	0.03
Bonus	NA	NA	NA	NA	1 for 2	NA	NA	NA
Reinvested Qty	NA	1,500	2,400	2,200	23,550	2,500	7,600	4,600
Qty of Shares (c/f)	41,000	42,500	44,900	47,100	70,650	73,150	80,750	85,350

Even though the shares value increased a lot compared to IPO price, the NAV per share is still above the share price at the time of writing! And we can see that the earnings increased with the NAV too. 

Keong Hong’s cash reserve in FY2016 annual report stood at 58 million, which is equivalent to 25.58 cents per share. The company also got high receivables from its associates and joint ventures. I believed that once the projects are completed the funds will flow back to the group. 

I believed that Mr Leo Ting Ping contributed a lot to produce the sets of good results. As he mentioned in an interview with zaobao.sg, he believed that number two’s position is the best position to develop and improve ourselves and companies. Therefore, when the group decided to participate in property develop industry, the group did not bid for the projects by itself. They incorporated joint ventures with those ‘number one’ companies with strong reputation and experiences. The group is able to develop more experiences as a property developer from the incorporation of the joint venture, and it is able to be the main contractor of the joint venture to earn more revenue! I found this strategy is very good and sustainable. It lowers the risk that the group must deal with, and learn from those big brothers will lead the group to future success! As stated in the IPO prospectus (even though the group recognised it as a risk), the group’s business is dependent on the services of the sub-contractors, and sometimes the sub-contractors are selected by the customers. The sub-contractors appointed by the big boys might be more reliable and might have a longer working relationship with the big boys, and they should know what are the big boys standards. 

After talking so much about the things I like, now I would like to mention some things that I found weird about the group. 

The group recorded 56 million of cash and cash equivalents in FY2012 annual report, and during that financial year the group raised 6.96 million by issuing ordinary share (IPO). Beside getting a listed company status, I found it is sort of pointless to IPO the group as it is not raising a lot of funds. The group purchased financial assets (held to maturity) in FY2012 and disposed them in FY2014. The total consideration was 2,839,000 SGD which can be divided into two categories: 1,250,000 SGD of unquoted debt securities with a coupon rates range from 3.15% 4.25% per annum, and 1,589,000 SGD of structured deposits which can the group may be entitled less than the principle amount if withdrawn before maturity date. 500,000 SGD of structured deposits matured on 15 January 2018 and 1,089,000 SGD matured on 2 July 2015. The structured deposits got fixed interest returns range from 0.65% to 2.50%, and the group is entitled for the variable interest returns at the maturity date which are determined by reference to the change in market prices of certain underlying quoted securities on SGX, and the variable interest rate ranges from 0.00% to 6.00%. The group withdrawn all financial assets (held to maturity) when 1,089,000 SGD or structured deposit actually got less than one year to maturity date, and the group suffered a 57,814 SGD of loss on disposal of financial assets held to maturity! The group still got more than 38 million SGD as stated in FY2012 report, I don’t understand why the group decided to withdraw the deposits which might generate more interest income when there’s enough cash in the bank. The group also issued 50 million medium term notes in FY2015, with a coupon rate of 6%. This non-current liability will generate 3 million interest cost for the group every year! According the FY2015 annual report, the interest rate of the term loans was 2% plus bank cost of borrowings, and the group disclosed that the exposure of the group’s borrowings to interest rate range from 2.86% to 3.11% only. I don’t understand that why the group doesn’t continue to borrow from the bank and issue a 50 million SGD medium term note instead. Doesn’t the issuance of note will generate significant finance cost? 

Overall, I found that the group’s performance is quite good, and I believed that the managements know what they have to do to survive and grow. FY2017 final result will be announced in this month, and I hope that management can disclose more information about their new business plans. One of the Maldives hotel are already operating, and I hope that it can build a good reputation quickly, and attract more visitors. I also believed that Mr Leo Ting Ping’s strategy of staying in number two position can bring the group further. 

However, the share price chart doesn’t look very good recently, as the share price just broke into its two years high region, the RSI is very high and when I look back into the three years chart, the share price always goes down after the RSI broke into 70% and above region. I will accumulate more shares and Keong Hong will be one of the big portion in my portfolio when the share price went into correction. I am looking forward for its FY2017 final result. 

Please take note that I already invested in Keong Hong’s shares with an average price of 0.47+! 

Always DYODD huh.

Thanks for reading. 

Cheers.