Singapore Equity: Ho Bee Land

Going forward, I will be updating the performance of a small model portfolio based on my various postings on this site.

There will be 3 strategies employed in picking stocks for the portfolio:
Good businesses, Deep Value and Special Situations.

Here is the current portfolio:
Equity Portfolio

Today, I shall feature another Deep Value stock:
Company Name: Ho Bee Land
Share Price: SGD 2.02
Market Capitalisation: SGD 1.41b

Ho Bee Land was founded in 1987 by Mr Chua Thian Poh who currently owns 73.054% of the company’s shares. Mr Chua sits on several boards and is the President of Singapore Federation of Chinese Clan Associations.

Ho Bee Land is known as a leading developer of luxury homes in the exclusive residential enclave of Sentosa Cove. Due to the cooling measures imposed on the property sector, Ho Bee Land has not acquired any new sites in Singapore in recent times and has been focused on slowly clearing its inventories in Sentosa and building up a stream of recurring income via investment properties in Singapore and London.

Property development activities have also been diversified out of Singapore into China (JV with Yanlord in Zhuhai, Tangshan) and Australia (Melbourne and Gold Coast).

Its biggest investment property in Singapore is The Metropolis (located just beside Buona Vista MRT) which has been valued at SGD 1.51b as of 31 Dec 2014.

Do note that Ho Bee Land is not affected by the Qualifying Certificate (QC) regulations imposed on developers (the 8% (1st year), 16% (2nd year) and 24% (3rd year and beyond) penalty imposed on the proportionate unsold value of the land 2 years after TOP) that are not 100% Singapore owned as developments in Sentosa are excluded.

Thus, please do not be misled by media reports that Mr Chua is rumoured to be considering privatising Ho Bee Land to avoid the QC penalties.

The accumulation of additional shares in Ho Bee Land by Mr Chua in recent weeks is a regular feature of the re-investment of the proposed dividends to be paid back in to his company. This is a very positive signal as it shows he believes Ho Bee Land will generate better returns than other investments!

So what is the rationale for buying Ho Bee Land and why buy now?
Quite simply, besides the steep discount to RNAV (CIMB’s estimate is S$3.76 per share) regularly highlighted by analysts:

1. Ho Bee Land’s core revenue and profit has seen a bottom in 2014 (no revenue from sales of development property) and the company will enjoy the full year contribution of its investment properties in 2015.

2. Incremental profit contributions from completion of Australian residential developments in 2016-2017 (revenue and profits for ECs and foreign residential projects are recognised on completion basis according to Singapore accounting regulations)

Thus, with the expected increase in revenue and profits in 2015 and beyond (excluding revaluation gains) and with the prospect of higher dividends, surely the share price should re-rate in the years ahead especially when it has been relatively stagnant over the past 2 years, no?

Ho Bee Land 2 Year Chart

Do note that the stock goes ex-dividend (SGD 5 cents per share) on 12 May 2015, payment date is 29 May 2015.

I have tweaked CIMB’s RNAV model to account for actual valuation figures for Metropolis and Rose Court and use valuations closer to the purchase price for the rest of the UK properties.

For the unsold units in Sentosa, I ignore the present value of the development profits and use the value of the unsold inventories.

My RNAV estimate works out to be SGD 3.49 so at SGD 2.02, Ho Bee trades at a 42% discount.