BUY. KSH Holdings (KSHH SP) R e t a i l M a r k e t M o n i t o r Monday, 13 June Get Paid While Waiting MONEY TALK. (Initiate Coverage)

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1 MONEY TALK KSH Holdings (KSHH SP) Get Paid While Waiting KSH Holdings, a construction firm with >35 years of experience, is one of the best local construction firms in terms of margins and balance sheet. KSH offers earnings visibility for the next two years with orders recovering, development profits locked in and overseas projects in the pipeline. FY16 net cash of S$53.4m positions KSH well for an upturn in the construction/property market with attractive dividend yield for investors. INVESTMENT HIGHLIGHTS Initiate coverage with BUY and a 0.93x P/B-based target price of S$0.69. KSH has a proven track record in both the construction business as well as in rewarding shareholders. Cherry picking projects with decent returns and holding back its resources allows KSH to maintain a sizeable balance sheet for a possible upturn in the property market. Our view is that a healthy 15-20% correction in home prices from 2013 s peak should prompt the government to relax some of the property cooling measures, in particular, the additional buyer s stamp duty and the seller s stamp duty. We reckon this could likely take place in late-16 to early-17. Clear earnings visibility with orders climbing back above S$400m, investment income and locked-in development profits. While construction orderbook stood at S$223m as at end-fy16, we expect orders to rise to S$400m by Jun 16. Coupled with locked-in property development profits of S$258.2m in pre-sold revenue and an estimated investment income of S$10m-12m a year, we see clear earnings visibility for the group over the next two years. Overseas development projects in the pipeline. Investors also need not be overly concerned beyond FY18 as KSH has overseas development projects in the pipeline. In China, it is waiting for the right time to realise profit on a completed Beijing project while a mega Sino-Singapore Health City township project in Hebei is poised to be its next key profit driver. One of the best local construction firms in terms of margins and balance sheet. As an A1 grade contractor in construction and an A2 grade in civil engineering, a proven construction track record and over 35 years of experience, KSH is one of the best local construction firms in terms of margin management and balance sheet strength. Investor-friendly management rewards shareholders. Since its listing in 2007, KSH has been paying out steady dividends and rewarding shareholders with bonus issues, share spilt and warrants. 1,000 shares subscribed at its IPO price of S$0.36 in 2007 would become 4,840 shares worth S$0.55 now with cumulated dividends of S$685, implying a total return of more than 800%. Robust net cash of S$53.4m should sustain FY17 dividend yield at an attractive 5.5%. As cash flows from existing property development projects return, we expect the group s robust net cash position to strengthen from S$53.4m in FY16 to S$74.5m by FY17, or 30.2% of its market cap. We expect the company to pay at least S$0.03/share in dividend (or a 25% payout) for FY17 and beyond, implying a sustainable attractive 5.5% yield. BUY (Initiate Coverage) Share Price S$0.55 Target Price S$0.69 Upside 25.5% COMPANY DESCRIPTION KSH Holdings constructs, develops, and manages various properties in Singapore, Malaysia, and the People's Republic of China. GICS sector Industrials Bloomberg ticker: KSHH SP Shares issued (m): Market cap (S$m): Market cap (US$m): mth avg t over (US$m): 0.1 PRICE CHART (lcy) KSH HOLDINGS LTD Ksh Holdings Ltd/FSSTI Index Volume (m) 2 0 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 Source: Bloomberg (%) KEY FINANCIALS Year to 31 Mar (S$m) F 2018F 2019F Net Turnover EBITDA EBIT Net profit EPS (cent) P/E P/B (x) Dividend Yield (%) Net Margin (%) Net Debt(cash) to Equity (%) 0.4 (39.3) (41.0) (44.2) (42.3) Interest cover (x) ROE (%) Source: Bloomberg, UOB Kay Hian ANALYST Edison Chen edisonchen@uobkayhian.com w w w. u t r a d e. c o m. s g 1

2 Valuation Initiate coverage with a BUY and target price of S$0.69, based on 0.93x historical average P/B. As there are no forecast data available for KSH s construction peers, we opine valuation is fair with the stock trading at close to its 3-year historical average P/B of 0.93x due to: a) a brighter outlook with orders returning and clear earnings visibility, b) strengthening balance sheet, c) superior track record and skilled management, d) shareholder-friendly management, and e) sustainable attractive FY17 dividend yield of 5.5%. FIGURE 1: 3-YEAR HISTORICAL P/B Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Historical PB Ratio Average +1SD 1SD Note: Data as of 6 Jun 16 Source: Bloomberg w w w. u t r a d e. c o m. s g 2

3 Investment Highlights Clear earnings visibility in the next two years Construction orders to climb back up to S$400m by 1QFY17. KSH s construction orderbook stood at S$223.0m as at end-fy16. We expect orders to go back up to S$400m by 1QFY17 as we are encouraged by its latest contract wins with National University of Singapore (NUS) as well as other possible wins from current contract bids. Current ongoing construction projects include other public projects and private mixed developments. FIGURE 2: ONGOING CONSTRUCTION PROJECT Source: KSH Bulk of S$220m NUS contract could be awarded to KSH. We estimate the total NUS contract value at S$220m, of which the bulk (addition and alternation works) could likely be awarded to KSH due to its previous works with NUS, which included the 3-storey University Sports Centre Building, residential colleges Cinnamon College and Tembusu College, as well as NUS University Town s Education Resource Centre. Currently bidding for S$340m worth of contracts. KSH is currently in the advanced stages of bidding for S$300m worth of building contracts and S$40m worth of civil engineering contracts. In terms of participation in property development projects, KSH intends to focus on its proven niche in small projects, such as those in the Geylang/Paya Lebar area where it is looking to sell at S$1,400psf, given cost at about S$1,100psf. w w w. u t r a d e. c o m. s g 3

4 FIGURE 3: CONSTRUCTION ORDERBOOK FY16 FY17 FY18 FY19 Contruction Order Book (S$m) Source: KSH, UOB Kay Hian Pre-sold property projects provide earnings visibility. As at 31 Mar 16, KSH had launched 14 projects held under associates and JVs, and sold 91.1% of the launched units. The group has about S$258.2m in pre-sold property project revenue that will be progressively recognised in the next two years. FIGURE 4: CURRENT PROJECTS LAUNCHED UNDER KSH AS AT 31 MAR 16 No. Project Name Group Stake Type of Development Status of Construction Revenue Recognisition Method % Units Sold Singapore 1 Lincoln Suites 25.00% Residential Completed Percentage of Completion 94.30% 2 The Boutiq 35.00% Residential Completed Percentage of Completion 94.60% 3 Palacio 32.00% Residential Ongoing Percentage of Completion % 4 REZI % Residential Completed Percentage of Completion % 5 REZI3TWO 45.00% Residential Ongoing Percentage of Completion 67.70% 6 Sky Green 25.00% Residential Ongoing Percentage of Completion 97.70% 7 Cityscape@Farrer Park 35.00% Residential Completed Percentage of Completion 90.40% 8 NEWest 12.25% Residential and Commercial Ongoing Percentage of Completion % 9 KAP & KAP Residences 12.60% Residential and Commercial Ongoing Percentage of Completion 99.20% 10 Floraville / Floraview / Floravista 12.25% Residential and Commercial Ongoing Percentage of Completion 50.00% 11 Hexacube 30.00% Commercial and Office Ongoing Completion 57.50% 12 Trio 35.00% Commercial Ongoing Completion 37.20% 13 High Park Residences 20.00% Overseas 14 Source: KSH Liang Jing Ming Ju Phase 4 - Sequoia Mansion 45.00% Residential and Commercial Residential (Commercial and Office excluded) Clear earnings visibility for next two years. Despite the challenging competitive landscape (rising wages, labour shortage), management is confident of maintaining net margins of 6-7% for construction-related revenue due to its cost-cutting efforts and ongoing production efficiency drive. Coupled with the locked-in property development profits and an estimated investment income of S$10~12m a year, we see clear earnings visibility for the group over the next two years. Ongoing Percentage of Completion 95.10% Completed Completion 90.90% w w w. u t r a d e. c o m. s g 4

5 FIGURE 5: REVENUE AND PROFIT FY16 FY17 FY18 FY Revenue (S$m) LHS Net Profit (S$m) RHS Source: KSH, UOB Kay Hian w w w. u t r a d e. c o m. s g 5

6 Projects in the pipeline Overseas projects in the pipeline beyond FY18. Investors also need not worry about what happens beyond FY18 as KSH has overseas projects in the pipeline. In China, it is waiting for the right time to realise profit on a completed Beijing project while a mega Sino-Singapore Health City township project in Hebei is poised to be its next key profit driver. Expanding into the UK and Australia. KSH is also looking to geographically expand from its traditional markets in Singapore and China. In the UK, KSH is involved in a longterm development of a 106,722sf site in Central Leeds and a smaller serviced-apartment redevelopment in Glenthorne Road, London. In Australia, its maiden investment is in a mixed development in Fortitude Valley, Brisbane. FIGURE 6: PROPERTY DEVELOPMENT PIPELINE IN THE UK AND AUSTRALIA Leeds Glenthorne Road, London Fortitude Valley, Brisbane KSH's Stake 15% 10% 4.95% Details 2.45 acres or 106,722 sq ft land site located in Central Leeds nearby central railway station that connects the city to London and other parts of UK. Maiden investment in UK real estate market to acquire a property along Glenthorne Road, London for approx. S$31m ( 14.85m) Approved to build over 1 million sq ft of mixed-use developments. Long-term project to be executed in phases Freehold land 2 minutes walk away from Hammersmith Underground Station Gross internal area of about 24,700 sq ft Currently has 42 operational hotel units Mixed development in Fortitude Valley, 1km away from Brisbane s CBD; 150m away from Brunswick Central Railway Station and 50m away from tourist hotspots (e.g. Chinatown/Brunswick Street Malls) Acquisition cost: A$150m One of the tallest developments in the vicinity with paranomic views of the CBD Source: KSH Expects to sell Beijing project at a premium in In China, KSH s Sequoia Mansions (Liang Jing Ming Ju) project in Beijing is completed. The retail and office units of more than 92,000sf are currently rented out for S$0.2m-0.3m p.a. as KSH is looking to sell the project closer to the opening of the Beijing Universal Studios theme park in It expects selling prices at Rmb50,000psm by then vs Rmb30,000psm currently (cost of around Rmb20,000psm). FIGURE 7: LIANG JING MING JU PHASE 4 Group's Stake 45% Location Beijing, Tongzhu Estimated Net Saleable Approximately 40,000 sqm Area (sqm) Number of Units Residential: 373 Retail: 26 Offices: 27 Basement storage unit: 16 Units Sold (%) Residential: Over 90% TOP June 2015 Source: KSH w w w. u t r a d e. c o m. s g 6

7 Key township development in Hebei, China. KSH s key development in China is the Gaobeidian town development project in Hebei, which it is involved in a consortium with Singapore-listed Liang Beng Group and Oxley Holdings (the same partners in its Beijing project). The local government supports this Sino Singapore Health City development by providing a 533.3ha site located near a new high-speed train station that will have transportation links to Beijing. FIGURE 8: GAOBEIDIAN PROJECT SINO-SINGAPORE HEALTH CITY Group s Stake 22.5% Location Gaobeidian (82 km from Beijing) Total Land Size Hectares (8,000 mu) Project Brief Sino-Singapore Health City Township Development with 50,000 households Stage 1: Mountain Climbing Training Centre & Outdoor Sports Centre Township Stage 2: Green Health Food Safety Testing Centre Township Source: KSH 19 minutes from Beijing. The project is sited in one of the satellite cities around Beijing that is earmarked by the government for development as part of its The Beijing-Tianjin- Hebei Metropolitan Circle decentralisation strategy. It is located next to the Beijing- Shijiazhuang expressway and a high-speed rail station that will have only a 19-minute train ride to Beijing, bringing enormous potential to the area. Two main components in the township. Other than residential and commercial developments, the two main components in the township are: a) a 1.97m sqm mountain training climbing centre and a 266,000sqm outdoor centre, and b) a 3.3m sqm Green Health Food Safety Testing Centre. Phase One should commence soon with sales to start before end-16. Construction of Phase One for the mountain climbing training centre, a 40,000sqm commercial belt, and 3,050-unit residential developments are targeted to commence before end-jun 16 with a 24- month construction period. Sales are expected to begin before end-16. w w w. u t r a d e. c o m. s g 7

8 Investor-friendly management that consistently rewards shareholders Rewarding shareholders with dividends, bonus shares and warrants. Since its listing in 2007, KSH has been paying out steady dividends to shareholders. The shareholder-friendly management has also rewarded shareholders with bonus issues, share spilt and warrants. 1,000 shares subscribed at its IPO price of S$0.36 in 2007 would become 4,840 shares priced at S$0.55 now with cumulated dividend payouts of S$685, a gain of more than 800%. FIGURE 9: KSH GAINS SINCE IPO Date/Period Accumulated No of Shares Accumulated Cash Received (S$) Re m arks Feb 07 1,000 0 IPO price of S$0.36 FY07 1, Dividends of S$0.025 FY08 2, Share split, 2 for 1 2, Dividends of S$ , Dividends of S$0.015 FY09 4,000 (143) 1 for 1 w arrants rights issue at S$0.01 w ith a strike price of S$0.10* 4,000 (63) Dividends of S$0.02 FY10 4, Dividends of S$0.02 FY11 4, Dividends of S$0.01 4, Scrip dividend scheme S$0.01* FY12 4, Dividends of S$0.015 FY13 4, Share bonus, 1 for 10 4, Dividends of S$0.025 FY14 4, Dividends of S$0.03 FY15 4, Dividends of S$ , Dividends of S$ FY16 4, Share bonus, 1 for 10 4, Dividends of S$0.02 S$ Total number of shares accumulated 4,840 Total value of the S$0.55 per share 2,662 Less: initial cost of IPO price (360) Add: total cash received 685 Total gain 2,987 Total Gain (%) 829.7% *Assuming all rights and warrants are exercised and cash is received for all scrip dividends. Source: KSH, UOB Kay Hian w w w. u t r a d e. c o m. s g 8

9 One of the best local construction firms Improving construction gross margins. With its proven track record of more than 35 years in construction, KSH is one of the best local construction firms in terms of margin management and balance sheet strength. In particular, management has been improving its construction gross margins in recent years via productivity improvement and prudent project selection. FIGURE 10: CONSTRUCTION OPERATING MARGIN 14% 12% 10% 8% 6% 4% 2% 0% FY12 FY13 FY14 FY15 FY16 KSH Historical Construction Operating Margin (%) Source: KSH BCA s PQM helps overall margin. And what has been helping KSH is the Building and Construction Authority (BCA) introducing the Price Quality Method (PQM) with a two envelope tender system in 2013 whereby firms who do not pass the quality criterion will be sieved out regardless of their price bid. This has helped support KSH s overall margin as shoddy construction companies who compete only on prices are weeded out and quality firms like KSH can compete with reasonable margins. Further information can be found here: One of the best construction firms around. Compared with peers, KSH has been consistently delivering above-peer average construction margins and is the only one amongst its peers with a net cash position. Its better margins helped overall profitability while its balance sheet strength allows it to get suppliers and subcontractors at lower prices as KSH is able to deliver prompt payment. FIGURE 11: PEER COMPARISON - CONSTRUCTION OPERATING MARGINS Ticker FYE FY12 FY13 FY14 FY15 FY16 Net Gearing as of Mar 16 Lian Beng Group* LBG SP 31 May 12.3% 10.6% 7.0% 6.2% 29.1% Chip Eng Seng CHIP SP 31 Dec 11.8% 5.9% 7.7% 6.9% 60.6% Tiong Seng Holdings TSNG SP 31 Dec 5.9% 3.5% 3.9% 5.8% 47.2% Keong Hong Holdings KHHL SP 30 Sep 8.9% 7.9% 10.0% Average 10.0% 6.7% 6.9% 6.7% 36.7% KSH Holdings KSHH SP 31 Mar 12.7% 10.1% 7.0% 7.3% 11.1% 17.0% *Net Gearing as of Feb 16 due to their reporting period Source: Respective companies, Capital IQ, UOB Kay Hian w w w. u t r a d e. c o m. s g 9

10 Astute management waiting for right timing to commit. Another reason why KSH is holding so much cash is because it is cherry picking projects that have decent returns and holding back its full strength while waiting for a possible upturn in the property market. Our view is that a healthy 15-20% correction in home prices from 2013 s peak should prompt the government to relax some of the property cooling measures, in particular, the additional buyer s stamp duty (ABSD) and the seller s stamp duty (SSD). We reckon this could likely take place in late 2016 to early-17. Share price catalysts likely on the horizon. As such, a possible catalyst on the horizon is an upturn in the property market when the government relaxes the property cooling measures. Other catalysts include more contract wins, which is likely, given KSH s track record which should allow it to win some of the contracts it is currently bidding for. w w w. u t r a d e. c o m. s g 10

11 Financials Construction revenue to grow 5% annually. Backed by upcoming orders, we expect revenue to grow 5% annually on continued order-win momentum. Assuming construction orders to maintain operating margins of 11.1%, we expect KSH to report S$27.9m and S$29.3m in operating profits for FY17 and FY18 respectively. FIGURE 12: CONSTRUCTION REVENUE AND OPERATING PROFIT FY16 FY17 FY18 FY19 Construction Revenue (S$m) LHS Construction Operating Profit (S$m) RHS Source: KSH, UOB Kay Hian Pre-sold property projects provide S$25m profits each in FY17 and FY18. As at 31 Mar 16, KSH had launched 14 projects held under associates and JVs, and sold 91.1% of the units launched. The group has about S$258.2m in pre-sold property project revenue that will be progressively recognised in the next two years. At an estimated net margin of 20%, this translates into decent share profits of S$25m each in FY17 and FY18. Investment income of S$10m-12m p.a. Investment income comes from four sources: a) Its 69% stake in the Tianjin property will generate S$6m in rental income p.a. backed by a two- year master lease and >90% occupancy; b) rental and sales income from the Liang Jing Ming Ju Beijing project which is currently held for rental income of S$0.2m- 0.3m p.a. until prices increase with the opening of the USS theme park in Beijing in ; c) rental and sales income from its 28% stake in the Prudential Tower associate which we estimate at S$4m-6m p.a. for the next three years; and d) income from its stakes in various overseas associates (in Australia, the UK and Japan) which we do not expect any dividend income in the next few years. This is because KSH s stakes are only sufficient to be accounted if dividends are paid out). FIGURE 13: INVESTMENT INCOME Investment Incom e (S$m) FY17 FY18 FY19 Tianjin Property Liang Jing Ming Ju Prudential Tow er Various Overseas Associates Source: KSH, UOB Kay Hian Financing cost savings of around S$2m p.a. through refinancing. KSH has an outstanding term notes of around S$70m at 5.25% interest rate. However, with its strong balance sheet, the notes were refinanced in May 16 with a bank loan at an estimated 2.5%. This will result in interest savings of around S$2m p.a. w w w. u t r a d e. c o m. s g 11

12 Clear earnings visibility for next two years. Despite the challenging competitive landscape (rising wages, labour shortage), management is confident of maintaining net margins of 6-7% for construction-related revenue due to its cost-cutting efforts and ongoing production efficiency drive. Coupled with the locked-in property development profits and an estimated investment income of S$10m-12m a year, we see clear earnings visibility for the group over the next two years. FIGURE 14: REVENUE AND PROFIT FY16 FY17 FY18 FY Revenue (S$m) LHS Net Profit (S$m) RHS Source: KSH, UOB Kay Hian Solid balance sheet and robust dividends Robust balance sheet with net cash of S$53.4m. KSH boasted a net cash of S$53.4m as at end-fy16. As cash flows from existing property development projects return gradually upon TOP, we expect the group s robust net cash position to strengthen to S$74.5m by FY17, which translates to 30.2% of its market cap. FY16 dividend yield hit 6.5%. The company announced a final dividend of 1.5 cents/share and a special dividend of 0.8 cents (likely due to a jump in profits from associates) for FY16. Coupled with interim dividend of 1.25 cents, FY16 dividend would hit 3.55 cents, or a yield of 6.5%. Attractive dividend payout of 5.5% to be sustained for FY17 and beyond. The strong net cash position should sustain the dividends KSH has been paying out. Excluding special dividends, we expect KSH to maintain at least S$0.03 in annual dividend, or a 5.5% yield for FY17 and beyond, given a payout ratio of 25%. FIGURE 15: NET CASH AND DIVIDENDS FY16 FY17 FY18 FY Net Cash (S$m) LHS Dividends Per Share (SG cents) RHS Source: KSH, UOB Kay Hian w w w. u t r a d e. c o m. s g 12

13 Company Background Proven track record More than 35 years of experience powers core construction business. Incorporated in 1979 and listed on the SGX in 2007, KSH is involved in two primary businesses - construction and property development & management. The construction segment is focused on Singapore where KSH acts as the main contractor for awarded projects in both the private and public sectors. FIGURE 16: PROFIT BEFORE TAX BY SEGMENT FY10 FY11 FY12 FY13 FY14 FY15 FY16 Construction (S$m) Property Development and Management (S$m) Source: KSH A1 construction grading allows for unlimited value tenders while A2 civil engineering allows up to S$90m. KSH is an A1-graded contractor under the BCA s CW01 category, which allows it to tender for public-sector construction projects of unlimited value. It also has an A2 grade under the BCA CW02 category for civil engineering, which allows it to tender for public-sector projects for value of up to S$90m. Proven construction track record. KSH has a proven capability in handling construction projects across a broad spectrum of industries. Its projects have performed well in CONQUAS, a standard assessment system on the quality of building projects. It won the BCA Construction Excellence Awards for the construction of Fullerton Bay Hotel, NUS University Town s Educational Resource Centre and Madison Residences. w w w. u t r a d e. c o m. s g 13

14 FIGURE 17: CONSTRUCTION TRACK RECORD Source: KSH Geographically diversified business spanning across the UK and Asia Pacific. For the property segment, KSH is engaged in property development and investment through strategic alliances and JVs with projects geographically diversified across Singapore, China, Malaysia, the UK, Australia and Japan. FIGURE 18: GEOGRAPHICAL FOOTPRINT Source: KSH w w w. u t r a d e. c o m. s g 14

15 Investment income from properties in Singapore and China. This segment also includes income from renting and selling of investment properties in Singapore and China. In Singapore, KSH has a 28% stake in Prudential Tower, a 30-storey Grade-A landmark office tower with full occupancy. In China, other than the Liang Jing Ming Ju Beijing project which is held for rental until prices increase with the opening of the USS theme park in Beijing in , KSH also has a 69% stake in 36-storey Tianxing Riverfront Square located at the heart of the business district of Tianjin. Recently, they have also made new investments in hospitality and residential properties in the UK and Japan. FIGURE 19: INVESTMENT PROPERTIES IN SINGAPORE AND CHINA Prudential Tower Tianjin Tianxing Riverfront Square ( 天津天星 ) KSH's Stake 28% 69% Details 30-storey Grade A landmark office tower with full occupancy 36-storey Retail and Office Complex located at heart of business district of Tianjin, PRC Strata-titled office development strategically located at the junction of Cecil Street and Church Street in the heart of Singapore's business and financial district, easily accessible from Raffles Place MRT Interchange and Telok Ayer MRT Stations Contributing positively to KSH since FY2015 with profit from sales disposal and recurring rental income Office units 44%-sold; remaining units and shopping podium leased out with average occupancy above 90%; contributes positive recurring rental income to the Group s performance Total Lettable Area: 37,033 sqm Tenure: ~50 years from Nov 29, 1993 Latest Valuation: S$115.6m Currently over 30% of net leasable area sold; expected to contribute positively to the Group s earnings in FY2017 Source: KSH FIGURE 20: RECENT INVESTMENT IN THE UK AND JAPAN ibis Budget Bradford ibis Hotel Gloucester Holiday Inn Express Manchester City Centre Chuo ward, nearby Sapporo City s CBD KSH's Stake 15% 15% 30% 10% Details 86-room hotel close to Bradford s city 127-room hotel east of Gloucester s 12-storey, 147-room hotel in 15-storey, 164-room hotel building centre, managed by French hotel urban centre, managed by French hotel Manchester, a global art and cultural city and 14- storey residential building operator, Accor operator, Accor Managed by global hotel operator, Well-located within the entertainment 49 miles away from Manchester, commonly regarded as the capital of Two hours drive from London City and InterContinental Hotels Group an hour away from the popular Bicester The hotel is strategicallylocated and shopping district in the Chuo ward, nearby Sapporo City s CBD North England 20 minutes drive away from the Shopping Outlet Nearby the headquarters of several nearby renowned shopping street and railway station for easy connection to Walking distance to subway stations, two stops away from main transit hub, international airport Bradford poised to benefit from an urban regeneration programme that is expected to raise visitors interest significantly major British businesses wellpositioned to benefit from year-round corporate patronage Greater Manchester and UK poised to Sapporo Station attract both leisure and business travellers Source: KSH w w w. u t r a d e. c o m. s g 15

16 Industry Construction demand in 2016 projected at S$27b-34b. According to BCA, Singapore s construction demand in 2016 is projected at S$27b-34b, with about 65% driven by public-sector demand. The expected ramp-up in public-sector projects comes after Singapore's economic growth slowed to 2.1% last year, hurt by a slowdown in China and sluggish global demand. Private-sector construction demand is likely to slow this year due to less favourable economic conditions and an increased supply of completed private housing projects and offices. Construction demand is expected at S$26b-35b for and S$26b-37b for FIGURE 21: CIVIL ENGINEERING CONSTRUCTION DEMAND Construction demand Year (Value of contracts awarded) Public Private Total 2015 p S$14b S$13.2b S$27.2b 2016 f S$ b S$ b S$27-34b f S$16-20 billion - S$26-35b f (60% from building S$26-37b projects and 40% from civil engineering p: preliminary f: forecast Source: BCA Construction sector grew in 1Q16. According to the Ministry of Trade and Industry (MTI), the construction sector grew by a seasonally-adjusted annualised 10.5% qoq in 1Q16, faster than the 6% growth in 4Q15. On a yoy basis, it expanded 6.2%, improving from the 4.9% growth in 4Q15, supported by both public- and private-sector construction activities. MTI also announced that Singapore s 2015 GDP grew 2.0% and maintained its forecast for 2016 at %. FIGURE 22: CONSTRUCTION GROWTH RATES 1Q15 2Q15 3Q15 4Q Q16 GDP yoy changed (%) GDP qoq changed (%) Construction yoy changed (%) Construction qoq changed (%) Source: MTI Singapore property market remains challenging. According to the Urban Redevelopment Authority, sales of new private homes in April fell 11.5% from March. Private home prices fell 0.7% yoy in 1Q16, following a 0.5% drop in 4Q15. For office space, prices decreased 0.3% yoy in 1Q16, following a decline of 0.1% in 4Q15. Prices for shop space also decreased 1.9% yoy in 1Q16, after a 0.1% dip in 4Q15. However, things should look brighter forward as we view a healthy 12-15% correction in home prices from 2013 s peak should prompt the government to relax some of the property cooling measures, in particular, the ABSD and the SSD. We reckon this could likely take place in 2H16 to early-17. w w w. u t r a d e. c o m. s g 16

17 FIGURE 23: NUMBER OF PRIVATE HOUSING UNITS LAUNCHED AND SOLD BY DEVELOPERS (EXCLUDING ECS) Source: URA China s property sector to remain stable through Moody's Investors Service said its outlook for China's property sector remains stable through 2016, but growth in nationwide property sales will slow due to the high base in Demand in lower-tier cities is generally weaker than that in higher-tier cities. China's Xinhua News Agency reported that prices in higher-tier cities like Shenzhen grew the most with a 52.7% leap, the fastest annual pace of price growth since Prices in Shanghai jumped 21.4% while Beijing saw an 11.3% rise. FIGURE 24: PRICE OF AVERAGE 100 SQUARE METRE HOUSE DIVIDEND AVERAGE HOUSE HOLD INCOME* * Three-month rolling average Source: Economist Intelligence Unit w w w. u t r a d e. c o m. s g 17

18 Risks Revaluation in investment properties. As overseas property markets remains volatile (particularly in China), it is plausible that some of its properties may face value adjustments. At this point of time, we understand one possible candidate is its Tianjin property as the local market remains lukewarm. However, we note it does have a >90% occupancy with more than two years of a master lease remaining. Margin pressure from increase in cost of construction. Construction and other operating costs are likely to continue in the uptrend as a result of various foreign manpower tightening measures and a labour shortage, adoption of advanced systems and technologies as well as equipment regulatory compliance and hikes in financing cost. However, the increase in cost is likely to be restrained by current stable prices of some key construction materials and KSH s ongoing productivity improvement through technology adoption and innovative measures. Challenge to sustain orders if slowdown in Singapore s property market worsens significantly. KSH would face challenges to sustain its orders and hence profitability if the slowdown in Singapore s property market worsens significantly. However, we believe this is not likely to happen as we view a healthy 12-15% correction in home prices from 2013 s peak should prompt the government to relax some of the property cooling measures, in particular the ABSD and SSD. We reckon this could likely take place in 2H16 to early-17. w w w. u t r a d e. c o m. s g 18

19 PROFIT & LOSS BALANCE SHEET Year to 31 Mar (S$m) F 2018F 2019F Year to 31 Mar (S$m) F 2018F 2019F Net turnover Fixed assets EBITDA Other LT assets Deprec. & amort Cash/ST investment EBIT Other current assets Associate contributions Total assets Net interest (6.5) (4.4) (4.4) (4.4) ST debt income/(expense) Pre-tax profit Other current liabilities Tax (4.6) (3.9) (4.2) (4.5) LT debt Minorities Other LT liabilities Net profit Shareholders' equity Net profit (adj.) Minority interest Total liabilities & equity CASH FLOW KEY METRICS Year to 31 Mar (S$m) F 2018F 2019F Year to 31 Mar (%) F 2018F 2019F Operating Profitability Pre-tax profit EBITDA margin Tax (2.5) (3.9) (4.2) (4.5) Pre-tax margin Deprec. & amort Net margin Working capital changes ROA Other operating cashflows (48.0) (28.0) (40.6) (43.2) ROE Investing (1.2) Capex (1.4) (1.4) (1.3) (1.2) Growth Interest and dividend income Turnover (0.3) Others EBITDA (2.5) Proceeds from sale of assets Pre-tax profit 44.9 (15.5) Financing 13.0 (17.9) (17.9) (17.9) Net profit 47.0 (15.5) Dividend payments (12.5) (13.4) (13.4) (13.4) EPS 47.0 (15.5) Issue of shares Proceeds from borrowings Leverage Others/interest paid (30.5) (4.4) (4.4) (4.4) Debt to total capital Net cash inflow (outflow) Debt to equity Beginning cash & cash Net debt/(cash) to equity (39.3) (41.0) (44.2) (42.3) equivalent Changes due to forex impact (0.2) Interest cover (x) Ending cash & cash equivalent w w w. u t r a d e. c o m. s g 19

20 MONEY TALK Bloomberg Consensus Recommendation Buy Sell Hold Valuation Ratios 3/14 3/15 3/16E 3/17E - 100% 0% 0% P/E Target Price 0.61 EV/EBIT Upside 12% EV/EBITDA P/S Income Statement 3/14 3/15 3/16E 3/17E P/B Revenue Div Yield 6.5% 5.4% - - Gross Income Operating Income Profitability Ratios % Pretax Income Gross Margin Net Income Adjusted* EBITDA Margin EPS Adjusted Operating Margin Dividends Per Share Profit Margin Payout Ratio (%) Return on Assets EBITDA Return on Equity Peer Comparison Ticker Market -----PE P/B----- Yield 12 Jun 16 Cap (US$m) FY15 (x) FY16F (x) FY15 (x) FY16F (x) FY16F (%) Tiong Seng Holdings Ltd TSNG SP n.a. 0.4 n.a. n.a. Koh Brothers Group Ltd KOH SP n.a. 0.4 n.a. n.a. Chip Eng Seng Corp Ltd CHIP SP n.a. 0.5 n.a. 6.2 Keong Hong Holdings Ltd KHHL SP n.a. 0.9 n.a. n.a. Average 6.0 n.a 0.6 n.a 6.2 KSH Holdings TSNG SP n.a. n.a. Source: Bloomberg, UOB Kay Hian w w w. u t r a d e. c o m. s g 20

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