TEE Land Ltd. Overweight. Making Headway Towards Value Discovery

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1 2Q17 results update 19 January 2017 Current Price Overweight S$0.195 Fair Value S$0.290 Up / (downside) 48.7% Stock Statistics Market cap S$87.1m 52-low S$ high S$0.230 Avg daily vol 67,709 No of share 446.9m Free float 30% Key Indicators ROE 17F 3.9% ROA 17F 1.7% P/BK 0.55 Net gearing 1.20x Major Shareholders TEE International 63.28% Phua Chian Kin* 68.45% *Phua Chian Kin is deemed to have interest in TEE land held by TEE International Limited Liu Jinshu Historical Chart 0 01/16 03/16 05/16 07/16 09/16 11/16 01/17 (+65) jinshu.liu@nracapital.com Making Headway Towards Value Discovery 2Q17 results dragged lower by loss at associates. reported PATMI of S$0.69m for the 2Q FY17 quarter ended 30 November Earnings were comparable to that of 1Q FY17 when the company made S$0.6m and would have been higher if not for S$0.68m of share of loss of associates compared to a positive profit share of S$0.8m in 1Q FY17. The loss at associated companies was mainly due to the sale of several units at the Boutiq project below cost and losses incurred by Chewathai in Thailand. Revenue recognition picked up pace in 2Q FY17. We are somewhat disappointed by the lower than expected earnings for 2Q FY17. However, revenue grew from S$13.8m in 1Q FY17 to S$24.0m in 2Q FY17, mainly due to faster project progress at Third Avenue. We expect the completion of projects to lead to better performance from Chewathai in 4Q FY17. In general, the results reflect a healthy shift towards higher profit contribution from majority owned projects. Costs were largely similar across 1Q and 2Q FY17 except for savings of S$0.6m to S$0.7m from the cessation of depreciation of Australian assets. To sell all hotels in Sydney. During 2Q FY17, reclassified its Australian hotels to assets held for sale, giving rise to two implications 1) efforts to sell Quality Hotel CKS Sydney Airport are making headway and 2) the company has also decided to sell Larmont hotel as well. Work to convert the newly acquired units to suites has been completed. Progressively reducing inventory to strengthen balance sheet. We have previously highlighted units as a key risk. Since our last update, has sold one unit at 183 Longhuas and three units at Peak I. This leaves 38 units with an estimated value of S$69.35m at 183 Longhause, Peak I and Hilbre 28 to be sold. Among associated projects, Floraville and the residential units at Floraview are more than 94% sold, having moved some 30 odd units over the last three months. Maintain Overweight (high-average return / low-average risk). We generally concur with the moves to improve balance sheet liquidity. These moves will be the future catalysts to bring about discovery towards our valuation. In this update, we revised FY17 PATMI from S$9.4m to S$6.2m. This estimate excludes any potential gains from the sale of the Australian hotels. Our valuation has been revised lower from S$0.335 to S$0.290 as we have revised selling prices and fair values lower for the portion of development projects and for the hotels in Australia. This is to reflect downside risks given current market conditions. However, we reiterate that our investment case for remains intact with an unchanged return / risk classification, especially with the more conservative projections. As of 30 November 2016, has a net asset value per share of S$ Key Financial Data (S$ m, FYE May) F 2018F 2019F Sales Gross Profit Net Profit EPS (cents) EPS growth (%) (5.3) (33.9) (15.4) PER (x) NAV/share (cents) DPS (cents) Div Yield (%) Source: Company, NRA Capital forecasts

2 Results Overview 1Q 2Q 3Q 4Q 1Q FY17 2Q FY17 Revenue Gross profit Gross margin 54.1% 37.3% 35.2% 35.3% 28.4% 27.5% Other operating income Selling and distribution costs Administrative expenses Remarks Steadily growing due to growing contribution from majority owned projects Cost savings from cessation of depreciation of Australian assets in 2Q17 Other operating expenses Share of results of associates Rezi3Two and Hexacube to boost results in 3Q/4Q17 Finance costs Profit before tax Income tax Profit after tax PATMI Positive minority interest from cessation of depreciation at 55% owned Minority interests Australian assets EBIT Depreciation and amortisation EBITDA Source: Company, NRA Capital Figure 1: List of and GDV Estimates (existing sales data obtained from URA caveats lodged) Launched and majority owned projects in Singapore Realised ASP (S$ psf) Sales No of units Area (sq. ft.) Value of portion Avg size (sq. ft.) Est. ASP (S$psf) 100% GDV Hilbre28 100% 1, , , LongHaus - Residential 100% 1, ,175 1,019 1, Launched associated projects in Singapore Realised ASP (S$ psf) Sales Revised higher from S$47.08m due to one unit sold at S$1,599 psf in November No of units Area (sq. ft.) Avg size (sq. ft.) Est. ASP (S$psf) Value of portion 100% GDV Residential Newest 7% ,480 2, Rezi 3TWO 45% 1, , , Floraville 7% 1, , , Floraview 7% 1, , , Commercial Newest - shops 7% 4, , , Hexacube - shops 30% 3, , , Hexacube - office 30% 1, , , Trio - shops 35% 3, , , The realized ASP for Floraville fell from S$1,322 to S$1,308 psf as 4 units worth S$3.8m were sold at ASPs of S$1,173 psf in November and December Hence, we reduced the estimated ASP for the remaining three units to S$1,150 psf. This reduced the GDV of Floraville from S$48.93m S$48.84m. The realized ASP for Floraview fell from S$1,238 to S$1,175 psf as 29 out of a total of 90 units were sold at ASPs of S$1,085 psf from August 2016 to January Hence, we reduced the estimated ASP for the remaining two units to S$1,080 psf. This reduced the estimated GDV from S$87.93m to S$84.39m. The net impact of the lower estimates for Floraville and Floraview is relatively low as only owns 7% of these projects. 100% owned 183 Longhaus sold one unit at a higher than expected price of S$1,599 psf. Hence, we retained our estimated ASP at S$1,400 for the remaining 9 units at 183 Longhaus. page 2

3 We have revised the ASPs for the commercial components of Newest, Hexacube and Trio lower by 10% for the retail units and 5% for the office units. These changes reduced the estimated value of the units by approximately S$15m of which S$4.14m is attributable to. The lower ASP estimates for the units is to reflect current market conditions. According to the URA, the retail property price index fell by 3.1% from 1Q16 to 2Q16 and by 0.6% from 2Q16 to 3Q16. Office property prices fell at a slower rate of 1.5% in 2Q16 and 0.4% in 3Q16. with limited or no existing sales data Previously Estimated Revised Estimates Saleable Area ASP ASP No of units (sq. ft.) (S$psf) GDV (S$psf) GDV Third Avenue - SOHO 100% , Third Avenue - shops 100% 31 23, Floravista - shops 7% 28 16,049 2, , Longhaus - shops 100% 10 11,281 4, , We have estimated the ASP for Third Avenue SOHO units at RM700 psf and the Third Avenue shops at RM1,000 psf. Due to the depreciation of the MYR, their average selling prices in SGD have been revised lower as shown in the above table. We also take the opportunity to revise the ASPs for the Floravista and 183 Longhaus shop units lower by 10%. These changes reduced the estimated GDV attributable to by S$9.25m. Land bank Land Area (sq. ft.) Plot ratio Maximum GFA (sq. ft.) Efficiency Est. Saleable Area (sq. ft.) Est. ASP (S$psf) GDV 31 & 31A Harvey Avenue 100% 11,044 na na na na 1, Lorong 35, Geylang 51% 12, ,605 80% 26,884 1, Pasir Panjang 100% 12, , % 18,106 1, No changes were made to the estimates for the land bank projects, except for 31 & 31A Harvey Avenue. We revised the estimates for 31 & 31A Harvey Avenue as it is a landed property project. Hence, the ASP should be based on land area rather than gross floor area. Consequently, the GDV has been revised lower to S$15.46m. This change removed approximately S$0.006 cents from our valuation. 241 Pasir Panjang has already received provisional permission and can be launched by April. The launch of 20 Lorong 35, Geylang may take place later this year, depending on when URA approves its designs. The company has commenced construction of 31 & 31A Harvey Avenue while continuing marketing activities for this project. Formal launch will be when one of the units has been completed. This list of projects excludes The Peak@Cairnhill 1. Three units were sold at The Peak@Cairnhill 1 since our last update. There are now 17 units at Peak 1. We rely on the Peak 1 s balance sheet value for RNAV estimation and that our discount from RNAV will adequately reflect the risks of this property. The estimated Qualifying Certificate extension charge for Peak 1 is about S$0.5m in the first year, S$1m in the second year and S$1.5m in the third year onwards. 3 units have since been sold and the extension charges will continue to drop with more sales. We have factored in S$1.0m of other operating expenses per year in our FY17 and FY18 forecasts to reflect this risk. The reported 1H FY17 results already include some of the first year QC charges for Peak 1. Other properties will only suffer QC extension charge from FY19 onwards. Recent Sales at Peak 1 Date of Sale Price Area (Sqft) Floor Level Unit Price ($psf) Nov-16 1,775, to 10 2,617 Nov-16 1,721, to 05 2,538 Oct-16 1,640, to 05 2,418 5,136, ,525 Source: URA, Company, NRA Capital page 3

4 Figure 2: List of and Net Development Value Estimates Attributable Saleable Area (sq. ft.) Attributable Land cost Other costs Est. Rev. Recognition as of end NDV to be recognized Attributable GDV NDV Hilbre28 100% 30, % Longhaus 100% 42, % 13.9 Newest 7% 21, % 4.7 Rezi 3TWO 45% 16, % 2.8 Floraville, Floraview, Floravista 7% 8, % 0.5 Hexacube 30% 13, % 0.0 Trio 35% 9, % 10.2 Third Avenue 100% 487, % & 31A Harvey Avenue 100% 11, % Lorong 35, Geylang 51% 13, % Pasir Panjang 100% 18, % 5.8 Total 672, Source: Company, NRA Capital *Other costs include S$450 psf of construction cost for Singapore projects and S$150 psf of construction cost for Third Avenue, 5% other expenses and 3% interest costs. Tax is assumed at 17% in Singapore and 25% in Malaysia. For projects with retail components, we assume that the retail property revenue will be recognized only on completion. As such, some projects may suffer initial losses which will be reversed on completion, e.g. Newest and Floraville, Floraview and Floravista. In the case of Floraville, Floraview and Floravista, the estimated NDV to be recognized is higher than the estimated NDV of the projects. Figure 3: Revenue Recognition and Key Forecasting Assumptions Previous Estimates Revised Estimates Revenue Recognition FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20 Hilbre LongHaus - Residential Third Avenue - SOHO & 31A Harvey Avenue Lorong 35, Geylang Pasir Panjang Third Avenue - shops Longhaus - shops Property Development Hilbre28 still has 12 units with only three units sold in 2016 after 13 units were sold in the initial launch in Given that we are already into January and the company only has five more months to the financial year end, we reckon that sales will likely spread into FY18. We generally assume a longer sales period and hence longer revenue recognition. In the updated forecasts, we assume revenue recognition over at least three years for residential units, except for Harvey Avenue which has only 2 units. FY17 FY18 FY19 Average daily rate Number of rooms Australia Revenue New Zealand Revenue Australia Gross Margin 61.2% 60% 60% 60% NZ Gross Margin 75.9% 75% 75% 75% also owns the Larmont Hotel and Quality Hotel in Sydney, Australia and the Thistle Guest House and Workotel in New Zealand. This part of our forecasts remain unchanged. We are mindful that intends to sell the Australian hotels. As we have not incorporated any sales proceeds into our forecasts, we continue to assume revenue contribution from them. page 4

5 FY15 FY17F FY18F FY19F Revenue Cost of sale Gross profit Other operating income Selling and distribution exp Administrative exp Other operating expenses Share of associates Finance costs PBT Tax PAT Minority interest PATMI Contribution from associate Chewathai is assumed at S$1.5m per annum. Source: NRA Capital Figure 4: Valuation Assets S$m Development profit (obtained from Figure 2) 58.4 Fair value of Chewathai in excess of book value (see Note A) 0.48 Common equity as of end May RNAV Number of shares RNAV per share Discount 40% Value per share (round to S$0.290) Note A Valuation of Chewathai No of shares in CHEWA held by 239,119,300 CHEWA share price THB 1.36 Current share price at THB1.53 SGD THB exchange rate Fair value of Chewathai shares in S$m S$13.14m Unchanged from previous report. Book value per Chewathai share THB1.31 As of end June 2016 Total book value S$12.66m THB1.31 / 24.75x239.1m shares Fair value in excess of book S$0.48m We have previously revalued the hotels upwards by around S$20m based on an estimated book value of S$65.23m and a fair value of S$100.8m. The carrying value of the Australian hotels has been disclosed to be S$75.2m, thus leading to a lower fair value in excess of book value, removing 0.7 cents from our after discount valuation. Taking a more conservative stance, we have decided to remove any fair value gains from the hotels in our valuation. This decision reduced our valuation by another 1.9 cents. On balance, the lower net development gains and the exclusion of any fair value gains from the Australian hotels led us to arrive at a revised valuation of S$0.291 per share (rounded to S$0.290) from S$0.335 previously. In contrast, the net asset value of is about S$0.355 per share. Source: NRA Capital page 5

6 Profit & Loss (S$ m, FYE May) F 2018F 2019F Revenue Operating expenses (49.3) (32.2) (67.1) (102.6) (72.8) EBITDA Depreciation & amortisation (3.2) (4.8) (3.6) (3.7) (3.7) EBIT 7.6 (2.1) Net interest & invt income (7.4) (4.1) (4.0) (2.8) (1.8) Associates' contribution Exceptional items 0.0 (1.7) Pretax profit Tax (1.2) (1.5) (1.8) Minority interests (0.5) (0.7) (0.7) Net profit Shares at year-end (m) Balance Sheet (S$ m, as at May) F 2018F 2019F Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders' funds Minority interests NAV/share (S$) Total Assets Total Liabilities + S holders' funds Cash Flow (S$ m, FYE May) F 2018F 2019F Pretax profit Depreciation & non-cash adjustments Working capital changes (14.8) (18.3) Cash tax paid (0.5) (0.8) 0.3 (1.5) (1.8) Cash flow from operations (1.8) (7.5) Capex (68.8) (16.0) (5.0) (5.0) (5.0) Net investments & sale of FA Others Cash flow from investing (60.1) (1.4) (5.0) Debt raised/(repaid) (80.3) (45.2) (32.2) Equity raised/(repaid) Dividends paid (5.3) (3.7) (2.5) (5.6) (6.0) Cash interest & others Cash flow from financing (82.8) (50.8) (38.2) Change in cash (8.2) 7.5 (13.0) Change in net cash/(debt) NA (0.0) Ending net cash/(debt) (162.1) (162.1) (99.8) (24.4) 11.3 KEY RATIOS (FYE May) F 2018F 2019F Revenue growth (%) 49.3 (42.0) (24.8) EBITDA growth (%) (74.9) Pretax margins (%) Net profit margins (%) Effective tax rates (%) 12.1 (2.6) (4.7) Net dividend payout (%) ROE (%) Free cash flow yield (%) (71.1) (10.2) Source: Company, NRA Capital forecasts page 6

7 NRA Capital Pte. Ltd ( NRA Capital ) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST. page 7