Tiong Seng - Sitting pretty on S$1.47b order books

Tiong Seng has come a long way since its inception in 1959, more than five decades ago, when Mr Pek Ah Tuan and the late Mr Pay Seng Koon from Peck Tiong Choon Private Limited and the late Mr Lee Tuan Chay and Mr Khng Kwi Cher from Song Hup Seng Private Limited formed a partnership named “Tiong Seng”. Tiong Seng’s business was to provide excavation, earth moving and trucking services. Gradually, Tiong Seng business expanded and is now one of the largest building construction and civil engineering contractors in Singapore with an A1 grade. An A1 grade allows the company to bid for public sector construction projects with unlimited contract value.

Besides the construction business, Tiong Seng has another significant division which is the property development division focusing on developing residential and commercial projects in various second- and third-tier cities in the PRC.

Some interesting points

1.     Order book of S$1.47b, one of the largest if not the largest among listed peers

As of 25 Mar 2013, Tiong Seng has an order book of S$1.47b. The bulk of the order books will be recognized in 12-30 months which should ensure earnings visibility over the next couple of years. Based on Table 1 below, Building Construction Authority (“BCA”) estimates the total construction demand in 2013 will range from S$26-32b. (2012: S$28.1b). As Tiong Seng is one of the largest players, if not the largest among its listed peers in Singapore’s construction industry, the stable / bullish BCA outlook bodes well for Tiong Seng.

Table 1: BCA outlook

Years	Total construction demand
2012	S$28.1b
2013	S$26-32b
2014-2015	S$20-28b

Source: BCA, company

2.     Property development sales to be the kicker

With reference to Table 2 below, the revenue from sales of development properties was about S$3.3m in FY12. According to their 4QFY12 results, the revenue of S$3.3m was contributed from sale of 1 unit totaling 84 sqm in Wenchang Broadway in Yangzhou and 4 units totaling 681 sqm in Tianmen Jinwan Building in Tianjin.

As at 31 December 2012, Tiong Seng has sold the remaining 1 unit, totaling 141 sqm of Tianmen Jinwan Building, 275 units, totaling 32,507 sqm of Sunny International Project and 4 units, totaling 239 sqm of Wenchang Broadway in Yangzhou. These were not recognized in FY2012 revenue yet, in accordance with their revenue recognition policy. Based simply on such sales, it is likely that FY13F revenue from sale of development properties should exceed that of FY12.

Table 2: Company financials breakdown

 

Source: Company

3.     Potential cost savings from future loan refinancing

With reference to Table 3 below, Tiong Seng has a secured RMB loan from financial institution of SGD equivalent 53.2m which expires on 5 Aug 2014. (The initial maturity date was in 2013 but Tiong Seng has renewed the loan after year end.) With the high interest 10-15% that it is paying for the RMB loan, there seems to be scope of potential interest savings upon renewal or refinancing of the loan.

Table 3: Potential interest savings from refinancing

Source: Company AR2012

4.     Steady dividend of $0.01 since listing; XD on 6 May

Since listing on 16 Apr 2010, Tiong Seng has been giving S$0.01 dividend per share each year. Based on Tues closing price of $0.265, this works out to be 3.8%, one of the highest among listed peers. It is going to ex dividend on 6 May, Mon.

5.     Maiden steps into Myanmar

On 22 Apr 2013, Tiong Seng announced that they have signed an MOU with Shwe Taung Development Co., Ltd, one of the leading corporations in Myanmar with exposure in diverse industries such as real estate, construction, engineering etc to explore entering into a joint venture to set up a pre cast plant in Myanmar. According to the Myanmar Ministry of Construction, Myanmar plans to build more than a million houses over the next two decades. This is likely to bode well to Tiong Seng’s potential joint venture in the long term as residential construction accounts for about 51% or US$1.5b of Myanmar’s total construction output.

Noteworthy points

1.     Lumpy results

This is widely seen in construction companies. Quarterly results are difficult to forecast with accuracy as revenue can swing quite significantly in accordance to their revenue recognition policies. Nevertheless, FY13F is likely to be a stronger year VS FY12 due in part to the sales contribution from their development properties in China.

2.     Construction business – tough business to be excited about

The construction business is not exactly the most sexy story to be excited about due to lumpy results, low margins, stiff competition and escalating costs etc. Notwithstanding this, it is noteworthy that Tiong Seng has executed several high tech initiatives which reduce their reliance on labour relative to their peers. For example, Tiong Seng possesses the ability to design, produce and install pre-cast components. This is unlike most other contractors who buy straight from pre-cast producers. According to management, such measures result in about 20% cost saving in manpower requirements. As Singapore’s foreign worker levy is expected to increase from $350 to $450 in July this year, it is likely that Tiong Seng’s competitive advantage will be more apparent this year vis-à-vis their peers.

3.     Valuations are not extremely cheap

Based on Table 4 below, Tiong Seng’s valuations of 8x FY13F PE and 0.9x FY12 P/BV are not exactly cheap but quite reasonable in view of the above mentioned points and relative to their peers.

Table 4: Tiong Seng vis-à-vis its peers

	Price	Div Yield	FY12 P/BV	FY13F PE
Tiong Seng	0.265	3.8%	0.9	8.0
Lian Beng	0.520	1.9%	1.1	6.9
KSH	0.475	3.8%	1.2	6.6
TA Corp	0.405	3.2%	0.9	NA
Ave excluding Tiong Seng		3.0%	1.1	6.8

Source: Bloomberg (30 Apr 13)

4.     Rather illiquid stock with average 30D volume at 1.16m shares

Tiong Seng’s free float is only about 20.8% as the top 20 shareholders own 79.2% of Tiong Seng (See

Table 5). As a result, Tiong Seng is rather illiquid with average 30D volume amounting to about 1.16m shares only. In my opinion, an illiquid stock is a double edge sword. If there is sudden positive news, it may be arguably easy for the share price to move higher as the supply of shares in the market is not large. However, it is noteworthy that the converse is also true. (i.e. if there is negative news and the share price plunges, investors may find it difficult to unload their positions).

Table 5: Top 20 shareholders own 79% of Tiong Seng

Source: Company AR2012

5.     Not extensively covered by analysts

DBS Research seems to be the only research house covering Tiong Seng with a target price of $0.330. With such scant coverage, it is likely that the investment community is still not familiar with its business and prospects. Therefore, it may take some time for Mr Market to understand it. Conversely, investors who understand and believe Tiong Seng prospects now can purchase it with a considerable margin of safety. On the investor relation aspect, Tiong Seng has recently appointed Financial PR as their investor relation firm to connect with the investment community.

Conclusion – Execution is key for potential re-rating

Investors would be watching Tiong Seng results in the coming quarters, coupled with any new contract wins to replenish their order books. In a nutshell, execution is key for potential re-rating.

Readers who are interested should check out Tiong Seng’s website http://www.tiongseng.com.sg/com_bizoverview.html & http://investors.tiongseng.com.sg/downloads.cfm for more information and analyst reports. You can also email me at crclk@yahoo.com.sg for the analyst reports and my writeup in pdf with tables and Tiong Seng chart attached.

*This is an amended version which I have sent out to my clients on 26 Apr 13.

Disclaimer
The information contained herein is the writer's personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied.  In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Dukang Distillers –Price range bound since Nov 2012

Dukang Distillers –Price range bound since Nov 2012

I have previously written on Dukang two months ago citing that Dukang is still growing despite industry headwinds (See http://ernestlim15.blogspot.sg/2013/02/dukang-distillers-still-growing-despite.html). Since then, Dukang reported a good set of 2QFY13F results. 2QFY13 revenue and net profit rose 37% and 52% y/y to RMB738m and RMB144m respectively. 1HFY13 rev and net profit were RMB1.14b and RMB208m respectively. It is noteworthy that 1HFY13 earnings were almost on par with their full year FY12 results. Dukang’s share price briefly saw a pop upon results (it closed at 0.310 before results) and went to an intraday high of $0.360 on 26 Feb before closing at $0.330 on 12 Apr, last Fri. With the share price being range bound since Nov 2012, is this a sign that smart money is not keen in Dukang, or are they merely taking their time to accumulate this stock?

Some interesting points to note

Undemanding valuations

Dukang trades at the historical PE and P/BV of 4.5x and 0.76x respectively. There is no forward PE as there is no rated analyst coverage. As mentioned above, 1HFY13 earnings were already almost on par with their full year FY12 results. Based on historical pattern, the upcoming 3Q is likely to be a seasonally strong quarter (However, do see Noteworthy point 2 below.) It should be reasonable to assume that FY13F PE should be 4x or lower. According to Bloomberg, its peers are trading at an average 13.2x FY13F PE.

Table 1: Dukang’s valuations vis-à-vis its peers

Short Name	Cur	Last Px	Analyst TP	Change in TP	1 Yr high	1 Yr low	Adj Mkt Cap	FY12 PE	FY13F PE	ROE (%)	Hist P/BV	Hist Div Yield
Dukang Distiller	SGD	0.335	NA	NA	0.37	0.21	267.4	4.5	NA	18.1	0.8	NA
Kweichow Mouta-A	CNY	172.14	234.27	36.1	266.08	160.45	35,728.2	13.4	10.4	45.0	5.2	2.3
Jiangsu Yanghe-A	CNY	62.89	92.92	47.8	156.48	59.52	13,578.8	11.3	10.8	53.6	5.1	2.0
Luzhou Laojiao-A	CNY	26.39	43.60	65.2	47.50	24.77	7,377.1	9.6	8.5	53.1	4.5	5.3
Shanxi Xinghua-A	CNY	32.22	41.64	29.2	46.62	27.27	5,577.3	21.0	14.6	43.9	7.9	0.8
Anhui Gujingd-A	CNY	27.00	45.40	68.1	53.18	23.10	2,460.4	18.2	16.2	26.1	4.3	0.8
Sichuan Swell-A	CNY	14.90	NA	NA	32.16	13.96	1,455.3	21.5	20.5	19.0	3.9	1.5
Sichuan Tuopai-A	CNY	20.18	16.10	-20.2	40.38	18.63	1,360.8	18.4	14.0	16.9	2.9	0.9
Jiuguijiu Co-A	CNY	24.64	31.35	27.2	61.45	20.50	1,600.6	16.2	16.3	30.6	4.3	NA
Wuliangye Yibin	CNY	22.50	27.68	23.0	39.55	21.30	17,075.0	8.6	7.7	36.6	2.7	2.2
Average ex Dukang								15.4	13.2	36.1	4.5	2.0

Source: Bloomberg 12 Apr 13

No rated analyst coverage – A double edge sword

Similar to Guocoleisure, there is no rated analyst coverage for Dukang at this time. The drawback to this is that investors and fund managers are still not familiar with Dukang business and prospects, thus it may take some time for Mr Market to understand it. Conversely, investors who understand and believe Dukang's prospects now can purchase it with a considerable margin of safety. On the investor relation aspect, Dukang has been working hard to engage the investment community by hosting analyst and fund manager visits over to their production sites in China.

Backed by S$0.168 net cash per share

Dukang has about RMB731m of cash on their balance sheet. Netting off loans, Dukang has about RMB671m or about S$0.168 net cash per share.

Technical charts are interesting

It has traded between a range of 0.305-0.360 since Nov 2012. At the closing price of $0.330 on last Fri, it is at the middle tier of the range. If there is a bullish breakout, either precipitated by a rated analyst report or good 3Q results or any other positive announcement, the measured target price is likely to be around $0.40. (See Chart 1)

Chart 1: Dukang traded between a range of 0.315-0.360 since Nov 2012

Source: CIMB itrade complimentary chart (12 Apr 13)

Some noteworthy points that investors should be aware of

Industry headwinds

As mentioned in my previous writeup, the ongoing government regulatory concerns pose major headwinds to the industry. Although Dukang mentioned during their 2QFY13 results that it was not much impacted by the current policies and the recent decline in the 1^st tier baijiu brands is likely to have a positive impact on  them, it remains to be seen as the effects of China’s regulations may take some time to materialise. A good gauge may be their 3QFY13F results and outlook on their business going forward. Furthermore, it is noteworthy that any new measures from the Chinese leaders would pose risks to the industry as a whole.

Relocation of Siwu likely to affect Siwu sales but effect is once off

In order to streamline their business, increase efficiency and cuts costs, Dukang had relocated the production of “Siwu” (四五) baijiu products from Henan Siwu’s production premises at Henan, Zhoukou City to the Group’s production premises at Henan, Luoyang City where “Dukang” (杜康) baijiu products are being produced. As a result of this relocation, Siwu's production was affected during that time. However, the effect is once off and relocation and integration were completed on 21 Jan 13. (FYI, this may affect its 3QFY13 Siwu sales. However, this decline is likely to be offset by the rise in Dukang brand products.)

Conclusion – continued results and business outperformance likely to be the catalysts

Investors would be watching Dukang’s upcoming results, business execution amid the government regulatory concerns and their outlook on their baijiu business. If Dukang can consistently deliver, it may not be long before investors warm up to the stock.

Readers can refer to my previous writeup on Dukang (link above) for more info. If you are interested to know more about Dukang, you can drop me an email at crclk@yahoo.com.sg and I will send you the latest unrated analyst report.

Disclaimer
The information contained herein is the writer's personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied.  In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.