Developers: Keppel Land, Wing Tai Holdings & GuocoLand

Previously, I examined the two biggest real estate development and investment companies, Capitaland and City Developments. In this post, I continue investigating this industry with a brief survey of three other big players, Keppel Land, Wing Tai Holdings and GuocoLand.

Overview

Of the three, Keppel Land is the biggest developer. It is a subsidiary of the offshore & marine conglomerate, Keppel Corporation. It has a major presence in the residential and commercial markets in Singapore, and is also very active overseas, particularly in China. Keppel recently lost out on a bid for the former NCO Club/Beach Road camp grounds to a City Developments consortium, which is one of its major competitors.

Nevertheless, it is currently partnering with Hong Kong Land (subsidiary of Jardine Matheson) and Cheung Kong Holdings (controlled by Li Ka Shing) to develop two of the newest and sexiest commercial developments, the Marine Bay Financial Centre and One Raffles Quay. On the residential side, Keppel has recently launched several upscale projects such as the Reflections at Keppel Bay and Park Infinia at Wee Nam, and is one of the several property players to have benefited from the recent surge in property sentiment in the last couple of years. Keppel Land is also the sponsor of K-REIT.

Wing Tai Holdings is somewhat smaller than Keppel, but large nevertheless in terms of absolute revenue. It is a player mainly in the residential and hospitality markets. The group’s operations have mainly been in Singapore but also in Hong Kong, China and Malaysia. Some of the recent projects by Wing Tai include the Helios Residences, VisionCrest Residence and The Tomlinson, which are all located within or near the CBD. Wing Tai has trading and retailing subsidiaries but these constitute a very small portion of the overall revenue mix.

GuocoLand is a subsidiary of Hong Leong Group Malaysia, run by billionaire Quek Leng Chan, cousin of Kwek Leng Beng. Its developments tend to be condominiums in the residential areas in Singapore, such as Le Crescendo in Macpherson and The Quartz at Buangkok/Hougang. GuocoLand is also active in Malaysia (through its GuocoLand Malaysia subsidiary) and China (with interests in Shanghai, Beijing, Nanjing and Tianjin).

Competitively, Wing Tai’s and Guoco’s market positioning is slightly different from the Keppel/CDL/CapitaLand group which focuses on large scale mega projects. On the other hand, Wing Tai and Guoco compete mainly in the mid to upper-tier residential market with condos and smaller upscale developments.

As is widely known, the macroeconomic environment is favourable overall, with many property players seeing large upside revaluations on their assets and a healthy environment with which to launch their new projects. This favourable environment is seen by most to be able to sustain itself for the mid-term future in all the key markets in which the businesses compete: Singapore, Hong Kong and China.

Financial Statement Analysis

In terms of disclosure, Keppel Land is far and away the most transparent and analyst-friendly. And considering that it is only their HY07 financial results, this is quite remarkable. Keppel provides a lengthy Management Discussion & Analysis of the operating environment, as well as detailed segmental reporting. The other two companies provide less of such information in their FY07 report. It is presumed that more information will be disclosed in their respective annual reports.

The table below displays the comparative Jun 07 results for the three companies. Wing Tai and GuocoLand report FY07 results in June. These are compared against Keppel’s HY07.

It should be noted that both Wing Tai and GuocoLand have registered significant gains due to revaluations in assets. The recording of revaluation gain in the income statement is brought about by the adoption of the accounting standard FRS 40. Prior to this standard, revaluation gains were recorded directly on the balance sheet as other comprehensive income. The earnings presistence of these gains is comparatively low and should not be treated as core income.

Just as for the property majors, I use an adjusted number, operating profit excluding other income, in order to adjust for the property revaluation income. The OPEOI/Revenues are more comparable, with Wing Tai registering a few percentage points higher in this margin. It is also notable that Wing Tai employs significantly less leverage than the other two developers.

Valuation

In terms of valuation, it can be seen than the P/E and P/B of Wing Tai is much smaller than its peers. This is probably due to large revaluation gains it has registered. Also, it could be due to the smaller pipeline of projects that Wing Tai has, compared to the mega projects of Keppel. The balance sheet space for additional leverage could indicate that Wing Tai does not have as many projects as it could have, in order to maximise the utilization of its balance sheet.

Keppel Land is very aggressively valued. Presumably investors expect its upscale developments of Keppel Bay, One Raffles Quay, Marine Bay Financial Centre, and other developments in China to generate strong earnings in the future. The high gearing on its balance sheet indicates that it has utilized debt facilities in preparation of its development projects.

Guocoland is priced somewhere in the middle.

It is difficult to say if any of these companies are over or undervalued, without a deeper and more detailed financial analysis of the development pipelines of the respective companies. Nevertheless, this overview is sufficient to give an overall feel for this segment of the industry and how it operates.

Property Majors: Capitaland and City Developments

Introduction

Capitaland and City Developments are two of the largest property developers listed on the SGX. Capitaland is a Temasek controlled GLC, while City Developments is controlled by Kwek Leng Beng and family.

Juxtaposing the 1H07 income statements of the two companies will reveal the differences in the sources of income of the two companies. Even though the two groups have a similar top line, Capitaland gets a significant portion of its net profit from “Other operating income”, “Share of Associates” and “Share of Jointly Controlled Entities” (see red arrows). This is due to the fact that apart from its development operations, Capitaland has significant investments in property-related assets. A further inquiry into the balance sheet information will reveal more:

As we can see, associates and joint ventures comprise a much bigger proportion of the non-current assets of Capitaland compared to City Developments. This will be an important distinction to consider when comparing the valuations of the two companies.

In order to contrast the operating profitability and risk ratios of the two companies, some adjustments have to be made. This is because CapitaLand seems to classify as part of “cost of sales” items that City Developments classifies as “other expenses.”

Also, CDL and CapitaLand have different accounting policies with regards to reporting revaluations in investment properties. Capitaland includes “fair value gain of investment properties” in its “other operating income,” however CDL does not take into account revaluation of its investment properties, because it says that “companies can reflect unrealized revaluation surpluses or deficits in the income statement which may significantly inflate or deflate the balance sheet and can cause volatile fluctuations in core earnings depending on market conditions.”(Extracted from Note 8)

I personally prefer this approach to conservative accounting because fair value changes are only real when properties are divested or sold, and it is always easy to get carried away by ‘paper gains’ before the market collapses and the value of the assets plummets back to earth.

In any case, to get around the differences in accounting policy, I have chosen to use “Operating Profit excluding other income,” and this is arrived at by deducting the “other operating income” from the operating profit item. The ratio is much more comparable, and in this case Capitaland appears to be doing slightly better than City Developments.

This appears to be the only comparable ratio between the two companies. The ROE of Capitaland is inflated because of the upward revaluation in properties. The revenue/assets for capitaland is much lower because it has a lot of investment properties which have rentals which are very small compared to assets. In a sense, it is better to think of Capitaland as a property developer + REIT under one house, whereas CDL is closer to a pure developer.

Also, it is very difficult to compare the P/E ratios because CDL has not accounted for asset revaluations; perhaps the only feasible way to compare the two is by looking at the P/B ratio, where CDL pips Capitaland, 2.68 compared to 2.34. But again, this must be tampered by the fact that CDL's book value would be higher if it revalues its properties to market value.

Conclusion

Based on this comparison, it’s hard to say whether either company is fairly valued by the market. Capitaland's practice of amalgamating the fair value revaluations into its operating profit, along with its large amount of investment assets, associates and joint ventures make it difficult to analyse vis-a-vis City Developments. I will get a better idea once I have gone through a few more property developers and REITs and then I’ll come back and see if my understanding is changed.

In the meantime, leave a comment if you have tips on how to interpret the numbers.