King Wan Corporation

FY16Q2 results out
Key facts:
- no more write downs related to DSC
- Earnings from M&E are very strong: Gross profit of $10.1mil for 1HFY16 is an increase of 35% compared to same period last year
In comparison, gross profit FOR THE FULL YEAR for past years are:
FY15: $12.5mil
FY14: $13.3mil
FY13: $11.4mil
FY12: $13.6mil
FY11: $11.4mil
So $10.1mil for 1st half is actually very strong.
- Earnings of course show a drop, mainly due to the 1 off recognition of KTIS gain last year. Excluding extraordinary items, earnings have actually increased strongly
- NAV of $0.277 inched up, but still decreased from FY15, mainly due to the $12mil write off from DSC
- CASHFLOW: now this is something important to monitor because of KW's business model. i.e. use operating cashflows from M&E, combined with bank loans, to loan cash to associates.
Operating cashflow is still going strong, $8.6mil this quarter
Loaned another $3mil + to associates this quarter.

Some negatives though:
- Again more cash loaned out to associates. I think some transparency here would do wonders. Most investors would like to know how much is loaned to which associate. Its not provided in the FS and this is esp crucial.
KW should take a leaf out of Hock Lian Seng's FS, their partner in the Skywoods project. Their FS are always transparent and details out every item.
- Debt to equity ratio has risen further to 0.49
This is getting a bit uncomfortable. KW is relying heavily on their M&E to constantly churn out FCF which is deployed into these investments.
The M&E core business is impressive: always generating nice CF with little Capex needed.
The investing arm results are still a mixed bag.
- No interim dividend. I think this is going to be a big disappointment to many shareholders... esp since there was talk of divesting KTIS and "special dividends" etc.
(Read the glowing reports by so called "Experts")
I would've expected the interim dividend to be maintained at the bare minimum, but this is not surprising considering that cash on hand has dwindled to only $9mil + and debt to equity has increased to 0.49.
They'd have to either borrow to pay out dividends, OR sell KTIS stake (at a much lower price than before). Both of which are not good options

<vested - 1000 lots>

Improvement on GPM. - extracted from half-year results.


Second Quarter ended 30 September 2015 (2Q2016)
Gross profit margin for the works completed in 2Q2016 was 13%, higher than the 8.7% achieved in 2Q2015.


6 Months ended 30 September 2015 (1H2016)
Gross profit margin for the works completed in 1H2016 was 19.4%, higher than the 18.8% achieved in 1H2015.

I think overall these are good results. It is really a speculating game tho to guess where their advance to associates go (I tried in the past by extrapolating with TA disclosures in DSC as TA is a bit more transparent than KWC).
It would obviously be much more reassuring if KWC was communicating on where this advance to associates money was going. I would not be worry if it was to pay for their dormitory business in Singapore since it is supposed to open next year. But any further advances to their DSC associates would not be reassuring...
Not vested anymore but would consider taking a small position later if KWC could improve transparency in their financial disclosures...

(12-11-2015, 10:25 AM)ethys Wrote: I think overall these are good results. It is really a speculating game tho to guess where their advance to associates go (I tried in the past by extrapolating with TA disclosures in DSC as TA is a bit more transparent than KWC).
It would obviously be much more reassuring if KWC was communicating on where this advance to associates money was going. I would not be worry if it was to pay for their dormitory business in Singapore since it is supposed to open next year. But any further advances to their DSC associates would not be reassuring...
Not vested anymore but would consider taking a small position later if KWC could improve transparency in their financial disclosures...

Yes agreed.
What is weighing heavily on the share price now is the uncertainty regarding the cash advances by KW to associates.
If the cash advances are to any other venture other than DSC, I am sure most SHs would feel assured.
On the other hand, I'd also note that the risks related to DSC may be overstated by the markets currently. With the 12mil write down, most of the risks would've been accounted for.
The dorm is on track and will start operations in 2016, so we should see it in the Q4 results.
I'll try to ask management to be more transparent and increase disclosures...

I'm sharing the information from my communications with King Wan management.
Thanks to "Nitro" for his suggestion.

In KW's latest financial statements FY16Q2, under the non-current assets - "Other receivables", KW has loaned a total of $85.2mil to various associates for their activities.

Can you provide a breakdown of how much is loaned to which associate?


A broad breakdown as follows: 30.9.2015

TOTAL Due from Associates

1

Property Development (Singapore)

44,379,739

2

Property Development (China)

8,353,267

3

Investment Properties

17,752,203

4

Vessel Operations

4,218,092

5

Dormitory Development

10,524,323

Total
85,227,624

Reply About the receivables:
"As you have correctly pointed out, the increase in debt equity ratio was due mainly to the Group’s extension of loans to associates, in particular, associates which are property developers and where the funding requirement is usually higher. The balance sheet will improve upon the completion of the respective ongoing development projects in the next few years. "

Reply about my suggestion to provide a clear breakdown in future FS:
"Thank you for your suggestion. The company will look into this disclosure seriously "

Reply about my query on the loan structure to assoicates:
"This is does not form part of the structure for investment in associates. When a company provides a corporate guarantee on behalf of any third parties (not restricted to subsidiaries and associates), a benefit is "deemed" to be enjoyed by the third party. Similarly, the company providing the corporate guarantee is "deemed" to have provided a service to this third party. As required by accounting standards FRS39, a "deemed" income is recorded in the books of the company depending on the quantum and period of the corporate guarantee issued."

Reply about Starlight Suites project:
Starlight Suites is managed by a joint venture company, Meadows Properties Pte. Ltd, which the Group owns 35.6%. The JV is deeply aware of the impending deadline and is studying a few options. These include the possibility of bulk sale and a change in sales strategy. The decision has yet been reached. Due to the confidential nature of the breakeven cost psf of this project to the joint venture partners, the Company is not able to share this information with you.

(22-11-2015, 03:45 PM)GFG Wrote: I'm sharing the information from my communications with King Wan management.
Thanks to "Nitro" for his suggestion.

In KW's latest financial statements FY16Q2, under the non-current assets - "Other receivables", KW has loaned a total of $85.2mil to various associates for their activities.

Can you provide a breakdown of how much is loaned to which associate?


A broad breakdown as follows: 30.9.2015

TOTAL Due from Associates

1

Property Development (Singapore)

44,379,739

2

Property Development (China)

8,353,267

3

Investment Properties

17,752,203

4

Vessel Operations

4,218,092

5

Dormitory Development

10,524,323

Total
85,227,624

Reply About the receivables:
"As you have correctly pointed out, the increase in debt equity ratio was due mainly to the Group’s extension of loans to associates, in particular, associates which are property developers and where the funding requirement is usually higher. The balance sheet will improve upon the completion of the respective ongoing development projects in the next few years. "

Reply about my suggestion to provide a clear breakdown in future FS:
"Thank you for your suggestion. The company will look into this disclosure seriously "

Reply about my query on the loan structure to assoicates:
"This is does not form part of the structure for investment in associates. When a company provides a corporate guarantee on behalf of any third parties (not restricted to subsidiaries and associates), a benefit is "deemed" to be enjoyed by the third party. Similarly, the company providing the corporate guarantee is "deemed" to have provided a service to this third party. As required by accounting standards FRS39, a "deemed" income is recorded in the books of the company depending on the quantum and period of the corporate guarantee issued."

Reply about Starlight Suites project:
Starlight Suites is managed by a joint venture company, Meadows Properties Pte. Ltd, which the Group owns 35.6%. The JV is deeply aware of the impending deadline and is studying a few options. These include the possibility of bulk sale and a change in sales strategy. The decision has yet been reached. Due to the confidential nature of the breakeven cost psf of this project to the joint venture partners, the Company is not able to share this information with you.

Thanks GFG, on the side of loan structure. Do you mean that KW will be entitled to income from providing service to subsidiary?

(22-11-2015, 10:45 PM)DP28 Wrote:

(22-11-2015, 03:45 PM)GFG Wrote: I'm sharing the information from my communications with King Wan management.
Thanks to "Nitro" for his suggestion.

In KW's latest financial statements FY16Q2, under the non-current assets - "Other receivables", KW has loaned a total of $85.2mil to various associates for their activities.

Can you provide a breakdown of how much is loaned to which associate?


A broad breakdown as follows: 30.9.2015

TOTAL Due from Associates

1

Property Development (Singapore)

44,379,739

2

Property Development (China)

8,353,267

3

Investment Properties

17,752,203

4

Vessel Operations

4,218,092

5

Dormitory Development

10,524,323

Total
85,227,624

Reply About the receivables:
"As you have correctly pointed out, the increase in debt equity ratio was due mainly to the Group’s extension of loans to associates, in particular, associates which are property developers and where the funding requirement is usually higher. The balance sheet will improve upon the completion of the respective ongoing development projects in the next few years. "

Reply about my suggestion to provide a clear breakdown in future FS:
"Thank you for your suggestion. The company will look into this disclosure seriously "

Reply about my query on the loan structure to assoicates:
"This is does not form part of the structure for investment in associates. When a company provides a corporate guarantee on behalf of any third parties (not restricted to subsidiaries and associates), a benefit is "deemed" to be enjoyed by the third party. Similarly, the company providing the corporate guarantee is "deemed" to have provided a service to this third party. As required by accounting standards FRS39, a "deemed" income is recorded in the books of the company depending on the quantum and period of the corporate guarantee issued."

Reply about Starlight Suites project:
Starlight Suites is managed by a joint venture company, Meadows Properties Pte. Ltd, which the Group owns 35.6%. The JV is deeply aware of the impending deadline and is studying a few options. These include the possibility of bulk sale and a change in sales strategy. The decision has yet been reached. Due to the confidential nature of the breakeven cost psf of this project to the joint venture partners, the Company is not able to share this information with you.

Thanks GFG, on the side of loan structure. Do you mean that KW will be entitled to income from providing service to subsidiary?

Yes.
KW has been recognizing this "income" from guaranteeing their associates loans, according to FRS 39.
but the associates have not been paying I.e. It has not been showing up in cashflow
according to KW ARs, these will be paid when the associates start making money.
thats the reason why the receivables have been ballooning, cos it's not just the loan amounts, but the outstanding "fee from guaranteeing "
if the associates are profitable, this can turn out to be a very favorable investment for KW as they benefit from being equity holders of the associates as well as being guarantors
the risk of course, is if the investments turn sour, then more write offs in future will be expected to cancel the receivables due.

Also, just want to point out that this "fee from financial guaranty" is clearly stated on the income statement so if you want to further break down, you can extract this information from the past FS, to derive hoe much of the "receivables" are actually due to guarantees and how much are really due to cash advances to associates

I think with the current breakdown, it is clear that the risks now are pretty limited.
Dalian accounts for less than 10% of the receivables, and surely it cannot go to zero.
So the risk, if any, is less than 10%
The other components: Skywoods, Dorm, vessel are on track and doing well. Skywoods TOP in end 2016 but already mostly sold, with strong sales volume this month
Starlight is a concern, which is why I queried.
Will be interesting to see what transpires.
As expected, they are not able to reveal the break even psf (I expected this because obviously if it's common knowledge, it affects the JV ability to nego a bulk sale)
Anyway, the starlight project is a JV so KW zai ability is limited.
Plus their current selling price is really very high. The psf is $2000+ which is unrealistic in the current market
I suspect just by dropping it to the $1.5-1.6k psf, they'd see healthy sales and surely at that price point it's still above break even psf.

Disclosure: vested. 1,000,000 shares

(22-11-2015, 11:14 PM)GFG Wrote: Also, just want to point out that this "fee from financial guaranty" is clearly stated on the income statement so if you want to further break down, you can extract this information from the past FS, to derive hoe much of the "receivables" are actually due to guarantees and how much are really due to cash advances to associates

I think with the current breakdown, it is clear that the risks now are pretty limited.
Dalian accounts for less than 10% of the receivables, and surely it cannot go to zero.
So the risk, if any, is less than 10%
The other components: Skywoods, Dorm, vessel are on track and doing well. Skywoods TOP in end 2016 but already mostly sold, with strong sales volume this month
Starlight is a concern, which is why I queried.
Will be interesting to see what transpires.
As expected, they are not able to reveal the break even psf (I expected this because obviously if it's common knowledge, it affects the JV ability to nego a bulk sale)
Anyway, the starlight project is a JV so KW zai ability is limited.
Plus their current selling price is really very high. The psf is $2000+ which is unrealistic in the current market
I suspect just by dropping it to the $1.7-1.8k psf, they'd see healthy sales and surely at that price point it's still above break even psf.

Disclosure: vested. 1,000,000 shares

Here's the data:
Fee income from financial guarantee to associates started in 2013:
2013: $420,557
2014: $753,311
2015: $942,716
2016 (ytd): $317,883
So of the $85.2mil, approximately $2mil+ are from financial guarantees.

Using SOTP analysis, even if you writeoff the ENTIRE Dalian project currently, that takes off about 2.4cents off the book value, which still gives it about a 25 cent book value. I find it hard to imagine the Dalian project is worth $0. The KTIS has been marked to market all this while and the price has fallen substantially since IPO, so the downside risks are definitely minimised from here.
I think there's a lot of value at the current $0.20 price or so.

As a shareholder, what is really disappointing for me is that a year ago, when KTIS was about to IPO, there was a lot of hype about special dividends.
The OSK DMG analyst wrote in a report that the dividend was likely to increase to $0.3 starting from FY15, and that the KTIS stake would be gradually sold off to give special dividends, and he concluded that this would mean there's a dividend yield of >10% for THE NEXT 10 YEARS.
I rem reading that report and writing that down in my investment thesis for KW and including a note that I thought that was an absolutely ridiculous thing to say. Esp for a supposedly expert in a written report.
What was more disappointing was that when asked about it, MD Chua Eng Eng replied:"I think those reports are not too far off the mark"
While I give her plaudits for the successful foray into KTIS, I think the true mark of a successful investor is to never get carried away by your investments, whether they are successes or failures. That means when it's a failure, you don't get upset and overly pessimistic. And when its a success, you don't get overly complacent. If I rem correctly, at the IPO, KTIS was valued at somewhere near PER of 30. I don't know what these analysts know that make them so confident it will stay the same or rise further, and even if it does, I don't know how they can forsee a dividend yield for the next 10 years. I'd much prefer if she just said that she wouldn't comment on those reports, or even try to dampen the crazy reports from these analysts. Most of them are useless except that they compile the data and saves me some time from having to do it.

I place emphasis on the investing nature because KW is exactly that. It's behaving like a platform company, similar to the platform companies in the US. eg. Valeant, platform specialty products etc.
There's a main business (M&E) that will likely be stable and cashflow positive, but unlikely to make big waves, the management then uses the CF to support investments. So KW should be assessed as a platform company, aka its investments.
Still, at this current price, there's a relative MOS, and I may consider adding to further, I think the results in 2016 will be substantially better, given that the skywoods will receive TOP, they are forced to do something quick for starlight suites, and the dorm project will start adding to earnings in 2016.

(23-11-2015, 12:07 AM)GFG Wrote: Using SOTP analysis, even if you writeoff the ENTIRE Dalian project currently, that takes off about 2.4cents off the book value, which still gives it about a 25 cent book value. I find it hard to imagine the Dalian project is worth $0. 

Dalian Shicheng (DSPS) is in a net liability position. $105.8m of assets vs $117.9m of liabilities. 

Bank loans rank higher over shareholders' loan if the project gets "written off". Under such scenario (not saying that it will happen), the outstanding bank loans will have to be repaid and King Wan being the guarantor to the associate will be liable.

My point is: $0 is not the worst case.

FY2015 Annual Report Wrote:The Group is a party to financial guarantee contracts where an entity in the Group has provided financial guarantee of $148,118,810 (2014 : $130,720,728) to banks in respect of associates of the Group. The Company also provides financial guarantee of $191,305,882 (2014 : $158,639,794) to banks in respect of loans borrowed by certain subsidiaries and associates.