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29-10-2015, 04:41 PM
King Wan's business model is not easily understood. Most people are valuing it as a M&E player, but the investment thesis should be based on KW as a capital allocator. Similar to a hedge fund managing $$$.
"OSK-DMG analyst: Lee Yue Jer, CFA
KING WAN: Target price 43 cents based on expected 7% yield"
Not too long ago many analysts were busy raising their TP, and releasing report after report touting the "likely" extraordinary dividends from the divestment of KTIS.
Now suddenly it's the other extreme and KW has fallen. These supposedly wise analysts with CFAs are nowhere to be found, no new reports, no new updates. I really wonder what gives these analysts the idea of an "expected 7% yield etc"
Did management give guidance on this? If not, then there's no justification for that.
If so, then now is the time to call up the management and ask why the deviation. who made the mistake?
Anyway, KW's main core investment thesis, as I said, should be such that KW is assessed on its capital allocation ability.
The M&E core business is going to hum along just fine. It has always been FCF generative, KW has a long track record on this. But it's hard to expand or grow the business substantially. It's just going to do OK. Not great, not bad either.
So KW's value is really in its ability or inability in using the cash generated.
KWW does this via associates or investment vehicles. This is not new as many companies form JVs, then pump cash into the JVs for their activities, in this case, property development in China Dalian, the worker's dormitories, the vessel etc.
What is unique though, and someone pls correct me if I'm wrong, is that most do not actually charge an interest on these loans. KW charges interest on its loans to associates, and this interest is booked as income in the income statement.
Most of this interest and the loan amt is NOT collected though, so it just keeps accumulating under the Balance sheet Assets as mostly, non current receivables. Most of these receivables are non current as the projects they invest in have long gestation periods. DSC has launched and sold 6 phases (or 7) and there are 2 more phases left. The worker's dorm will start operating likely early 2016. Skywoods condo sales have razor thin margins, but units are moving at a good pace every month. I think that's the right strategy. Developers have to move units. The risk of holding out for a higher price is just not worth it with the Development charges, which increases for every yr longer past the 2 yrs post TOP mark.
What is also unusual is that at least for DSC, the receivables are further pledged by KW to the banks to secure more loans for DSC, and KW charges for providing collateral for such loans too.
IMO, it is not very conservative to be taking the interest as part of income. There is a real risk of not being to get any part of the principal, much less the interest, back. The recent 12mil writedown in DSC is a fine example.
However, I also think KW has fallen too much. The price is reflective of uncertainty of this receivables from associates. I don't think there'd be much more writedowns from DSC, and if there is, the quantum will not be large.
Again, like I said, KW behaves more like a hedge fund. They take money from M&E and try to invest in higher yielding projects
Investing in KW is basically trusting the powress of Chua Eng Eng to allocate capital and control risks. In this aspect, KW's track record is OK.
KTIS has been a success. The other ventures are or have done ok as well: Skywoods, Starlight suites, SI property
DSC has been a mistake.
<vested>
"OSK-DMG analyst: Lee Yue Jer, CFA
KING WAN: Target price 43 cents based on expected 7% yield"
Not too long ago many analysts were busy raising their TP, and releasing report after report touting the "likely" extraordinary dividends from the divestment of KTIS.
Now suddenly it's the other extreme and KW has fallen. These supposedly wise analysts with CFAs are nowhere to be found, no new reports, no new updates. I really wonder what gives these analysts the idea of an "expected 7% yield etc"
Did management give guidance on this? If not, then there's no justification for that.
If so, then now is the time to call up the management and ask why the deviation. who made the mistake?
Anyway, KW's main core investment thesis, as I said, should be such that KW is assessed on its capital allocation ability.
The M&E core business is going to hum along just fine. It has always been FCF generative, KW has a long track record on this. But it's hard to expand or grow the business substantially. It's just going to do OK. Not great, not bad either.
So KW's value is really in its ability or inability in using the cash generated.
KWW does this via associates or investment vehicles. This is not new as many companies form JVs, then pump cash into the JVs for their activities, in this case, property development in China Dalian, the worker's dormitories, the vessel etc.
What is unique though, and someone pls correct me if I'm wrong, is that most do not actually charge an interest on these loans. KW charges interest on its loans to associates, and this interest is booked as income in the income statement.
Most of this interest and the loan amt is NOT collected though, so it just keeps accumulating under the Balance sheet Assets as mostly, non current receivables. Most of these receivables are non current as the projects they invest in have long gestation periods. DSC has launched and sold 6 phases (or 7) and there are 2 more phases left. The worker's dorm will start operating likely early 2016. Skywoods condo sales have razor thin margins, but units are moving at a good pace every month. I think that's the right strategy. Developers have to move units. The risk of holding out for a higher price is just not worth it with the Development charges, which increases for every yr longer past the 2 yrs post TOP mark.
What is also unusual is that at least for DSC, the receivables are further pledged by KW to the banks to secure more loans for DSC, and KW charges for providing collateral for such loans too.
IMO, it is not very conservative to be taking the interest as part of income. There is a real risk of not being to get any part of the principal, much less the interest, back. The recent 12mil writedown in DSC is a fine example.
However, I also think KW has fallen too much. The price is reflective of uncertainty of this receivables from associates. I don't think there'd be much more writedowns from DSC, and if there is, the quantum will not be large.
Again, like I said, KW behaves more like a hedge fund. They take money from M&E and try to invest in higher yielding projects
Investing in KW is basically trusting the powress of Chua Eng Eng to allocate capital and control risks. In this aspect, KW's track record is OK.
KTIS has been a success. The other ventures are or have done ok as well: Skywoods, Starlight suites, SI property
DSC has been a mistake.
<vested>