Heeton Holdings

[propertyinvestor]

Thanks for highlighting this property company. Took a quick look at its recent financials and annual report and noticed that it is undervalued in terms of book value. However, I noted that their financial health seems terribly poor. Not really sure how the cash flow in property development companies work but their current liabilities >>> adjusted current assets.

As of Q2 2012, Current Assets excluding Developmental Properties (i.e. Cash and cash equivalents + accounts receivable) stands at 15 million, while current liabilities stands at 87 million. Cash flow liquidity risk seems rather high in this case.

Perhaps this is the reason the market is discounting its property assets since a cash flow crisis will possibly result in the company selling its developmental properties at fire-sale prices. So the big question is how large margin of safety is required and how do we discount the value of the properties in our RNAV calculation? And also are there any catalysts (such as a corporate takeover) or any intention from the management to realise the value of their properties soon? If not, the wait for value to be realised may not be fruitful. \

IMO, these are the factors we have consider when investing in apparently undervalued asset plays.

I haven't taken a look at their free cash flow record, but based on Bloomberg it seems that their FCF has been positive so that's a good sign. Will need to dig deeper and look how efficient the company is run.

Based on this analysis, Wing Tai deserves to be a $1 stock

[pianist]

is it appropriate to exclude the developmental properties when looking at current asset for such counter??

[mysterion]

The question is how easily convertible are these developmental properties to cash when the need for cash arises.

I'm a newbie in property analysis but from a layman perspective, I would consider developmental properties as something that may or may not be able to be sold within a short time period. In fact, standard inventory in a consumers product company would seem more readily convertible to cash. As such, I believe it is prudent to understand quickly how these properties can be sold for cash with minimal discounts to its fair value (at least historically) before investors can determine its state of financial health.

Just to clarify, I'm not really excluding the value of developmental properties from the net asset value but rather questioning how "current" this asset really is.

Hopefully there can be some meaningful and in-depth discussion here in terms of the fundamental strengths and weaknesses.

[dzwm87]

By excluding/heavily discounting away the development properties is IMO too harsh a conservative approach to adopt. By doing so, you are effectively removing the core business of a property developer.

My suggestion is to do a present value of the various property projects instead.

If project A will be launched in 2 years time, we can probably apply a conservative 3 to 4 years discount (to reach 100% sold) and map out the present value of the property worth. By doing such, it will provide a better estimation gauge. if we simply calculate the net net without readjusting its NAV, then every property counter will not be worth an investment.

Just my 2 cents.

[mysterion]

Hi dzwm87, I agree with what you are saying but maybe I didn't explain myself clearly. My point is not about excluding or heavily discounting away the developmental properties from the net asset value of the company. As per what you mentioned, a conservative discount based on completion date would suffice to revise the reported equity.

Rather my point was how "current" and "non-current" developmental properties are actually, as compared to the fact that the accounting dumps every developmental property under the current assets section. So what I'm driving at is that I think that conservative investors will need to separate which developmental property is really current (i.e. can be converted to cash easily in the short-term) and which developmental property is actually non-current (i.e. still under construction or difficult to sell)

My concern is not the total value of assets but rather the differentiation in classification of assets. To me, this is important because it defines the extent of liquidity risk in property development companies.

Cheers

[propertyinvestor]

Its fine to discount the value of investment properties but if you are going to discount the value of development properties, you might as well not buy a developer stock to begin with.

Development properties are already stated at the lower of cost or realisable value.

[dzwm87]

mysterion:
I see. Nonetheless, a time discount can adjust for the risk. For instance, one may wish to apply a 5 years discount if the project seems hard to sell.

propertyinvestor:
By discounting, I meant discounting the readjusted value of the development properties.

[mysterion]

@dzwm87

But how would one apply a time discount to the value of each individual property if the company does not release segmented valuation for each of its developmental properties. For Heeton, there are four developmental properties which are valued at cost (which includes cost of land + interest capitalised + development costs + recognised profit/loss - progress billings). However, all of these variables are consolidated into one and there isn't any breakdown in their latest annual report, which makes it near impossible to apply a time-discount to partially completed properties.

Any idea how to obtain such a breakdown??? Will emailing their IR work??? Or must I actually get my hands dirty and try to estimate their individual valuations based on their gross floor area and their respective average prices??? :S

[freedom]

pay attention to its associates. those associates might not be well funded.

last time, I tracked KSH, which has a lot of joint ventures with heeton. I got scared when they kept creating more and more joint ventures which surely not well funded as there is little equity in those joint ventures.

[dzwm87]

mysterion:

Normally, you can get a breakdown of their property portfolio either in their annual report or their website

You can obtain their land purchase price + development cost (if any) from their SGX announcements. If it's too far back, you may wish to check their company website for an older archive.

You can apply an estimated construction cost + selling/marketing cost figure - thereafter, you will be able to obtain an implied GPM for the particular project.

It's not the full picture yet. Several adjustment still needs to be made. This is where you adjust for % of property which has been sold and recognized in P&L and also adjust/discount for probability of properties not being sold out.

Of course, you can't get the exact full number. It's just an estimate but the variable of cost, discount rate & % sold can allow you to apply some sensitivity test to see how rnav changes when the properties are being sold off.