Hock Lian Seng

[weijian]

Hi ksir,

I do not know the Chua family good enough (haven't followed them). But just a quick dirty check on their remuneration (kept by themselves) and dividend (shared with OPMIs):

- In FY14 (which is their record year due to recognition of TOP-ed properties based on VB GFG's past postings), Towkay Chua was paid ~3.4mil in salary but took home 7.6mil in dividends (38% stake of ~20mil distributed at 4cents/share)

- Needless to say in FY16, the humongous 12.5cents/share dividend (10cents special, 2.5cents normal) meant he took home 24mil dividends (38% of 63mil) and probably shared another 24mil with OPMIs?

- FY22 wasn't a "good dividend year" for OPMIs as they only got 1cent/share. But from that 5mil of total dividend, Towkay took home 1.9mil from his 38% stake, compared to his salary at ~875k. Even in the darkest of days during Covid-19 (FY20), Towkay did not forget to share and dividend made up ~40% of his total 1mil proceeds (salary+dividends received).

In prosperity and suffering, Towkay Chua seems ready to share.

Talking about better returns from cash holdings, Hock Lian Seng is not the only beneficiary as there are plenty of cash rich companies on SGX. A majority of the SSH have demonstrated good stewardship by putting them to risk free bank fixed deposits. A noticeable mention would be the exchange itself, SGX, whom has not just benefited from better rates from fixed deposits from its big cash hoard, but also from treasury income (earning a spread from market participants' margin).

[dzwm87]

The shareholder list has the extended Chua family probably owning at least 70%. Can't keep family member starving

Their order book is very lumpy even comparing to other peers and at anytime probably only doing around 2 to 5 civil construction orders.

[ksir]

So far their margin is decent even with the "shocking" covid times margin (even the strict BP hit badly by the margin and cost overran). Why so? I bet this has to do with their focus on small amount of projects at any point in time.
Usually their construction order is rather huge and hence perhaps more buffer built in.

To borrow the cliché, you get that construction business for free and with the bonus of securities and some Tuas & Gambas industrial units (hey, it's near Tuas Mega Port and hence the rental so far is quite good).

[weijian]

So far their margin is decent even with the "shocking" covid times margin (even the strict BP hit badly by the margin and cost overran). Why so? I bet this has to do with their focus on small amount of projects at any point in time.
Usually their construction order is rather huge and hence perhaps more buffer built in.

To borrow the cliché, you get that construction business for free and with the bonus of securities and some Tuas & Gambas industrial units (hey, it's near Tuas Mega Port and hence the rental so far is quite good).

The current net margins look to be "supported" by Tuas/Gambas' rental income (and interest income from rising rates). Since it is probably not Towkay Chua's intention to hold them forever for rental, stripping the rental income off, the margins are actually not too decent.

Would we expect the gross margins to improve post covid, so that overall (excluding rental income) would revert back to pre covid?

How are the sales at Tuas/Gambas doing? I am quite sure if rental is good, the sales would be even better. What would be the catalysts to finally get most of them off their working capital and hopefully translate into another blockbuster unforgettable FY16 for OPMIs?

[ksir]

So far their margin is decent even with the "shocking" covid times margin (even the strict BP hit badly by the margin and cost overran). Why so? I bet this has to do with their focus on small amount of projects at any point in time.
Usually their construction order is rather huge and hence perhaps more buffer built in.

To borrow the cliché, you get that construction business for free and with the bonus of securities and some Tuas & Gambas industrial units (hey, it's near Tuas Mega Port and hence the rental so far is quite good).

The current net margins look to be "supported" by Tuas/Gambas' rental income (and interest income from rising rates). Since it is probably not Towkay Chua's intention to hold them forever for rental, stripping the rental income off, the margins are actually not too decent.

Would we expect the gross margins to improve post covid, so that overall (excluding rental income) would revert back to pre covid?

How are the sales at Tuas/Gambas doing? I am quite sure if rental is good, the sales would be even better. What would be the catalysts to finally get most of them off their working capital and hopefully translate into another blockbuster unforgettable FY16 for OPMIs?

Actually I don't know the answer to all those questions and perhaps not seeking the answers also. haha.
My expectation is quite low on this investment, since I paid at less than net cash.
If net cash can returns 3% + securities 3-4% and with some rentals, I am happy if they can give me dividend yield of 4-6% and occasionally give me a bumper dividend. As simple as that, I don't have insight of the business or deep dive into the industrial figures as well. Just trying to be roughly right and not precisely wrong.

[weijian]

Actually I don't know the answer to all those questions and perhaps not seeking the answers also. haha.
My expectation is quite low on this investment, since I paid at less than net cash.
If net cash can returns 3% + securities 3-4% and with some rentals, I am happy if they can give me dividend yield of 4-6% and occasionally give me a bumper dividend. As simple as that, I don't have insight of the business or deep dive into the industrial figures as well. Just trying to be roughly right and not precisely wrong.

hi ksir,

Thanks for your frank answer. It is so much harder to admit "I don't know" than acting "I know". And a lot of times, better to admit the former than act the later.

There are probably already quite a handful of net cash stocks on SGX. Most of them would be decent. When I look back HLS's thread, I realized the real money was made when VBs accurately pinpointed the future catalysts. And together with the decent price that Mr Market offered and that of Towkay's generosity, the combination pushed the HLS's returns for vested VBs to be beyond the usual decent.

I would be looking for such "lethal" combinations

[Ben]

To those who collected the humongous 12.5c/share dividends for FY2016, are they better off today if they were to hold on to their shares till now? The answer is an obvious NO.

Let’s add up all the dividends declared from FY17 to FY22, and it totalled $0.073.

HLS shares was trading above $0.50c in 2016 when they declared the special + ordinary dividends of $0.125. It seems that anyone who bought in then will get an instant return in excess of 25% from the dividends. However, after XD, and follow by subsequent years of low return, it is trading at around $0.25c/share now, which means a 2016 investor would have lost a minimum of 50%, or $0.25c per share. Less off the dividends received from FY2017 to FY2022, which is $0.073, a 2016 investor is still very much in an overall loss position.

However, I personally think this is an okay company conservatively and carefully run by the management. I feel that they are quite careful in their bidding for new contract to make sure the projects will offer a certain level of margin. This is probably why they don’t win as many contracts as other civic engineering companies. This is also probably why they can build up a sizeable cash hoard after the large pay-out in 2017.

[ksir]

To those who collected the humongous 12.5c/share dividends for FY2016, are they better off today if they were to hold on to their shares till now? The answer is an obvious NO.

Let’s add up all the dividends declared from FY17 to FY22, and it totalled $0.073.

HLS shares was trading above $0.50c in 2016 when they declared the special + ordinary dividends of $0.125. It seems that anyone who bought in then will get an instant return in excess of 25% from the dividends. However, after XD, and follow by subsequent years of low return, it is trading at around $0.25c/share now, which means a 2016 investor would have lost a minimum of 50%, or $0.25c per share. Less off the dividends received from FY2017 to FY2022, which is $0.073, a 2016 investor is still very much in an overall loss position.

However, I personally think this is an okay company conservatively and carefully run by the management. I feel that they are quite careful in their bidding for new contract to make sure the projects will offer a certain level of margin. This is probably why they don’t win as many contracts as other civic engineering companies. This is also probably why they can build up a sizeable cash hoard after the large pay-out in 2017.

Those buying at over S$0.5, likely jumped in due to the humongous dividend. Before announcement it was generally trading at below S$0.35.
If one bought at high Price with about the same average Earning (hence high PE), they are just looking for trouble. Haha. This is not great business with sustainable super high ROE and moat that you can buy at high PE and still get great return!

[weijian]

It seems like the OPMI is not going to get special returns buying after special dividend announcement.

Over the years, I had my fair share of special dividends happening to the stocks I bought. Some of them were project based - example in case for SembCorpMarine, the distribution of special dividends seem to coincide with the peak of the cycle, or probably slightly past the peak where the company decide to pay out most of its earnings.

Another example was the company enjoying a bonanza from the Gov (VICOM selling Setsco HQ back to SLA) and pay out a special dividend. But few years down the road, they themselves have to pay up for new sites. When you sell expensive, you have to buy expensive down the road.

However, for those shrewd and generous from GK Goh - they are in the investing business and sufficiently diversified across private equity, real estate and public equities. They seem to be able to keep repeating the "special dividend" trick.

So there we have it. Special dividend scenarios are special. The default for the investor would be to specially consider whether there is a peak of cycle, lack of new business opportunities and the like.

[ksir]

It seems like the OPMI is not going to get special returns buying after special dividend announcement.

Over the years, I had my fair share of special dividends happening to the stocks I bought. Some of them were project based - example in case for SembCorpMarine, the distribution of special dividends seem to coincide with the peak of the cycle, or probably slightly past the peak where the company decide to pay out most of its earnings.

Another example was the company enjoying a bonanza from the Gov (VICOM selling Setsco HQ back to SLA) and pay out a special dividend. But few years down the road, they themselves have to pay up for new sites. When you sell expensive, you have to buy expensive down the road.

However, for those shrewd and generous from GK Goh - they are in the investing business and sufficiently diversified across private equity, real estate and public equities. They seem to be able to keep repeating the "special dividend" trick.

So there we have it. Special dividend scenarios are special. The default for the investor would be to specially consider whether there is a peak of cycle, lack of new business opportunities and the like.

Exactly, it's always case by case basis (Chuan Hup is a good case for generous dividend as well and it seems to be keep on giving).

For commodity businesses (cyclical), I tend to look at the Balance Sheet (net cash) and buy cheap.
For great businesses, I'd focus more on Earning/Cashflow side (the quality and ROC) and pay fairer price.

But to both, Price is still key, Margin of Safety is the key.

To digress, on the MOS topic:
I'm curiously watching a case of a Sg Fund buying Great Businesses (those with high revenue growth & high ROE) but paid high Prices (eg: PS of 10 or more).

Curious to know if that would work out well in the long term (10 years or more) and to be clear, I don't intend to mock them for their current underperformance return, as I think their focus on great businesses are commendable although I will not pay anything with such high PS.