KSH Holdings

[ghchua]

hi CY09,

Boss would actually be deemed more generous if they hadn't retained the capital within the company to buy properties. In general, unless there are past or future indications of "resource conversion", else I would regard companies holding "investment properties" that don't have a chance to convert to PPE, as "red flags".

Hi weijian,

I beg to differ with you here. Why companies holding investment properties are considered as "red flags"? Most companies in construction and property development businesses know that their earnings are lumpy. Some have decided to hold some investment properties for yearly recurring income to smooth out the volatility. There is nothing wrong with that. What is worrying is that they might overpaid/over geared for those assets in their balance sheet, in the name of having a recurring income stream.

I don't see KSH having a over geared balance sheet currently, despite their losses in the construction segment. In fact, revenue should be coming in from sales of completed development projects in PRC. I see it as a potential turnaround play.

[weijian]

hi ghchua,

Do we believe that Towkays prefer less lumpy businesses than the lumpy ones they found themselves in? Or maybe it is only OPMIs that don't like volatility?

I think Towkays embrace volatility and are used to it. If they want less volatility through investment properties, there is a choice to declare dividends out of the listed entity and invest the monies on their own property ventures. It is not different from an OPMI doing equity investing, earn some money from it and then use it to buy an investment property on their own.

Between retaining capital to invest via the listed entity AND paying out capital to invest on your own, i will always favor the latter. So, this is what I mean by "red flag" in my personal checklist. Of course, not all companies that invest in "non core" investment properties are bad. But this "red flag" check has saved me lotsa heartaches I suppose.

[ghchua]

hi ghchua,

Do we believe that Towkays prefer less lumpy businesses than the lumpy ones they found themselves in? Or maybe it is only OPMIs that don't like volatility?

Hi weijian,

The fact is that construction and development profits are volatile, and it might affect their dividend paying ability if they make losses for that year. Which is why most of these listed companies do have some investment properties, and most have allocated a reasonable amount of capital for that. Some do unlock value and sell those investment properties at a profit, and distribute some cash back to shareholders.

As I have said earlier, the red flag is really when they allocated too much into investment properties and becomes cash strapped. When done at a reasonable level, these investments should deliver value in terms of recurring income plus capital gains when sold in the long run.

Personally for me, I don't invest in investment properties privately. This is because I do not have a salary and it is difficult for me to get bank loans. Therefore, I do it indirectly through listed companies.

[weijian]

Hi weijian,

The fact is that construction and development profits are volatile, and it might affect their dividend paying ability if they make losses for that year. Which is why most of these listed companies do have some investment properties, and most have allocated a reasonable amount of capital for that. Some do unlock value and sell those investment properties at a profit, and distribute some cash back to shareholders.

As I have said earlier, the red flag is really when they allocated too much into investment properties and becomes cash strapped. When done at a reasonable level, these investments should deliver value in terms of recurring income plus capital gains when sold in the long run.

hi ghchua,

I don't deny that construction and development profits are volatile. But since dividends are declared out of retained profits, a dividend can still be paid in a loss-making year as long as the retained profit is positive. The retained profit will be positive if the capital allocator had been prudent in building in up and not overdistributing profits in the earlier years.

So rather than using investment properties to "reduce volatility", real volatility reduction comes from the behavior of the capital allocator.

I also agree with the red flag you mentioned, ie. wrong capital allocation or overleveraged. But that is just a choice between "good and bad", with the red flag you mentioned as "bad". For the amount of brain damage I put in, I am not contended to choose between "good and bad" anymore. I am looking for decisions between "excellent and good".

[AQ.]

I don't see KSH having a over geared balance sheet currently, despite their losses in the construction segment. In fact, revenue should be coming in from sales of completed development projects in PRC. I see it as a potential turnaround play.

I will agree with ghchua. I think this is a good turnaround play - been snapping up shares from 26c down to 23.5c, and i will continue to accumulate albeit at a slower pace having bought a decent chunk already.

Unfortunately everything that can go wrong is going wrong:
construction hit hard by inflation 
investment property in China hit by China slowdown.
Prop development in starting phase with costs but no revenue.

But
1. If KSH is suffering, the rest of the industry must be in huge pain. That means prices will have to go up since noone is profiting at current levels. This segment will pull in a profit very soon.
2. I see astute management in managing their debt loads - cashflow has been managed well to pare own debts to be in only small net debt. This company is not heading into armageddon any time soon.
3. China of cos continues to be in doldrums but surprisingly their properties still manages to get some sales. My expectations were very low of cos.

[weijian]

hi AQ,

For (1), results of local listed firms in the construction industry seems to suggest that many folks are making hay right now though - from building materials (eg. BRC Asia, Engro) to main/sub-contractors (HLS, OKP). Putting aside the last reported results ended Dec2023, BRC Asia reports ~1Q ahead of its peers and its March2024 results suggest that things are still going strong despite a slight slow-down. So while inflation from utilities/manpower/subcontracting might have gone up, but most are probably still profiting at current levels.

[money]

hi ghchua,

Do we believe that Towkays prefer less lumpy businesses than the lumpy ones they found themselves in? Or maybe it is only OPMIs that don't like volatility?

I think Towkays embrace volatility and are used to it. If they want less volatility through investment properties, there is a choice to declare dividends out of the listed entity and invest the monies on their own property ventures. It is not different from an OPMI doing equity investing, earn some money from it and then use it to buy an investment property on their own. 

Between retaining capital to invest via the listed entity AND paying out capital to invest on your own, i will always favor the latter. So, this is what I mean by "red flag" in my personal checklist. Of course, not all companies that invest in "non core" investment properties are bad. But this "red flag" check has saved me lotsa heartaches I suppose.

Agree with weijian there. Whenever the company's core business isnt property investment, but starts buying investment properties with excess cash on the balance sheet, i always see it as a terrible way to deploy capital. 

And if got fair value gains on the investment properties, they seem to reward themselves more bonus. And when got fair value losses, the share price gets pushed down and OPMI suffer. Heads they win, tails OPMI lose

[ghchua]

Agree with weijian there. Whenever the company's core business isnt property investment, but starts buying investment properties with excess cash on the balance sheet, i always see it as a terrible way to deploy capital. 

And if got fair value gains on the investment properties, they seem to reward themselves more bonus. And when got fair value losses, the share price gets pushed down and OPMI suffer. Heads they win, tails OPMI lose

Hi money,

Some companies bought investment properties because they want to save on rental for their core business, which needs a space to run it. There are various reasons why companies wish to do so, and one would have to decide on its merits based on each individual situation, and not just say that it is a "terrible" way to deploy capital.

And your point on fair value gains is only applicable for companies which accounted their investment properties under fair value accounting. Not every company do that. Some valued it based on cost less depreciation. As to whether fair value gains of investment properties are included in bonus calculation, again it defers from company to company.

[specuvestor]

Just to chime in that in investment 101 it is better for companies to focus on their core business, pay out excess cash and let investors diversify themselves

However if you are owner of the business you would also want to diversify your business risk and even go horizontal or vertical integration to grow the business or in some cases venture out when your own business is saturated. Investors come and go... business owners generally stick (or stuck) with the business and have to consider the longer term viability.

It's a fine balance between strategic planning or reckless diworsification that swings between owners' and shareholders' interest. So OPMI have to differentiate between the good or bad allocators, strategically that makes sense and not just on ratios.

Berkshire actually provides that cozy platform for owners to grow their business slowly and pay out excess cash to remove this conflict of interests.

[money]

Agree with weijian there. Whenever the company's core business isnt property investment, but starts buying investment properties with excess cash on the balance sheet, i always see it as a terrible way to deploy capital. 

And if got fair value gains on the investment properties, they seem to reward themselves more bonus. And when got fair value losses, the share price gets pushed down and OPMI suffer. Heads they win, tails OPMI lose

Hi money,

Some companies bought investment properties because they want to save on rental for their core business, which needs a space to run it. There are various reasons why companies wish to do so, and one would have to decide on its merits based on each individual situation, and not just say that it is a "terrible" way to deploy capital.

And your point on fair value gains is only applicable for companies which accounted their investment properties under fair value accounting. Not every company do that. Some valued it based on cost less depreciation. As to whether fair value gains of investment properties are included in bonus calculation, again it defers from company to company.

Hi ghchua,

If it is to save on rental for core business as a PPE, i am neutral about buying properties. I mean for most of us, our homes for living will mostly like be bought and not rented.

I am referring to some companies with a lot of cash but prefer to buy IP instead, with the main objective of generating rental income. Examples will be many years ago, if i remember correctly, St****** went to UK to buy some office and singholdings went to australia to buy some hotel.

Is the cash wisely deployed? Or is it meant to reduce cash on the balance sheet, such that OPMI wont see it, so wont ask about special dividend during AGM? Or is the miserable rental from IP used to pay the salary increment of management?