20160704-辉立证券-Hock_Lian_Seng_Holdings：More_weaknesses_expected_22页_2mb

Hock Lian Seng Holdings (HLSH) Summary

Core Content

Hock Lian Seng Holdings (HLSH) is a Singapore-based company primarily engaged in civil engineering and property development. The company has a strong track record in public sector projects and is currently facing challenges due to a slowdown in the private residential property market and increasing competition in the civil engineering sector.

Main Viewpoints

Civil Engineering Sector Outlook

• Construction Demand: Public sector construction demand in 2016 is expected to be the highest since 2002, while private sector demand weakens due to oversupply of unsold residential units and economic slowdown.
• Contract Value: BCA projects total construction contracts for 2016 to be between $27b and $34b, with civil engineering comprising 37.9% of this demand.
• Project Tenders: Grade A1 contractors can tender for projects with unlimited contract value, while lower-grade contractors are restricted to lower limits. HLSH is a Grade A1 contractor.
• Competition: With private sector demand slowing, more contractors are returning to public sector projects, intensifying competition.
• Margins: Gross margins are expected to decline further due to rising labour costs and uncertainty in material prices.

Property Development Segment

• Residential Development: The Skywoods, a residential project developed via a joint venture, is 99.5% sold. This has limited the revenue contribution from property development.
• Industrial Property: The group is developing Shine@Tuas South, a 6-storey industrial building. Sales are expected to be weak due to competition and lower land prices.
• Earnings Impact: Full year earnings in 2016 are expected to be the lowest in three years, mainly due to the absence of property development revenue and a muted property investment segment.

Financial Position

• Cash Reserves: HLSH maintains a solid financial position with a current ratio of 2.8 times and a cash balance of $153.5m as of 1Q16.
• Dividend Outlook: Dividend payments are expected to fall in the next three years due to declining earnings and management's reluctance to maintain dividends through cash usage.

Key Information

Company Background

• Established in 1969, HLSH has been involved in both public and private civil engineering projects in Singapore.
• Listed on the Singapore Exchange Mainboard in December 2009 at S$0.25 per share.

Financials

Valuation

• SOTP Valuation: $0.31
• Target Price: SGD 0.31
• Current Closing Price: SGD 0.35
• Total Return: -9.6%

Shareholders and Performance

• Top 3 Shareholders: Chua Leong Hai (38.0%), Eng Ah GoH (8.3%), Chua Aik Khoon (5.9%)
• Price Performance: -4.2% (1MTH), -8.1% (3MTH), -17.4% (1YR)
• STI Return: 2.00% (1MTH), 2.50% (3MTH), -11.44% (1YR)

Tendering Limits

Financial Standing Requirements

Project Details

• Current Order Book: $382m, comprising three projects with a gross margin of 5.9% in 1Q16.
• Projects:
  • Development of Taxiways, Aircraft Parking Stands and other works at Changi Airport (Jan-14 to Jan-18)
  • Construction of stabling yard at Gali Batu Depot (Jan-15 to Jan-19)
  • Maxwell Station (Apr-14 to Apr-20)

Industrial Property Development

• Shine@Tuas South: 6-storey, 174-unit multi-user industrial building, expected to be completed in 2018.
• Land Tender Prices: The project had the lowest land tender prices until 24 Nov-15.

Residential Property Development

• The Skywoods: Joint venture with King Wan Corporation and TA Corporation, 99.5% sold as of May-16.

Conclusion

HLSH is expected to face challenges in the coming years due to the slowdown in private sector construction demand and the lack of revenue from property development. The company's strong financial position supports its ability to compete in public sector projects, but the overall outlook for earnings and dividends is negative. The valuation suggests a "Reduce" rating, indicating potential for a price decline.