Tiong Seng Holdings - Builder for costliest flats (KimEng)

Event

 Tiong Seng submitted the lowest bid for the most costly HDB project to date, the 804‐unit Punggol Waterway Terraces (PWT) II. Last week, the award of the last 3 contracts wraps up the tender for Downtown Line (DTL) Stage 3, it was overall disappointing for local builders. The upcoming launch of 3 Balmoral by Tong Eng is expected to set Balmoral’s primary market prices at $2,350 to $2,600psf. At this price, Tiong Seng’s redevelopment of Balmoral Condo yields 10‐15% profit margins. The stock is grossly undervalued, the current price values its stable construction business at just 2x P/E. Maintain BUY with adjusted target price of $0.27.

Our View

 HDB released PWT II in May 2011’s BTO, priced at $354,000‐$456,000 for 5‐room flats. Its construction tender, closed last week, saw 5 bids with the lowest from Tiong Seng, at $146.6m or $182,392 per unit (2% higher than PWT I awarded to Tiong Seng in April 2011). The expected win brings the total contract this year to $443m, on track to meet our $600m forecast.

 Last week, the LTA awarded the last 3 contracts for DTL Stage 3. In all, 18 contracts worth a total of $3.5b have been awarded to foreign companies, with the exception of Tampines Central Station. The number of new foreign entrants in the civil engineering space surprised most local builders. The added competition has driven margins in this space to a new low.

 The launch of 3 Balmoral by Tong Eng will set new prices for Balmoral. The last condominium launch in Balmoral was two years ago when 85‐unit Volari sold for $2,000 psf in 2009. Units at 3 Balmoral are priced in the range of $2,350 to $2,600 psf. Using an ASP of $2,500 psf, the redevelopment of Balmoral Condo yields 15% pre‐tax margins (breakeven of $2,070 psf).

 The Building and Construction Authority (BCA) revised its construction demand forecast on 5 August 2011 from $22‐$28b to $24‐$30b after taking into account the stronger demand from the public residential sector. This bodes well for Tiong Seng as it is the biggest winner of HDB contracts in 2011, securing nearly 10% (including the expected win of PWT II) of the total $3.5b building contract year‐to‐date by HDB.

Action & Recommendation

We maintain a BUY recommendation with revised SOTP target price of $0.27.