Hiap Hoe - Playing all its cards right (DMG)

BUY

Price S$0.42

Previous n/a

Target S$0.61

Niche developer with an illustrious history. Hiap Hoe started out as a construction firm in the 1950s and has accumulated over 40 years of experience in the construction industry. The company diversified into property development in the early 1990s and has since evolved into a niche integrated property developer engaged in mid-tier and luxury residential properties. Today, the group is focused primarily on its own residential developments, and is able to leverage on its in-house building expertise to manage costs efficiently. Past projects include Oxford Suites, Cuscaden Royale, City Edge, Papillon, The Vines and The Moonstones, all of which have been sold out.

Sitting on a low-cost prime landbank. Hiap Hoe timed its land purchases well in the current cycle, embarking on a buying spree in the early stages of the property upcycle in 2005-2007 and accumulated a residential landbank just under 0.5m sf GFA in the prime districts of Balmoral Road, Cavenagh Road and St. Thomas Walk. It has since launched and substantially sold several projects, including Waterscape at Cavenagh (75% sold), Skyline 360° (54% sold) and Signature at Lewis (88% sold). It is currently waiting for an opportune time to launch its remaining unsold project, Treasures on Balmoral. Waterscapes and Skyline 360° together should generate over $300m in pretax profits when fully sold given the low land cost of $600-700 psf. We estimate a development surplus of S$235m, or $0.50/share from Hiap Hoe’s existing landbank, of which $122m or $0.26/share represents locked-in profits from pre-sold units.

Zhongshan development site provides future source of recurrent income. Beyond property development, Hiap Hoe is developing a hotel-cum-commercial site at Zhongshan Park along Balestier Road with its JV partner Superbowl. The 421,000 sqft GFA site was clinched at a bargain price of $172 psf ppr in mid-2008, and is being developed into a 405-room Days Inn hotel (3-star) and a 390-room Ramada hotel (4-star) together with some 120,000 NLA of office and retail space. We estimate Hiap Hoe’s share of the development surplus at $104m ($0.22/share).