Chip Eng Seng - Phillip Securities 2016-05-09: Slow but not unexpected quarter

CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng Corporation Ltd - Slow but not unexpected quarter

Chip Eng Seng (CES) reported its 1Q16 results on 5 May-16 after the market closed.

The sharp drop in Chip Eng Seng Corporation’s (CES) 1Q16 revenue was stemmed from lower recognition of revenue from the property development segment. This is because a bulk proportion of revenue has already been recognised in the two development projects, Nine Residences and Junction Nine.

High Park Residences, which is still at its early stage of construction (96% sold) substantially accounted for 1Q16's property development revenue.
Consequently, the group’s overall gross margin in 1Q16 came in at 18.5% (compared to 20.2% in 1Q15) amid lower gross margin from the property development segment. This was however not unexpected, as Nine Residences and Junction Nine which are higher end projects and commercial properties respectively, commanded higher development margins compared to High Park Residences.

Fulcrum, a high end freehold condominium was recently re-launched in Apr-16 and has been c.30% sold (before relaunch: 13.2%). Sales are likely to remain slow amid the relatively large supply of unsold private properties in the market, as well as the higher quantum for these units increases the difficulty of obtaining financing, bounded by the TDSR and MSR requirements.
However, at this moment we do not expect significant price cuts since CES has more than 15 months to clear these units before the QC is due.
Fulcrum is not subjected to ABSD charges.

As at 1Q16, the suburban development project, Williamsons Estate, which consists of more than 100 townhouses has been completely sold. However, profits are expected to be only booked in upon the handing over of units in FY18.
Willow Apartments, which is the extension of Williamsons Estate, has registered steady sales where the development has been 23.6% sold since its launch this quarter.
While the litigation issue at Tower Melbourne is still ongoing, the group has managed to move ahead with demolition works on the existing building, but was unable to carry out any works due to delays encountered, while applying for demolition approval from the authorities.

CES currently owns a total of 3 land parcels in Singapore and Australia.
The group has acquired a land parcel in the Tanah Merah area and it expects the project to debut in 1H17.
The other two land parcels reside in Australia, namely South Melbourne and Northcote.
The availability of these land banks provides a pipeline of future development opportunities and potential sources of revenue for the property development business.

Construction segment continues to provide a steady source of revenue and margin visibility where the group’s construction order book currently stands at $507.3m.
Given its longstanding track record in the development of HDB flats, and a higher number of HDB launches to be introduced in FY16 (FY16: 18,000, FY15: 15,000), are factors that are likely to boost the group’s chances to successfully tender for new projects.

Revenue from the hospitality segment maintained in the $6.5m territory (4Q15: $6.4m) despite the challenging industry outlook in the hospitality segment.
Property investment segment booked in 41% higher revenue led by a higher occupancy rate at CES Centre.

We maintain an “ACCUMULATE” rating on CES and an unchanged derived full-year RNAV TP of S$0.72.

Peter Ng Phillip Securities | http://www.poems.com.sg/ 2016-05-09

Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.72 Same 0.72