Chip Eng Seng - DBS Research 2018-11-07: Negatives Priced In


Chip Eng Seng - Negatives Priced In

  • 3Q18 PATMI of S$31.4m above expectations as Chip Eng Seng (CES) delivers on Park Colonial.
  • Uncertainty over sell-through rates remain as fresh policies kick in/
  • Bond redemption obligations post change of control also limits scope for acquisition-led growth.
  • Negatives priced in at current levels; upgrade to HOLD.

Upgrade to HOLD as Chip Eng Seng (CES) delivers on Park Colonial; Target Price unchanged at S$0.75.

  • Notwithstanding the hike in ABSD rates and tightening of mortgage LTVs from July 2018, sales-to-date for Park Colonial have tracked ahead of initial expectations to 65.1% currently. FY18F/19F estimates tweaked as we bring forward sales contributions for Park Colonial to 2H18 vs 1H19F previously.
  • Ahead, uncertainty over sell-through rates for the upcoming Changi Garden site remains as the surprise implementation of a second set of policies in October continues to weigh on buyer sentiment. 
  • Debt redemption obligations arising from the exercise of the Change of Control put by bondholders also limits the scope for acquisition-led growth opportunities over the near term. However, at -1SD (or c. 0.55x) of its historical P/NAV range, we believe that negatives for CES are priced in. 
  • Upgrade to HOLD with Target Price unchanged at S$0.75.

Where We Differ:

  • A largely uncovered stock, we like CES for its strong earnings visibility and the potential to unlock its undervalued hotel portfolio.

Potential Catalysts: 

Successful pre-sales, land-banking activities. Potential unlocking of undervalued hotel portfolio. 

  • Chip Eng Seng has also built up a sizeable hotel and commercial portfolio. The jewel is Park Hotel Alexandra, which is recorded in its book at an estimated S$210m (S$475,000/key) but potential realisable value, if sold, could be as high as S$376m (S$850,000/key), which means a 27-Sct upside to current NAV. 
  • While the hotel provides stable recurring cash flow to the group, substantial value could be unlocked, given the robust demand for hotel assets in Singapore.

Key Risks to Our View:

  • Execution risk,
  • Weaker demand,
  • Competition,
  • Equity fund-raising risk.

WHAT’S NEW - 3Q18 Results Highlights

3Q18 PATMI of S$31.4m above expectations as Chip Eng Seng (CES) delivers on Park Colonial

  • 9M18 PATMI rose 63% y-o-y to S$31.4m from S$19.3m in 9M17 on higher contributions from the property development and hospitality divisions. 
  • The increase was mainly led by higher revenue growth from the property development (revenue +54% y-o-y) and hospitality (revenue +108% y-o-y) segments and maiden contributions from the education sector, which offset lower contributions from construction (-28% y-o-y) and property investments & others (-33% y-o-y).
  • CES recorded 3Q18 PATMI of S$14.3m vs S$13.2m in 3Q17. Similarly, the strong performance in 3Q18 was led by both property development and hospitality.

Property development remained the key earnings driver.

  • Property development recorded strong growth mainly from the progressive recognition of High Park Residences, Grandeur Park Residences and Park Colonial, and the sale of its property at 150 Queen Street in Melbourne.
  • Meanwhile, construction revenue fell mainly due to timing of construction works where older projects in Tampines and Woodlands are nearing completion while Bidadari projects are in their active stages of construction.
  • The group also registered an impairment loss of S$7.5m during the quarter, which was attributed to the construction segment.

Hospitality division was driven by new acquisitions and opening of new hotel.

  • Hospitality division delivered strong growth from newly acquired hotels in Australia, The Sebel Mandurah and Mercure & Ibis styles Grosvenor Hotel, and the opening of the Grand Park Kodhipparu Resort in June 2017.

Property Investments & Others division.

  • Contributions from this segment fell mainly due to absence of contribution from the divestment of 420 St Kilda Road in Melbourne in August 2017.


Property Development:

  • In the wake of the property cooling measures, buyer activity has slowed, but incremental sales for CES’s key projects remained healthy with Grandeur Park and Park Colonial being 96.7% and 65.1% sold respectively.
  • Management believes that URA’s revised guidelines on the supply of smaller units will further weigh on market sentiment. While maintaining a cautious stance, the company is currently preparing its Changi Garden site for its 1H19 launch.
  • Tightened credit conditions have also affected CES’s recently launched Fifteen85 project in South Melbourne, which has only sold 4.1% of its first phase. Additionally, 20 apartments from Williamsons Estate, which were completed in 3Q18, remain unsold.


  • Total construction orderbook fell to S$440.7m vs S$479.9m in 3Q18, as the group did not secure any significant construction projects during the quarter.


  • The group expects its first Repton Schoolhouse to commence operations in January 2019. While it will take time for this new venture to break even, given the competitive landscape and the lack of track record in this space, it could help unlock a new recurring income stream for the group over the medium term.

Our Thoughts and Recommendation

Upgrade to HOLD; S$0.75 Target Price.

  • FY18F/19F estimates tweaked as sales-to-date for Park Colonial has tracked ahead of our initial expectations to 65.1% currently.
  • While the stock lacks immediate catalysts, we believe that at current prices – c.-1SD (or 0.55x) of its historical P/NAV range, the negatives are largely priced in. Upgrade to HOLD with SOTP-based Target Price of S$0.75 unchanged.
  • Meanwhile, an attractive prospective yield of c.5.8% is on offer.

Carmen TAY DBS Group Research | Derek TAN DBS Research | Rachel TAN DBS Research | 2018-11-07
SGX Stock Analyst Report HOLD UPGRADE FULLY VALUED 0.750 SAME 0.750