Tuan Sing Holdings - DBS Research 2020-06-16: Under-Appreciated Asset Play

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TUAN SING HOLDINGS LIMITED (SGX:T24)

Tuan Sing Holdings - Under-Appreciated Asset Play

• Deep value play. We initiate coverage on Tuan Sing (SGX:T24) with a BUY.
• Attractive valuation at 0.27x P/NAV or -2 SD of 5-year mean.
• Australian hotel business set to recover with relaxation of COVID-19 measures.
• Potential value unlocking of Gultech to transform counter into partial tech play.

Tuan Sing - Company Background

Corporate History.

• Tuan Sing Holdings Limited (SGX:T24) is a Singapore-based investment holding company with core interests in property development, property investment and hotel ownership. The Group’s real estate businesses are mainly focused in the key Asia Pacific markets of Singapore, China, Indonesia and Australia. The Group also has interests in PCB manufacturing, commodity trading and production of polypropylene packaging bags.
• Tuan Sing’s property segment is involved in the development of properties in Singapore, China and Indonesia. Properties that have been or are being developed by the Group include Sennett Residence and Mont Botanik Residence.
• The property segment is also engaged in investment properties in Singapore, Australia and China. In FY19, the property development business and investment property business contributed 21% and 13% of Tuan Sing’s top line respectively. A noteworthy development was the receipt of a Temporary Occupation Permit (“TOP”) for the redeveloped investment property, 18 Robinson in 2019.
• Tuan Sing's hotel investments segment comprises two hotels in Australia, namely the Grand Hyatt Melbourne and Hyatt Regency Perth. Both hotels completed renovations in 2011 for a total cost of A$70.0m and saw occupancies of 91.0% and 75.7% respectively in FY19. The hotel investment segment contributed 33% of Tuan Sing’s revenue in FY19.
• Tuan Sing's industrial services segment consists of two businesses, namely SP Corporation (SGX:AWE) and Hypak Sdn Bhd. SP Corporation is involved in the trading of industrial commodities such as aluminium, coal and natural rubber. Hypak mainly deals with the manufacturing and marketing of polypropylene woven bags. Notably, while this segment constitutes a large proportion of Tuan Sing’s revenue, the businesses are low margin in nature. Net margin for the industrial services segment was only 1.2% for FY19.
• Tuan Sing also saw significant contributions from its other investments in Gul Technologies (GulTech) and Pan-West.
• The Group’s FY19 net profit from these two businesses was S$21.7m. GulTech manufactures PCBs that serve sectors such as automotive, computer peripherals and healthcare. GulTech has three manufacturing plants in China, one each in Jiangsu, Suzhou and Wuxi. Pan-West is a distributor of golf-related lifestyle products that distributes golfing brands such as Cleveland Golf and Volvik exclusively in Malaysia and Singapore.
• Tuan Sing has geographically diversified its business with Singapore revenue dropping to 52% of revenue in FY19 from 75% in FY14. Conversely, revenue from Australia had risen to form 38% of FY19 revenue, up from 4% in FY14. This change could largely be attributed to a shift in the business model towards recurring income. Specifically, Tuan Sing acquired 50% of the remaining interest in Grand Hotel Group (“GHG”) in December 2014. As a result, revenue from Australia rose due to GHG’s focus in Australia. Recurring revenue as a percentage of total revenue also rose from 8% in FY14 to 46% in FY19.

Initiate with BUY for Tuan Sing with Target Price of S$0.38.

• We believe Tuan Sing is significantly undervalued as it is currently trading near a multi-year low of 0.26x P/NAV. This represents a level close to -2SD and warrants an appropriate relook at Tuan Sing for its
  1. regular cashflows from its staple of commercial properties and hospitality assets, and
  2. potential value unlocking events as management looks to streamline its portfolio.
• While the COVID-19 outbreak has impacted Tuan Sing’s hospitality properties in Australia (33% of FY19 revenue), the gradual reopening of the Australian domestic travel market will limit the properties’ downtime and contain the losses somewhat. We project that the hospitality business could be set to recover substantially given its high exposure to the domestic market and an easing of Australian interstate movement restrictions.
• There are also other bright spots in its portfolio. Despite the COVID-19 outbreak, Gultech is expected to perform well in FY20F led by a pickup in data storage demand.

China-focused Gultech a force to be reckoned with.

• Gultech has performed strongly in recent years. The company contributed S$21.7m to Tuan Sing’s FY19 net profit of S$32.7m and could stand to benefit from an uptrend in the semiconductor cycle in our view. Notably, Gultech reported a strong 1Q20 driven by two factors.
  • Firstly, data storage demand is on the rise and this has increased demand for PCBs. Indeed, Micron, a leader in NAND and DRAM memory, recently revised its FY20Q3 sales guidance to US$5.2-5.4bn from US$4.6-5.2bn previously.
  • Secondly, Gultech has captured new orders from its competitors which struggled to operate as a result of COVID-19. We believe this has helped solidify the company’s reputation as a choice PCB producer in such uncertain times.
• While we do expect some impact on Gultech’s performance for FY20F stemming from COVID-19, we believe Gultech could still see strong growth and we forecast a 15.0% growth in Gultech’s profit for FY20F. Aside from data storage, the company has exposure to other information and communication technology products through Wistron which has seen increased demand. Visteon, a customer in the automotive sector, has also ramped up production in China post-lockdown and expects to return to pre-COVID-19 levels in 2Q20.

Value unlocking of Gultech may be imminent.

• Gultech’s capacity is targeted to rise by c.56% from 19.2m sq ft to 30.0m sq ft in 2020. We believe this production capacity is sufficient to meet new demand which could mean a lower need for capital expenditure outlays going forward. As a result, Gultech may begin paying dividends to Tuan Sing.
• Another option on the table is a divestment of Gultech to unlock value. Indeed, Tuan Sing has indicated its intention to divest non-core assets such as Gultech, should a good opportunity arise. Based on a conservative valuation of 11.0x FY20F PE, this may bring in c.S$270m in our estimates or 23 Scts per share.

Indonesian developments light the way forward although impact is likely to remain small for now.

• A key piece of Tuan Sing’s strategy lies in the Opus Bay integrated mixed development in Indonesia. Tuan Sing has acquired c.1.25m sqm of land next to the Waterfront Ferry Terminal in Batam and envisions the development to consist of hotels, MICE facilities, retail outlets, attractions and residential buildings. The Group will begin with an asset enhancement of the ferry terminal before developing 300 villas over 5-6ha of land. This will be followed by the construction of 1,500 serviced apartments. Tuan Sing expects to launch Phase 1 of the project and commence construction in 2H20.
• We believe this is a positive for Tuan Sing and would create a pipeline of medium-term projects for the company. One seemingly interesting observation is that the lease for c.850,000 sqm of land related to the project expires in 2034. However, according to local practices, we believe the lease term can be extended by a typical period of 30 years for a small fee.

Property development in Singapore:

Private property demand has been dampened for now, but projects have hit key development milestones.

• Based on the URA Private Residential Price Index (PPI), Singapore private residential prices fell 1.0% q-o-q in 1Q20 compared to a 0.5% rise the previous quarter. Considering that the Circuit Breaker measures only began in April, private residential prices could see a larger impact over the next few quarters. Indeed, we have projected the PPI to drop by 5%-10% in 2020. Additionally, current travel restrictions could also dent near-term demand for private residences, especially luxury-end projects in the near term.
• For Tuan Sing, this may mean lower take-up and sales prices for its development projects in Singapore with the yet to be launched Peak Residence likely to be the most affected. That said, we estimate that FY20F revenue for the property segment could grow by c.43% as sales from the Kandis Residence and Mont Botanik projects are progressive recognised.

Recent loosening in regulations have also provided respite.

• Following recent revisions to Qualifying Certificate (QC) rules in 1Q20 and the COVID-19 temporary bill, Tuan Sing will no longer be required to pay QC extension charges for its en-bloc projects (Peak Residences, Mont Botanik). All its projects will also enjoy an additional six months in timeline to complete selling its projects before being subjected to the additional buyer’s stamp duty (ABSD), we see this as positive for the Group.
• Additionally, Tuan Sing’s properties have done relatively well. Notably, from March - May 2020, Tuan Sing sold eight units (out of 57 available) of Mont Botanik and four units (out of 33 available) of Kandis Residence.

Australian hospitality segment to bounce back from COVID-19.

• Tuan Sing’s hotel businesses in Australia have not been spared from COVID-19. The Grand Hyatt Melbourne has suspended its operations for three months while the Hyatt Regency Perth served a month as a quarantine venue for the Western Australia Department of Health. The moves came as visitor arrivals to Australia tumbled 60.3% y-o-y in March as a result of travel restrictions imposed. We understand that the COVID-19 outbreak came as operations at the Hyatt Regency Perth were improving. In the period prior to COVID-19, the hotel saw occupancies in excess of 90% (compared to 75.7% for FY19). While losses for the segment are expected this year,
• Australia’s JobKeeper scheme could help mitigate some of the impact. Encouragingly, we estimate that 75% of Tuan Sing’s guests are Australian. Indeed, in 2019, international visitors only spent a total of 28.8m nights in Australian hotels compared to 101.0m nights by domestic residents.
• In the near term, while travel might remain subdued, we believe Tuan Sing’s hotels may achieve FY20F average occupancies of between 45% and 50%. Hotels have been allowed to reopen in both Melbourne and Perth while travel restrictions for domestic residents into and out of Victoria have been lifted. Barring a second wave of infections, these moves should boost occupancies in 2H20.

Tuan Sing is positioning well for recovery.

• The asset enhancement initiative (AEI) at Fortescue Centre (which is adjoined to Hyatt Regency Perth) will boost the vibrancy of the area and be completed in December 2021. Included in the AEI plan is the refurbishment of the office and retail plaza and an addition of retail space. Post-AEI, Hyatt Regency Perth could see better occupancies for both its hotel beds and office space.
• Notably, Pan Pacific Perth, which is located nearby, saw average occupancies of 84% in FY19.

Tuan Sing Holdings - Valuation

Tuan Sing's SOTP-valuation of S$0.38 gives potential upside of c.60%.

• In valuing Tuan Sing, we divided the Group into a few parts, namely the property business, SP Corporation (see SP Corporation Share Price; SP Corporation Announcements), Gultech, and other equity-accounted investments (such as Sanya Summer Real Estate and Goodwill Property Investment).
• We assigned a FY20F PE valuation of 11.0x to Gultech given that its Singapore peers trade between 8.5x and 14.6x. We believe this is a conservative estimate as Gultech’s Chinese peers are trading at above 25.0x FY20F PE. Imputing 11.0x as the multiple, Gultech is valued at S$613.0m, putting Tuan Sing’s 44.5% interest at S$272.8m.

Tuan Sing’s property business RNAV valuation stood at S$513.4m before discount.

• Using a conservative 65% discount to RNAV, Tuan Sing’s property business would be worth S$179.7m. Our RNAV valuation accounted for the surplus values of Tuan Sing’s development projects and conservative estimates for key properties such as 18 Robinson and Link@896 Dunearn Road. Excluded from the valuation were the surplus value of the Peak Residence project and the NAVs of SP Corporation and Tuan Sing’s equity-accounted investments.

Other equity-accounted investments were also revalued.

• We assigned no value to Hypak and Pan-West given their small size and history of losses. Sanya Summer Real Estate and Goodwill Property Investment were revalued to cost while SP Corporation was assigned a market value of S$10.0m.
• Altogether, we computed an SOTP-based Target Price of S$0.38 after applying a 10% conglomerate discount. See PDF report attached below for more details on Tuan Sing's SOTP-valuation. This valuation implies a PNAV of -2SD from the multi-year mean. The valuation excludes any possible developments related to Opus Bay.
• See Tuan Sing Share Price; Tuan Sing Target Price; Tuan Sing Analyst Reports; Tuan Sing Dividend History; Tuan Sing Announcements; Tuan Sing Latest News.

Continue to read the PDF report attached below for more details on Tuan Sing's financials and management team.

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-16

SGX Stock Analyst Report BUY INITIATE BUY 0.38 SAME 0.38