TEE-ing up for growth
Intrinsic Value S$0.585
Prev Closing S$0.360
TEE Land has a track record in developing low rise private apartments in Singapore. With a robust pipeline of projects, the company’s earnings are set to grow in the next few years. The company has adopted three strategies to propel growth: (1) focusing on IRR of projects for faster capital recycling, (2) applying what they have learnt in Singapore to their overseas ventures, and (3) reducing reliance on Singapore and property development diversification.
We estimate that TEE Land has at least S$200m in project earnings which will be progressively recognized in the next few years as the projects are completed. We view the recent share purchases by the substantial shareholders and directors as an affirmation of TEE Land’s positive outlook. Recommend Increase Exposure with an intrinsic value of S$0.585 per share.
• TEE Land has a pipeline of projects that will ensure earnings growth through FY 2016. With several high take up rates projects and existing developments in plan, earnings would continue to increase beyond FY 2016. Furthermore, the company mitigates rising labour costs as contracts are signed with sub-contractors to prevent the upward passing of costs. This would allow them to control operating expenses.
• The company is gradually reducing their reliance in Singapore by taking on projects in Malaysia, Thailand and New Zealand. Through their overseas experience in Thailand, the company seeks to replicate the same model in the other countries. In addition, TEE Land is looking at emerging markets to propel growth in the coming years.
• While the company started out as a residential property developer, it has sought to diversify into commercial and industrial property developments. These new developments reduce their exposure to the slew of residential property cooling measures in Singapore. This will result in greater stability in the company earnings.
Company background: TEE Land started out as a subsidiary of TEE International in 2006 when the latter decided to expand into the property development business. Most of TEE Land’s residential property developments are freehold in tenure and are targeted towards the middle-to-high income earners.
From 2007 to 2009, TEE Land has launched and completed five residential projects in Singapore and Thailand. In Singapore, the company started by building smaller development projects. These projects allowed them to achieve faster turnover and reduced the risk of holding on to excess units. In Thailand, the company established joint ventures with local developers. These partnerships allowed them to gain insights on overseas expansion and increase the scale of their property developments.
The company was listed in the SGX Mainboard on 6 June 2013. For the IPO, TEE Land issued 115m shares and raised SGD 62m in gross proceeds. The proceeds were mainly earmarked for project developments and for future land acquisitions.
Pipeline of projects
Secured earnings for the next two years: TEE Land has a strong pipeline of ten development projects in Singapore and one development project in Thailand. 448 @ East Coast was completed in May 2013. The remaining eight projects in Singapore have an average 89% pre-completion take-up rate while the Chewathai Ramkhamhaeng project in Thailand have a 45% pre-completion take-up rate. Take up rates in Thailand tend to be lower as locals tend to wait for developments to be completed before purchasing.
448 @ East Coast (completed)
448 @ East Coast is a freehold residential project launched in 2012 and granted TOP status in 2013. With a gross land area of 11,754 sq ft, the 5 storey building has a total of 28 units and it is located close to Eunos MRT, Parkway Parade Shopping Centre and 112 Katong. The project has a capital value of S$18m and all 28 units have been sold.
91 Marshall (completing)
91 Marshall is a freehold residential project launched in 2012 and estimated to be granted TOP status in 2016. With a gross land area of 13,182 sq ft, the 5 storey building has a total of 30 units and it is located close to Eunos MRT, Katong Plaza and Paramount Shopping Center. The project has a capital value of S$18m and all 30 units have been sold.
Aura 83 (completing)
Aura 83 is a freehold residential project launched in 2013 and estimated to be granted TOP status in 2014. With a gross land area of 27,641 sq ft, the two blocks of 5 storey building have a total of 51 units and are located close to Eunos MRT, Parkway Parade Shopping Centre and 112 Katong. The project has a capital value of S$41m and 43 units have been sold.
The Boutiq (completing) (30% stake)
A joint venture project with Heeton Holdings (45%) and KSH Holdings (25%), The Boutiq is a freehold residential project launched in 2012 and estimated to be granted TOP status in 2014. With a gross land area of 39,972 sq ft, the two blocks of 10 storey building have a total of 130 units and are located close to Somerset MRT and the Orchard Road shopping district. The project has a capital value of S$38m and 109 units have been sold.
Rezi 26 (completing) (45% stake)
A joint venture project with KSH Holdings (45%) and Heeton Holdings (10%), Rezi 26 is a freehold residential project launched in 2012 and estimated to be granted TOP status in 2015. With a gross land area of 26,625 sq ft, the two blocks of 7 and 8 storey building has a total of 106 units and it is located close to Aljunied MRT and City Plaza Shopping Centre. The project has a capital value of S$24m and all 106 units have been sold.
Sky Green (completing) (20% stake)
A joint venture project with Heeton Holdings (40%), KSH Holdings (25%) and Zap Piling (15%), Sky Green is a freehold residential project launched in 2013 and estimated to be granted TOP status in 2016. With a gross land area of 71,284 sq ft, the two blocks of 16 storey building has a total of 176 units and it is located close to Tai Seng MRT and the Macpherson Industrial Area. The project has a capital value of S$25m and 169 units have been sold.
Palacio (completing) (32% stake)
A joint venture project with Heeton Holdings (36%) and KSH Holdings (32%), Palacio is a freehold residential project launched in 2013 and estimated to be granted TOP status in 2014. With a gross land area of 31,930 sq ft, the 3 storey building has a total of 21 units and it is located close to Kembangan MRT, Kembangan Plaza and 112 Katong. The project has a capital value of S$13m and 19 units have been sold.
The Peak @ Cairnhill 1 and The Peak @ Cairnhill 2 (completing)
A joint venture project with TG Development (73%), The Peak @ Cairnhill 1 and The Peak @ Cairnhill 2 is a freehold residential project launched in 2011 and 2013 and estimated to be granted TOP status in 2015 and 2016 respectively. With a gross land area of 10,527 and 16,243 sq ft, the 15 and 18 storey building has a total of 50 and 62 units respectively. It is located closed to Newton MRT and the Orchard Road shopping district. The projects have a combined capital value of S$48m and 31 units have been sold.
Chewathai Ramkhamhaeng (completed) (49% stake)
A joint venture project with Chartchewa Co. Ltd (51%), Chewathai Ramkhamhaeng is a freehold residential project launched 2011 and granted TOP status in 2013. With a gross land area of 65,970 sq ft, the 33 storey building has a total of 535 units and it is located close to Masjid Ridwanool Islam, Ram Square and The Mall. The project has a capital value of S$14m and 241 units have been sold.
Securing earnings after the next two years: TEE Land had acquired 5 new development sites in Singapore, with 4 of the sites acquired with a joint venture partner(s). These sites are mainly freehold and are designated for residential or residential and commercial purposes.
Flora Ville (7% stake)
A joint venture project with Oxley Holdings (55%), Heeton Holdings (16%), KSH Holdings (12%) and Goldprime Investments Ltd (10%), the land is freehold and approved for both commercial and residential development. The 5 storey building has a total of 56 units and was launched in August 2013. Situated in Yio Chu Kang (District 26), the land has an area of 27,131 sq ft and a capital value of S$8m. The project is currently 26% sold.
NeWest (7% stake)
A joint venture project with Oxley Holdings (65%), Heeton Holdings (16%) and KSH Holdings (12%), the land has an area of 164,665 sq ft with tenure of 999 years. It is approved for both commercial and residential development. With a total of 141 commercial shops, 59 apartments and 77 triplex town houses, NeWest is situated in West Coast (District 5) and it is close to Clementi Town Centre, West Coast Plaza, and National University of Singapore. The project is currently 71% sold.
64 – 80 Hillside Drive
Approved for residential development, the land has tenure of 999 years and a capital value of S$21m. Situated in Hougang (District 19), the land has an area of 21,533 sq ft. It is close to Kovan MRT, NEX Shopping Centre and Rosyth School.
48 – 60 Geylang Lorong 32 (45% stake)
A joint venture purchase with KSH Holdings (45%) and Heeton Holdings (10%), the land is freehold and approved for residential development. Situated in Geylang (District 19), the land has an area of 13,283 sq ft and a capital value of S$13m. It is close to Aljunied MRT, City Plaza and Grandlink Square.
7 – 19 Sam Leong Road (35% stake)
A joint venture purchase with KSH Holdings (35%), Heeton Holdings (15%), Futuris Holdings (10%) and Zap Piling (5%), the land is freehold and approved for commercial development. Situated in Little India (District 8), the land has an area of 12,362 sq ft and a capital value of S$7m. It is close to Farrer Park MRT, City Square Mall and Mustafa Centre.
TEE Land has acquired a freehold land in Tambon Map Yang Phon, Rayong with an area of 450,922 sq ft for THB 47m. The land is approved for industrial use and will be developed to build 10 factories. The first 5 factories are expected to be completed by the end of this year and have been contracted for leasing, while the next 5 factories is expected to start work soon. The expected cost of the development is THB 200m and construction is slated for completion by 2013.
The Silicon Valley of Malaysia, the town of Cyberjaya is a science park located in Sepang, Selangor and is about 50 km south of Kuala Lumpur. Bordering with the administrative capital of Putrajaya, the town has seen rapid developments since its opening in 1997. With the relocation of several multinational corporation headquarters (MNC HQs) and the setting up of more universities in Cyberjaya, the population is expected to increase to 200,000 within the next 10 to 15 years.
While residential developments have increased to match the expected population increase, there is still a supply gap. Further, recreational and commercial facilities remain lacking in several areas. As such, there is high demand for both residential and commercial properties.
TEE Land has acquired a freehold land located in Jalan Teknokrat, Cyberjaya with an area of 259,000 sq ft and a plot ratio of 3. The land which is approved for commercial use is expected to have a gross development value of MYR 353m. Currently, there are plans to develop the land into a mix of residential and commercial properties.
Most of the current residential developments are on the fringes of Cyberjaya. Hence, given that TEE Land’s new development is located in the midst of several MNC HQs and universities, we are of the opinion that the development would be well-received upon launched. This is further bolstered by the strong sales in the residential developments in CBD Perdana 1, 2, and 3. In our visits to Cyberjaya, we visited several property launches located in the various CBD Perdanas. Most of the developments have a take-up rate of over 95% prior completion.
Petaling Jaya is located in Petaling, Selangor and is about 40 km south of Kuala Lumpur. The mature city has a higher than proportion of Chinese residents who forms 55% (30% Malays and 15% Indians) of the overall population of 500,000.
According to estimates from CH Williams Talhar & Wong, the Petaling district provides the highest percentage of supply in Klang Valley at 36% or 14,280 units. Demand for industrial properties in prime locations remain high as there is a shifting trend for companies to integrate its office, production and storage facilities within one building.
TEE Land has acquired a freehold land in Jalan Penchala, Petaling Jaya with an area of 96,600 sq ft and a plot ratio of 4. The land which is approved for industrial use currently has an existing building (Kompleks Penchala) on the site. If necessary, the land can be converted to commercial use and the existing building can be torn down for other developments.
Currently, Kompleks Penchala has an occupancy rate of 92% with a gross rental yield of 5.2%. At six storeys high, the building has a gross floor area of 163,692 sq ft. This provides TEE Land the option of receiving rental income from the existing tenants if market conditions become unfavourable or going for new developments if market conditions are favourable.
We view the move to convert Kompleks Penchala to a commercial building with optimism as the office occupancy rates near Kompleks Penchala i.e. Jalan Gasing and Jalan Templer are close to full occupancy.
While Malaysia and Thailand have been at the forefront of TEE Land overseas expansion, the company has also looked at other overseas market in New Zealand, Vietnam, Sri Lanka and Myanmar. The company has identified these countries for future growth due to country-specific events that would propel future demand.
Christchurch is one of the largest cities in New Zealand, with an estimated population of 350,000. The city has a strong economy with an emphasis on the tourism, services and manufacturing sectors.
The 2010 and 2011 Christchurch earthquakes led to severe devastation for the city’s infrastructure and buildings. Being the second largest city in New Zealand, there is an urgent need for reconstruction to restore the city. Besides the construction of housing for local residents, there is also the need to provide temporary dormitories for the labourers involved in the reconstruction projects.
TEE Land has embarked on an operational workers accommodation property (Workotel) in Christchurch. The development of Workotel lies in the conversion of the existing Riccarton Holiday Park which is sited on 174,375 sq ft of freehold land. Upon the conversion, Workotel would be able to house workers as well as up to 300 guests. TEE Land has prior experience in building workers dormitories as it had been the company to provide Marina Bay Sands with a workers dormitory during the construction of Marina Bay Sands.
As the first project in New Zealand, TEE Land could ride on the wave of reconstruction efforts and develop similar affordable residential properties or building workers dormitories. With reconstruction efforts estimated to last for several years, New Zealand could also provide better opportunities for the company.
Strategies for growth
Strategy 1 – focusing on IRR of projects: TEE Land has focused on projects that generate the highest IRR over a short time span. This allows them to recycle capital faster and proceed with other projects. We noted that most of TEE Land’s land purchases are in the open resale market and tend to be of smaller land area as compared to those offered in the Government Land Sales program. This allows them to save on land purchase costs and reduces the need to commit a high amount of capital in developing a large land area.
Furthermore, TEE Land has opted for smaller development projects on their land by building low rise buildings and a small amount of units. This reduces the costs and time for building which allows them to launch the projects faster. It also lessens the risk of holding on to excessive unsold units if the market conditions turn negative. Thus, TEE Land is able to attain a high IRR for their projects.
Strategy 2 – learning in Singapore and applying in overseas: In Singapore, TEE Land started out by developing low rise buildings with a small number of units. This provided them with the opportunity to learn about site selection, materials sourcing and marketing for their development projects. Concurrently, the company maintained its exposure to large scale development projects by collaborating with established property developers through joint ventures. This allowed them to understand about the complexities involved in large scale development projects i.e. project financing, machinery and statutory requirements.
TEE Land has applied this knowledge to their overseas ventures. The company starts with small scale development projects to understand the local market environment and to establish relationships with the local developers. Subsequently, TEE Land would increase the scale of their development projects by working with the local developers and tap on their network.
The time and capital spent on developing low rise properties is lower as compared to high rise properties. Foundation and piling works for high rise buildings takes a significantly longer time as compared to low rise buildings due to safety regulations. Correspondingly, the amount of equipment and labour needed is also much higher which will consume and tie down more capital than necessary.
TEE Land has also gone into several joint venture agreements with other property developers in Singapore. This has allowed TEE Land to gain experience and by pooling their resources, it allows the consortiums to embark on projects that would otherwise not be feasible due to capital restraints. Further, it provides an opportunity for the various partners to leverage on the network of each other for future business development in Singapore and overseas.
Strategy 3 – reducing reliance on Singapore and property development diversification: While the bulk of the company’s projects are still in Singapore, the company has increasingly expanded into overseas markets i.e. Malaysia, Thailand and New Zealand in order to diversify their reliance on the Singapore market and to increase profitability.
Further, the company has started to shift towards commercial and industrial property development projects which will provide the option of capital gains or rental yields. Since its IPO, the company has been seeking opportunities to expand overseas and diversify their property developments. (refer to Figure 9)
The need to reduce the reliance on Singapore has intensified in the past few years due to the slew of property cooling measures introduced to halt rising property prices. Private property prices have increased in the past few years due to low interest rates and increased purchases from foreigners and HDB upgraders.
These effects have already affected potential buyers, as can be seen from the decreasing number of buyers for private residential units. Further, the supply of private residential units is expected to increase in the next few years. (refer to Figure 14 and Figure 15) These factors make the Singapore private property market more challenging.
TEE Land has started to shift towards developing industrial and commercial buildings. Industrial and commercial buildings serve to provide recurring income for the company in the form of rent, and still allow the option of participating in the capital upside by selling away the buildings when it has appreciated in value. This reduces the volatile earnings inherent for property developers due to revenue recognition on a project basis.
The company has outlined several key acquisitions in Malaysia and Thailand that will propel the company’s earnings for the next few years. These projects are not restricted to just residential and include both industrial and commercial.
In seeking overseas opportunities, TEE Land maintains the same prudent approach adopted for Singapore. The company does not acquire land parcels based on possible property or infrastructure development projects surrounding the land parcel.
Rather, the company only acquires land parcels that already have completed facilities and amenities i.e. shopping centres, transport infrastructure and offices surrounding it. This ensures that there will be strong demand for their respective developments. Further, it reduces the risk that their developments would be left isolate in the area upon completion if the other developments do not materialize.
With the end of internal strife, Myanmar is starting on the path of recovery by opening up to foreign investment in various development projects. In lieu of the improving economy, demand for residential and commercial properties should also increase. While the company is looking at opportunities in Myanmar, there are no signs to show that TEE Land had engaged in any projects.
Area of concern
Unfamiliar operating environments: While TEE Land has prior experience in Singapore, Malaysia and Thailand due to their connections with TEE International; this is not the case for the new markets they are entering. Each of the new markets present a unique set of challenges that the company must carefully navigate in order to ensure smooth operations. In particular, countries such as Myanmar have just recovered from internal strife and their legal environment is still in the initial formation stages.
Forecasting and valuation: In valuing TEE Land, we accounted for the net asset value of TEE Land’s new developments based on the gross development value. In addition, factors such as last transacted prices of nearby areas, size and location of each site were also taken into consideration. Due to TEE Land’s various joint ventures with other property developers, we anticipate higher contributions from its share of associates’ results.
Our meetings with the management have allowed us to make assumptions in the calculations of the project values and the timing of completion. Thus, we applied a 20% discount factor for TEE Land’s new projects due to conservatism, recent property cooling measures and the possible unfamiliarity of the local operating environment.
As TEE Land still have progressive recognition of sales from other projects in their majority-owned and joint ventures development, we anticipate higher revenues for the next two to three years. Further, the cost structure should remain relatively unchanged as most of the contracts that TEE Land signed with their subcontractors prevents the absorption of future cost increase by TEE Land.
TEE-ing up for growth
TEE Land has established a reputation for its property developments in Singapore. By expanding overseas and diversifying property developments, it reduces the volatility of the company earnings and also increases the upside potential inherent in these new markets.
The company has a strong backlog of unrecognized revenues that will be progressively recognized in the next few years. In addition, the current land acquisitions should provide the company with further growth in the coming years. We will adjust our discount factor accordingly based on the revenues recognized and the upcoming development plans.
Thus, given its robust fundamentals and positive growth prospects, we are of the opinion that TEE Land is TEE-ing up for growth and initiate valuation at S$0.585. Increase Exposure.
Publish date: 05/09/13