Interview With Keith Chu from Boustead Singapore

We had a great chat with Mr. Keith Chu, the Senior Vice President of Corporate Marketing & Investor Relations at Boustead Singapore Limited. Keith currently sits as a key decision maker on the two-man Group Investment Committee for a S$50 million cash management programme and treasury investment fund. He was also the leader in the establishment of the Group’s S$500 million multicurrency debt issuance programme in August 2013 and a core member of the team handling the demerger and listing of the Group’s subsidiary, Boustead Projects Limited on the SGX Mainboard in April 2015. He concurrently leads the corporate marketing and investor relations portfolios for both SGX-Mainboard-listed entities. Boustead Singapore and Boustead Projects have long been well loved companies among value investors.

This was recorded during our June Facebook Live Event. Here is the complete interview with transcript. Enjoy!

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Stanley Lim: Hi guys, welcome! Welcome to Value Invest Asia Facebook live. This is our June edition and we are very honored today that we have with us Mr. Keith Chu from Boustead, Singapore and Boustead Projects. Keith is actually now the Senior VP for Corporate Marketing and Investor Relationship at Boustead Singapore, and today, we are very happy for him to come and chat more with us about what’s going on with Boustead Singapore and Boustead Project.


Interestingly, I’ve met Keith in my previous job as an analyst and he just told me that he has actually been with Boustead for 15 years. So, that’s a huge amount of experience with the company and I’m sure he’s the right man for us to know prop more about the company, that without further do, let’s welcome Keith. Hi! Keith, how are you today?


Keith Chu: Hi! Stanley, I’m good. Thank you! Thank you for this invitation also to speak. First time on Facebook live. Yeah, interesting experience!


Stanley Lim: Yeah, definitely! Thank you so much for joining us. If you guys have any questions for Keith, just ask along on the command step and I’ll try to get him to answer as many questions as we can. Before we put the question to the floor, let’s maybe talk about some of the current event happening with Boustead Singapore, especially I think a lot of people is interested about your current White Rock Medical Acquisition. Can you maybe talk a little bit about what is that about and how does the management see it?


Keith Chu: Although, you know that Boustead pretty much has been talking about acquisitions and trying to do something for the past decade, ever since the global financial crisis, came and went. So for us, we sort of reach a stage where obviously organic growth is a lot more difficult to achieve now that we are of a certain size, and so acquisitions and inorganic growth seemed like the way to go now, because I think most people were always thinking that we would make an acquisition within one of our three divisions, and that’s always been actually how our direction.


But in the past year and half, we started to open up our minds to the possibilities of wiring in other areas, especially areas where there could be long-term prospects, market that is underserved, and of course this is where White Rock comes in. It’s something that we basically have begun to look at. In fact in terms of health care in general, as far as a year back, there were also other opportunities that came along and in terms of management, there was a great interest, in fact, given the long-term prospects of healthcare as well as the demographics of our aging populations, whether it’s globally or here in Asia.


So, White Rock quite clear that it’s a small acquisition something at $19 million, quite manageable and certainly for us, it will be a fourth division, something that diversifies our way from some of the most cyclical industries that we are in. I mean, if you talked about oil and gas and the construction industry here in Singapore for example, those are cyclical in nature, right? So, I think in terms of health care, clearly less cyclical, no matter whether or not the economy is doing well or badly, it’s an area that clearly people need and pay the focus on White Rock. I mean if we look at White Rock specifically that three areas in which is really focused, these are the three areas are really rehabilitative care for the elderly usually cancer aside, not cancer, but cardiac or stroke patients. The other area, sleep therapy, which is in a way related because it’s usually what they call comorbidity, which is associated disease that comes along with people who suffer from cardiac or stroke.


And then the third area is spot science, so rehabilitate in nature again, and also focused really on getting people back to be their normal selves in terms of mobility. So it’s a pretty underserved area at this point in time. What is interesting is that it has an engine platform, big presence here in Singapore, Malaysia and Thailand; and the other key markets that we’re looking at in Asia, and of course, it’s also serving through an associate company, the whole of China, so that is a very important market for us as well.


Stanley Lim: Right! Okay! You talked about, you know, your management has always been looking to grow by not just organically but also through M&A. So, is this deal sort of, did they came to you or you guys have – I would say maybe an official investment team that, you know, search around Asia to look for good acquisition. How did that process work and how did it lead to this deal?


Keith Chu: Oh yeah, you’re right. In most cases of course, acquisition targets are brought by either brokers or banks who are the usual intermediaries, but in this particular case, I think if you saw the announcement, you have notice that Goh Boon Seong, who is our audit committee chairman, is also the CEO of White Rock. He owns 1.8% of the company, a very small stake. So you can see he’s very much, even though he was a founder of the company. There were other big shareholders who put in the money and his role was really done as a professional manager for the business. So given his position when the time came for basically really the divestment on White Rock’s side of things, he came directly to us and knowing that we had also the financial capability to make the acquisition and also to fund future growth that will be required for this business.


Stanley Lim: Okay! And will Mr. Goh continue his tenure as the management or you guys are putting in your own team.


Keith Chu: Is definitely continuing, is going to join us as the CEO of our quite business and also his entire team along. So we’ve got the good experience thing of that entire team, and of course I would have been no intention to take over business and try and run it ourselves.


Stanley Lim: Yeah, no problem! I think more and more of us are joining. Hey, Grace! Nice to see you again, you’re here again. I think so it more or less signified that you know, Boustead is moving, not say in a new direction, but it’s more open to companies of the other industry in the future, that do you guys have maybe like a KPI of how many deals you need to do a year or right now the M&A process is still quite ad hoc for Boustead?


Keith Chu: Well, if you said KPIs for us, I think you have failed miserably. Were far too many acquisition targets that we have looked at and you know, with walked away from many of these simply because, either you know, you go in and then you do your in depth due diligence and you find that something’s not right in then, in cases like for example, the oil and gas industries where we’ve been searching over the last couple of years ever since the downturn happened, that’s always the question of can this company survive prolonged downturn. Usually, we find it very difficult to answer that affirmatively, yes, you would buy that company; you would survive a prolonged downturn.


Stanley Lim: Yeah, of course! That’s interesting to know. Let’s go into the, I wouldn’t say traditional, but the key main businesses are Boustead mainly the geospatial, your energy business and of course your real estate solution business. Can you maybe give a little bit background on each of this business and just let the audience understand what are the three business units are really doing?


Keith Chu: So, before this I think we had three core divisions, right? And the first being our energy related engineering division, primarily most of the businesses are in oil and gas, and if you think about it, quite a part of bit of business is really the downstream oil and gas sectors. We provide process heaters, we see recovery units to that sector. We also have process control systems which we provide to the upstream oil and gas sector, and we have water and wastewater engineering, which is really for the energy sector in general.


Moving on, we have the real estate solutions division and that’s very big here in Singapore. Of course we’re the market leader here in Singapore from the private sector. We design and build industrial buildings or multinational clients. It has extended also to design, build, and lease where we own the buildings and we lease it on a long-term basis, so we have a portfolio of properties today. Lately of course, we have been adding more developments in overseas markets as well for that.


The final division is geospatial technology, and that’s very much in terms of big data mapping analysis and really smart maps, if you think about it for the management of infrastructure, the deployment of smart cities, so all this requires underlying mapping platform and that’s what we provide, including the services associated with it.


Stanley Lim: Right! That’s very interesting like a wide range of businesses and solution. I think Grace have a question for you, you know, talking about say your real estate solution now or maybe the energy business because they work on a project basis. Are you seeing improvement in projects on hand on winning new contracts? Are you able to see, you know, let’s say in the next one to three years, are we expecting better times for Boustead, especially maybe in the oil and gas we’ve seen that it hasn’t been doing so well, not just for Boustead, of course for the entire industry. Are you seeing some bright spot right now?


Keith Chu: Okay, well I’ll start with really the real estate side of Boustead project. I think when we look back, FY 2017, $140 million in contracts secured; FY 2018 the year just passed, we had 233 million in contracts secure, so you can see that’s definitely been an improvement in this particular area. We’re sort of riding on the fact that you know, that the Singapore government has put out many industry transformation that’s right? So essentially, all of these industries eventually need to transform themselves. I think one of the key areas, of course, greatly we’ve talked about is automation, digitalization industry for really right so.


Essentially, when it comes to even the industrial facilities that all of these industries are using, many times they have to build or they have to revamp their existing industrial facilities just to get to that kind of stage where they can transform their business, so it’s not as simple as, I just take my existing processes and then I change it to meet the new transformation roadmaps and being laid out. They have to do quite a fair bit or so in terms of infrastructure.


What we’re saying is that in the logistics sector, one of the first movers actually within the past year, we’ve picked up four contracts there, and three of them are in fact for very advanced type of logistics facilities, talking about the highest level of automation, robotics being introduced and in a way the three market leaders in the logistic space appointed us really because we have the necessary experience to build those type of facilities for them.


So, I would say that in terms of the outlook, it seems to be improving. I think for industrial real estate as a whole, not just talking about what we are focused on, seems like there’s a bottoming out right now and more contracts flowing through. Of course, JDC is also helping out because they’ve been putting out quite a number of tenders for very mega industrial project, so in a way, you know, more players then have the chance to participate.


Stanley Lim: Right! Before we go onto the oil and gas sector, maybe a follow-up question on the real estate solution, so for this maybe current cut your current book order right now, do you have a split between how much of it is coming from government projects and how much of it is coming from the private sector?


Keith Chu: By and large actually, everything that we get come from the private sector. So we’ve been starting in the past year actually to tender for government projects as well, but we haven’t been successful yet at first project. So usually where we get the points in terms of the new tendering system is in terms of quality and of course the methods used, but we tend to lose points in terms of pricing. So it’s a difficult balance as more and you know, until the point where we get that balance right-right. I think we will be trying obviously still to get government projects, but it may not be as easy.


Stanley Lim: Right! No problem, I understand. Okay. Maybe you can share a little bit about the energy side of things as well.


Keith Chu: Sure! I think we look at energy of course looking globally, oil and gas prices have now even touch a high of 80 recently contracted  out of 70 plus. We’ve looked at it and we also feel that things are somewhat improving. It’s not a very quick improvement, but certainly it’s much better than a year ago. So a year ago, $40 million in contract secure; in the past year, we’re talking about $80 million in contract secure, it’s still not high enough for us, but at least we’re starting to see activities move again. Oil and gas clients who are willing now to make final investment decisions versus in the past just delay-delay butter down the road. So, I think from that perspective, we also feel slightly more confident of things. That being said, we started by a very hard and long journey in terms of a full path to recovery.


Stanley Lim: Okay! It seems that from both your comments, you are cautiously optimistic, that the right word to use.


Keith Chu: Yeah! I think you would have noticed that the change in toll rates. Someone actually told me is like trying to read the set minutes while you ask interest rates.


Stanley Lim: Okay! I think we have another question from the floor. One is asking for Boustead project. Are you guys up against; he said, are you guys up against the big IT vendors for these types of digital transformation projects? I’m not quite sure what he means by the big IT vendors, but maybe you can talk a little bit about your competition, who are they, and are they like really large guys or mainly firms of your same size?


Keith Chu: I guess this is probably in reference to geospatial technology, right?


Stanley Lim: I think he was talking about just now you’re talking about the real estate where you have the government plan to do more digital transformation initiative, right? For so for this kind of new type of buildings, who are you actually competing with? Who has the capability of building all this? I guess smart buildings.


Keith Chu: Well, I guess because; of the focus really on high infrastructure here. We’re really up against like still of people like Ascenders, Maple Tree who would be our biggest competitors. They are developers but of course, you know, with the government backing, they’re able to put together quite good packages for clients. But having said that, I guess, you know, when it comes to certain sectors such as aerospace, logistics, high tech manufacturing, these are all places where we’ve built our market leadership position.

And so clearly, when it comes to also designing and building these type of facilities a lot or because around the processes of our clients and that’s a very important part we understand and are able to build around that. The other area of course is in the fact that not only does it have to be built around that process, but in a lot of cases, multinationals are now looking to go Grimaud, right? So, Grimaud Platinum buildings are actually a space where we are the market leaders well, 18% of all the new industrial buildings are back that none have been built by us.


Stanley Lim: Okay! That’s interesting statistics. I do have a question for your energy business like in more on the longer term, a slightly longer term, we are seeing that, you know, there’s this slow but kind of a sure trend moving away from oil and gas energy supplies, like say the automotive industry is moving more into battery technology or you know more and more renewable energy now is coming up. Would that impact your energy business, you know, given that you are still serving the oil and gas industry predominantly. Are you able to use your solution to suit other energy source like renewables or batteries?


Keith Chu: I guess, you know, in this particular space, the one I know of course the combustion engine, petrol engine is very hard to replace overnight. So, clearly even with the advent of electric cars right? It will take some time obviously for that transformation to come through. And I think also increasing maybe we have to differentiate really that the oil and gas industries is no longer really a single industry, but the fact is that you have oil and you have gas. And how gas is important is, really we feel as an intermediate solution between oil and renewables because they’re not going to reach even a stage where renewables makes up most of their energies supply, for example, a short frame of time. So gas being not exactly the cleanest, somewhat clean and oil right, is going to have a long runway we’re talking about easily 20 years to 50 years.


The other thing is that a lot of people forget that our power plants which are supplying that eventually that electricity to electric cars, right? Most of the cleaner power plants are really actually gas, right. So gas is going to be here also for a very long time. So we find that of course our heaters, they have been used for both oil as well as gas, and so a lot more deployments in terms of the future, in terms of gas processing plants, LNG plants will add, in terms of providing the heaters for gas distillation.


The other thing is that our waste recovery units also are very important in this whole aspect. If the use the word greenifying the [inaudible 23:45], the streetscape which is extremely polluted in this by itself. The fact is that we are helping to at least reduce the carbon footprint in a way. The idea really that you are recycling, reusing wastes gases, you’re not flaring it off into the environment. These are aspects of what the waste recovery units do, and they also increase the efficiency of gas turbines by double the amount. So it’s a very significant uplift in terms of efficiency, so these are very important.


With that being said, yes in time obviously, we are going to try and see whether our products can be pushed out by the industries that are the industries to do use both heaters as well as we see recovery units but not as big a way as the oil and gas industries.


Stanley Lim: Right! Okay! So, this probably still ways for you guys to sort of diversify away your revenue stream away from oil dependent in that sense, right? That’s right. Okay. I think let’s move onto your geospatial business. I think many of us, including myself, we sort of see your geospatial business, like the crown jewel of Boustead, Singapore, right. It’s always consistent, always growing, moneymaking and, but over the years, it’s sort of strike me as it still predominantly still very much focused in the Australasia region. What is the plan? Are you guys able to expand beyond that your distribution rights with the company? Can you maybe talk a little bit about that? Are you able to scale this business up significantly?


Keith Chu: With attempted to in the past? I would say that in order to broaden our exclusive distribution network, we would have to buy over another exclusive distributor of ESRI Technology in another country. So, that would be the only way given that all the countries have been given out already. We attempted too in the past, but you know, this kind of thing, it actually requires, first of all, a blessing from our principal in the US as we have thought, and we got those blessings in fact, but we couldn’t agree finally on the valuation, so you could say that the sellers spend well .


In our perspective, they were asking far too much for those businesses. So in the end, we didn’t take on new territories or try to acquire new territories. How we are looking at trying to expand the business and it’s going to be a slow processed. Really there are certain revenue streams that perhaps we see going out. So a lot of people obviously are using big data to analyze and then sell solutions and make money from it.


We’re also going down that pathway; we’re trying to find revenue streams that we can monetize ourselves. Even we have some data, I’m not saying that we have a lot of data, but we do have some data within our grasp, some data can be bought and what we’re trying to do then is to provide a solution that somebody can buy without having to go through the process of building their own a system of solution. So we’re using the ESRI platform. We produce a solution for them, we gathered the data and so we analyzed it, and then we sell them that part of it rather than they buy the ESRI platform to do it themselves.


Stanley Lim: Oh, okay! Interesting! And sort of, I guess because given that you are the exclusive distributor to ESRI and a lot of your potential and your revenue is coming and very dependent on what ESRI is doing. Do you see a trap? What I’m seeing is a lot of the technology is moving very fast in terms of development, and also it’s sort of becoming democratized , like you’re talking about satellites in the past is a huge satellite, but now they have a cube set where almost anyone, not anyone, but generally speaking, most people are able to send up satellites now, and we’re talking about your geospatial technology on say traffic mapping, I don’t know if a WEIS or Google they are using the ESRI at the background, but you know, we see more and more of this company, both large and small startups that is you know, destructing this kind of industry. Does that bother you? Is that a thing that investors should be worried about?


Keith Chu: I mean you’re right. Technological disruption at this point in time, it’s probably as highest in history, right? But we’re actually pretty happy with the situation at the moment because of the fact that this disruption a lot of them are riding really on the need or underlying mapping platform. So, like you said WEIS right? WEIS actually rides on the ESRI platform in the background? We’re talking about quite a number of start-ups around the world as well as here in Singapore where they are also increasingly tapping on the ESRI platform.


Many of them of course, been startups right? They try to tap almost free, but they use Google maps for example, what they find is that the information is all debit by Google and it tends not to be verified, right, because it’s free information again. So, that platform also limits that ability to do analysis, it doesn’t have all the tools that they need. So what we’re finding really is that when it comes to the need for more robust tools, and to do more things, then a lot of companies have come to ESRI, and of course the government agencies, most of them are using ESRI rarely because it’s always stayed at the forefront in terms of technological development.


Now we feel that with the advent of smart cities, with the advent of Internet of things, big data. Actually, we’ve been doing the mapping for all of these for the last 40 years. It’s just that within the last few years you can say that things have really much work in this particular area, so that helps our business in the long run obviously.


Stanley Lim: Right, okay! That’s interesting to know, you know of course as a consumer standpoint, when we see new startup coming with a mapping technology, we always taught, you know, this is going to disrupt your business, but actually is an interesting point that you mentioned that a lot of a startup is actually using the ESRI platform, so that’s very good to know. On that note, right, because you have spin off your real estate solution Boustead Project, is it not surprising maybe in the future that we can expect maybe you guys will spin off to say the geospatial business and also the energy business. Is that something you guys would consider?


Keith Chu: Yeah! To be frank, we are not shied away from looking at that before. In fact, when you know Boustead, when basically our energy division had been doing very well, but there have been opportunities at that point in time either to do a separate of kind listing on its own or also a way to be divested into totality at very good valuations back then. Of course, we didn’t have the foresight to know how this recession year, otherwise maybe we have made certain moves, right. But anyway, the thing is that with any spin off of a division, I think that the key thing is really hasn’t reached a critical mass could it stand on its own without having Boustead Singapore in terms of a need to finance any future growth without having to require our strategic direction in many ways. So far of course, many Boustead Projects has met that criteria. Not saying that others won’t, but I think they would still have to build up their business or a larger scale in order for us to then consider seriously to do a spinoff of these divisions.


Stanley Lim: Oh, okay! Interesting! Maybe we can close that off with some discussion on Boustead Project. Boustead Project of course now from your annual report, you talked about the three main type of business model on Boustead project. You know your view and design, your leasing, and of course some strategic partnership or investment, of course now is still design and build that is the main bulk of your revenue stream, but you will see, you know, you guys are moving more and more to what it’s just owning the property outright and having a leasing model for your future projects. Is it something that you are seriously on building up your leasing portfolio?


Keith Chu: Well I guess, of course, design and build has always been our bread and butter. I don’t think we’ll ever get away from that in terms of, at least here in Singapore. But if we had a choice, we still love to do more in terms of development and leasing. Of course, quite a fair bit of this is really up to our client, right, but is there global mandate on whether they own their own facilities, or lease facilities. So, that opportunity is there for development and leasing, we would rather take that option because it comes with the recurring income for the long term, so that will be our aim.


Now overseas markets, really three overseas markets at this point in time, which is Malaysia, Vietnam, and potentially Indonesia, I’ve skipped China is because China is very difficult market to basically do any of these things, but the other three overseas market. We find that trying to do just pure design and build services is much more difficult, clearly because the clients themselves one proposition where you have the land, you are able to design and build for them, and the location has to be right.


We’ve come across the situation where we can do the design and build for them quite easily, but fairly we don’t have the land, so we’ve been looking very actively across these three markets for a land bank that would be suitable, one which is in a good location and one which really meets the target industries that we are out after. Quite a bit of it causes right now focused on logistics type of hubs, networks, so a land in that space and we have been looking for land partners as well. So, these land partners typically of course have land but they don’t have the designer and build expertise, also don’t have clients [inaudible 36:53].


Stanley Lim: Okay! That’s interesting of how you guys have a unique position on making everything work. But I think Edmond brought out a nice point saying that you know, because you guys are focused so much on the design and build of a building, when the company wants to lease it from you guys you know, does it include a risk for you because it’s all designed for their purpose and you know, if they’re businesses isn’t take off and they have to move out. Is that a risk for you to have a white elephant or you’re quite easily you can convert that to another purpose or properties?


Keith Chu: That’s a fair question. I think when it comes to what we do, we have to basically go through a very in depth due diligence process, also our clients. And I’ll give you an example, during the global financial crisis, just before that, we truly turned away half of all the opportunities that we were seeing because; we felt that after doing the due diligence on the clients, that balance sheet was not strong enough and clearly there, even their profitability at that time also wasn’t showing that they could be very good paymasters, so that part of it is something that we always look at.


Secondly, when it comes to the clients who come under this kind of proposition leasing proper proposition, we always asked for corporate guarantee from the parent company, right? So that’s supposed to cover really the duration in 10 years or more until so, they pull out halfway, right, this corporate guarantee we have something to seize upon.


The third thing that we do is; I think this goes against conventional thinking. We don’t do any facilities usually for monopolies. You’re thinking monopoly, a good business right? By rights, they should be there for long time, but the reality is what happens if they pull out of Singapore, there is no competitor who could take over the space very easily. At least with a competitor, they could likely take over the space with minimal disruption as well as minimum works that we have to do to the existing facility.


And the very last thing that we typically do is in terms of the structural design, which to put in some flexibility that of course you can put in total flexibilities because certain things of the structure cannot be changed, but some flexibility than you could adapt building to a new use to a new industry if it need be.


Stanley Lim: Okay! That’s very reassuring to know. I think let’s have the last question. I think Mr. Lee’s asking the last question because of your leasing business, would you consider once you have a sizeable portfolio, you know, even to do Boustead REIT or maybe some of your properties that you’re open to leasing it now or maybe midterm off your lease, you decided to spin it off, and sell it to another REIT, maybe talk about what the management view on this kind of issue?


Keith Chu: I guess you know we were one of the first movers right when it came to design, build, and lease. So we had actually quite a number of properties early on and then we were selling one to two a year, we build out maple tree logistics trust, so they put this up the lease, and few other competitors of course in the REIT market, and so clearly the end benefit was going to these guys eventually. So, around the financial crisis period, we said, okay, let’s stop, benefiting these other parties why don’t we do things ourselves and lock things ourselves.


The reason, I mean, at least in the past decade, holding onto all these properties and trying to build up a sizeable portfolio, tension really to put it into ideally, either you have a lease early for a property trust, probably trust is not listed that can basically in such an instance, you know, we are strong sponsor to this reach of trust. We also take a controlling stake in it so that we control the direction of it, we will be part of the manager then not the properties, but of course in any case you get the tax incentives, right you get the vision, structure, whereas in the other cases that we’ve looked at, you don’t get that. So, it’s a fine balance at the moment. We haven’t yet reached that critical mass to do it. Then we have been pretty aggressive in picking up new deals over the past few years.


So, we’re talking about portfolio size really almost doubling in terms of the value, once we include all our joint venture partners and [inaudible 42:39] data. So we’ve been able to do that part of it, but the final move, whether they do it, the REIT or our property trust that part of it we haven’t yet decided that. The other thing I could probably say is that we probably wouldn’t sell out totally to another revamp or editor of things like that. So we have no intention to let them enjoy those benefits.


Stanley Lim: That’s extremely good to know for all the Boustead shareholders. Thank you so much for your time, Keith. It has been a really insightful interview and I guess I will take away. It’s really – Boustead is trying to form itself to be able to continue to grow for the future and that really would not just include your three core businesses, and you guys are really open to other new businesses coming into the fall, and I’m really excited to see your development and I wish you all the best Keith. Thank you very much.


Keith Chu: Thank you!


Stanley Lim: Thank you! See you guys.


Keith Chu: Thank you!

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