Ho Bee Land Limited (SGX: H13) is an SGX-listed mid-sized property company. Established in 1987, it has property investments and developments in Singapore, the United Kingdom, Australia, China, and Germany. 

In this article, we take a closer look at its operations, finances, and assets to determine if its share price’s large discount to the book value can be of something that value investors can exploit. 

Overview 

Ho Bee’s main business activities include developing residential and commercial projects for sale and holding investment properties for rental income. 

Under property development, the group is best known as the biggest developer which built several high-end condominiums, terrace houses, and luxurious villas at the Sentosa Cove. It also has projects in China (Shanghai, Tangshan, Zhuhai) and Australia (Melbourne, Gold Coast) as joint ventures with local companies. 

The group has a growing portfolio of investment properties in the commercial space as a recurring income generator. The portfolio includes the Metropolis, a Grade A office project with 1.2 million square feet of floor area fully leased to multinational corporations. The group also owns 7 prime office assets in London with 1.6 million square feet of floor area with full occupancy. 

As of the end-2019, Ho Bee’s property portfolio is worth S$6.0 billion. The majority of these are commercial properties located in Singapore and the UK. 

Ho Bee’s property portfolio spread. Source: FY2019 AGM Presentation

Latest Earnings

Ho Bee posted a 40.1% increase in revenue for FY2019. The group has minimal sales activities in the year such that rental income and fair value gain on investment properties made up 97% of the total revenue.  

Profit before tax increased by 15% to $365 million

The core commercial assets recorded strong fair value gains supported by a buoyant commercial office sector. The Metropolis saw its value surged by $168 million, higher than the gain in FY2018 $76.8 million. The London portfolio had a fair value gain of 38.0 million, compared to 25 million the year before.

FY2019 results summary. Source: FY2019 AGM Presentation

Historical Earnings

In the past five financial years, Ho Bee’s turnover as measured by development sales and rental income has risen steadily except for 2016 which was boosted by the bulk sale of two residential projects in Australia. Profit before tax shows a similar trend of stable increase as well.  

Source: FY2019 Annual Report

The group managed to grow its shareholders’ funds consistently at a compounded rate of 5.8% per year. Return on equity stayed mostly above 8%, signifying management’s ability to earn good returns on shareholders’ funds. 

Source: FY2019 Annual Report

This has translated to a steadily-increasing net asset value per share of $5.32 as of end-2019, with a compounded annual growth rate of 5.9%

Cash Flow and Gearing Trend

Ho Bee’s net cash flow from operating activities was positive in four of the last five years. This is attributed to the group’s new focus on recurring rental income. 

The group’s gearing, defined as net debt divided by equity, has hovered around 0.5 times from 2015 to 2017. It increased in the past two years due to debts raised for acquisition of investment properties. 

Source: Self-Compiled from Annual Reports

Strengths and Opportunities

Ho Bee’s pivot to commercial assets rental income was a strategic move that diversifies its revenue away from property sales. As seen from FY2019 results, the investment properties provided the group with steady rental income despite property sales dropping significantly. 

The group now owns a collection of quality commercial properties in Singapore and the UK. Past annual reports show that the assets recorded higher fair value gains and almost full occupancy throughout the past three years. These assets allow Ho Bee to secure cheap financing for its future development projects. The group can also leverage Singapore’s status as a premier REIT hub by spinning-off the assets into a Real Estate Investment Trust (REIT).  

The group has won a tender to develop a biomedical sciences property next to the Metropolis, its flagship office development. Slated to complete in phases from 2023, this project would likely achieve strong synergy with the Metropolis, further strengthening Ho Bee’s commercial assets portfolio. 

Negatives

Ho Bee lacks the scale and operations that allow them to monetise their investment properties which is common among the local real estate big boys. These include property funds or mergers and acquisitions. This limits the potential to close the valuation gap between its share price and the net asset value, which currently stands at a 60% discount.  Value investors who buy Ho Bee’s shares expecting its value to be unlocked should be aware of this risk.

Shareholding Structure

Dr Chua Thian Poh, the founder and CEO, holds an effective stake of 75% in Ho Bee via direct interest and deemed interest in Ho Bee Holdings Pte Ltd. 

High insider ownership ensures alignment of management interest with minority shareholders. However, investors need to be wary that extremely high stakes of controlling shareholders increase the probability of value-destroying corporate actions.   

Dr Chua last increased his holdings through open-market purchase for $1.90 and $1.97 per share in March 2020, suggesting that management saw good value in the group back then.

Conclusion

Ho Bee has shifted its focus from being a real estate developer to a landlord that derives stable recurring rental from its portfolio of prime commercial properties in Singapore and London. 

Based on the group’s business activities last year, I believe it focuses on large scale commercial property developments that can be held as investment property in the future. One example would be the latest project at One North. 

The group is currently trading at $2.13 per share, with a dividend yield of 4.7% and a price-to-book value of 0.40. The company is probably suitable for conservative, value investors who see valuation upside from its substantial discount to the net asset.

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