Popular Holdings Ltd - Why did it impair two units at '18 Shelford' shortly before selling them to the CEO?

3/10/2013 – Popular Holdings Ltd has sold two residential units at '18 Shelford' off Bukit Timah Road to its CEO Chou Cheng Ngok.

Chou is CEO, Executive Director and almost 60% shareholder of Popular Holdings Ltd.

Mr Chou will pay a net consideration of S$8.8 mln to the company.

At the end of April, the units were still worth S$12.43 mln.

But about a month before the sale, the company took a S$3.1 mln impairment charge on the properties, bringing the value down to S$9.33 mln.

The company then applied a further discount, resulting in the S$8.8 mln purchase price.

According to the announcement on September 6, the terms and conditions of the transaction were approved by the Audit Committee of the company.

'18 Shelford' is a relatively new development, built on the site of the former Shelford Vale by Popular Land Pte Ltd, a wholly owned subsidiary of Popular Holdings Ltd.

According to page 109 of Popular Holdings Ltd's 2013 annual report, the project obtained its temporary occupation certificate in September 2010.

'18 Shelford' has 19 units, of which 17 units were sold as on April 30, 2013 (refer page 36 of 2013 Annual Report).

In other words, the two units sold to Mr Chou were the only ones remaining at the '18 Shelford' and have a combined gross floor area of 818 square meters (refer page 109 of 2013 annual report).

Interestingly, Popular Holdings Ltd impaired the units by S$3.1 mln during Q1 ended July 31, 2013 (refer page 12 of Q1 FY14 earnings report).

And to sweeten the deal further, the company gave a special discount of 3.5% to its CEO.

Popular Holdings Ltd also sold a unit at '18 Shelford' to the son of Mr Chou for S$3.4 mln in October 2010.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why couldn't it sell the last two units at '18 Shelford' earlier?

According to page 33 of Popular Holdings Ltd's 2012 Annual Report, 16 units were sold as at April 30, 2012.

That means the two units sold to the CEO have been waiting for a buyer for at least the last 16 months.

Now that's a fairly long time, despite it offering a 5% discount along with a 5% rebate for additional buyer's stamp duty and, for direct buyers, a 3% commission rebate (refer the September 6 announcement).

Question

2. What was the reason for the S$3.1 mln impairment?

According to pages 58 & 109 of Popular Holdings Ltd's 2013 Annual Report, the two units at '18 Shelford' were worth S$12.43 mln as on April 30, which was either the lower of the cost or the net realisable value of the units.

The net realisable value of the units was based on two or more independent valuers' reports (we don't know how many).

Therefore it wouldn't be wrong to conclude that the independent valuers estimated the units to be worth S$12.43 mln or more.

But the independent valuers – Jones Lang LaSalle Property Consultants Pte Limited, CKS Property Consultants Pte Ltd and GB Global Pte Ltd – seem to have really discovered something during Q1 FY14.

According to page 12 of the Q1 FY14 earnings report, Popular Holdings Ltd's S$3.1 mln impairment of both the units was based on the average of 'recent' valuations by three independent valuers.

In short, the independent valuers marked down their valuations within three months of the previous reports.

Therefore that makes us wonder what caused such a sudden and sharp drop in the valuations of units at '18 Shelford'.

Did it suddenly have a leaky roof?

(Total:6 questions)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

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