Is Wing Tai Real Growth Generated Overseas?

Last weekend, as I walked down orchard road in search for shirts. I visited my usual haunt of stores, particularly Uniqlo, G2000, Topman, Adidas, Ben Sherman and Fox.

Two things I realized that they all had in common was:

(1) They were packed with shoppers and (2) They were operated by Wing Tai.

Ben Sherman's “shirt bar” with a dizzying selection of tops.

List of brands operated by Wing Tai in Malaysia and Singapore. Don't they seem awfully familiar to you?

Therefore, lets dwell deeper to evaluate if the quality of its business is as good as its shirts.

Business Segments

Despite the popularity of these brands paving way for a regional footprint of over 240 stores in Singapore and Malaysia, it only contributes to a fraction of Wing Tai’s revenue. Furthermore, net margins are further depressed by the high operating cost of running a retail business.

Majority of its revenue comes from its property business.

With total assets exceeding $4.5 billion, its not surprising that Wing Tai’s core revenue generating segment is from its property business.

Gloomy Outlook For Luxury Residential Property Sales

With cooling measures implemented by the Singapore government last June, prices of non-landed private residential properties in the Core Central Region in 1Q14 has fallen 1.3 percent, the fourth consecutive quarter of price decline.

The gloom brought about in the residential property sector has led to the decline in sales for smaller listed developers like Wing Tai and Wheelock with exposure to the prime residential developments.

What is worrying is that Wing Tai’s Le Nouvel Ardmore and Nouvel 18 may face extension premium in 2016 should its units remain unsold.

This can be observed from a dip in Wing Tai’s operating profit in 1Q14 (30-Sep-13) results onwards.

Valuations

On a positive note, despite the falling demand and oversupply in the luxury residential home market coupled with Wing Tai’s lack of catalyst with few upcoming developments, it seems to be trading at a significant discount.

Besides its cheap valuations, we further observed three positive signs.

1. An overall increasing Dividends & ROE trend in the last 10 years.

   

   

2. Diversification of property portfolio

In previous years, despite deriving bulk of its revenue from the sales of residential properties in Singapore, Wing Tai has accelerated diversification of its geographical revenue streams.

This is evident from its two recent acquisition of land parcels in prime residential district in Shanghai Baoshan and Huangpu Districts.

3. Profitability of its Associates and JV companies

As you might have noticed above where the EBIT generated from China and HK is significantly more than its Revenue.

This would then bring across my next point, which further exemplify Wing Tai’s overseas exposure.

The difference between the revenue and EBIT figures is attributed to Wing Tai’s share of profits of associated and joint venture companies which has been an increasingly significant contributor to its net profits in recent years.

Therefore, as observed in the chart below, Wing Tai’s stream of income generated from Singapore is technically less than half or 45 percent of its net profits.

This shows that despite the slowdown and the limited upside in the Singapore property market, Wing Tai has gradually diversified its portfolio to regional markets that offer a more optimistic growth potential.

Investment Merits

1. Cheap Valuations priced at a 45 percent discount from its NAV or NTA.

2. Low Gearing.

   

3. Increasing diversification overseas, with 55 percent of revenue derived from foreign markets.

4. An increasing ROE and dividend yield.

Investment Risk

1. Property prices for prime residential areas are expected to dip a further 10 percent.

2. Unfavorable sales outlook might tilt valuation ratios such as its P/E ratio.

3. Limited upside to the Singapore properties as a result of an oversupply and lower demand for residential properties.

4. Profits are cyclical in nature.

5. Forex risk due to a significant exposure to overseas markets.

SI Research Takeaway

Wing Tai is a local developer with a long-standing history that has stood the test of time. Through diversifying its portfolio into foreign markets it has proved that it is capable to adapt to a constantly changing and uncertain economic and regulatory climate.

We note that its cheap valuations, low gearing ratios, large exposure to foreign markets fortified by an increasing ROE and dividend yield may prove to provide investors with confidence that Wing Tai would be able to remain profitable amidst a pessimistic short term outlook.

However, more effort is required to dig deeper to understand the profitably and sustainability of its various associated and joint venture companies, before a decision can be made.

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