Tuesday, April 17, 2007
Shun On Construction (983): Becoming a Fund Manager? Part II
Construction business
This is the old build and deliver construction business, which is unexciting and earns little profit. Profits for the last 2 years were more or less $50m. Most businesses are in HK and Macau but future opportunities will come from referral from SOL and the distressed property division in China. Since the scale now is really small I'll simply give it a 8x p/e valuation at $400m and move on.
Distressed property (or what Shui On calls DAD)
This is the newer and more interesting business as it's similar to what SOL does but on a micro level. DAD team will buy up abandoned or half-finished property sites from distressed owners or creditor banks and then complete it and sell for profit. Up to now there's 5 projects of similar nature being developed and 2 more projects will commence later this year (and there's 5 more on the pipeline being negotiated). Each deal is structured in form of a JV with different partners like JP Morgan and other institutional investors.
It certain looks like this DAD business is really promising that SOC is planning to spin it off on a stock exchange, maybe on the London AIM market since Deutsche Bank London branch will be the placing agent. This move is logical since SOC has the reputation and experience (it gained from SOL) to source enough deals but not the capital to secure it (SOC itself is pretty loaded with debt already). And it'd be time consuming to find partners and negotiate a separate JV agreement for every deal. Plus SOC gets to benefit from putting on a second hat as a fund manager and can earn additional fees.
According to preliminary information, property interests and shareholders loan valued at $2.3b (of which SOC portion is $1.1b) will be injected into the listco. DB London is expected to raise $4.3b cash from listing. SOC will subscribe some new shares too in cash subject to a cap of $1.2b and that it'll hold no more than 49% of the listco. I note that these properties cost SOC only $460m and thus it'll make 100%+ profit upon listing. I hope this will look impressive enough to the investors in London, where property prices are on a very high plateau already.
The listing is expected to close before the end of May. If everything runs smoothly the fund will have a NAV of $6.6b (note: I use 'fund' as the listco is like a closed-end fund). SOC will be both the fund manager and the chief contractor earning income from both sides. Management fee will be 2% on net equity (less 0.5% for expenses) and 20% performance fee on the portion of return above 10%. The all-in fee should be 2.5% p.a. assuming an average annual return of 15%, or $165m in dollar term. I don't know if or where taxes are to be paid so I'll simply discount it by 20% to get after tax earnings of $132m. Contractor fees will be 4% on each budget and some incentive fee from cost savings. This calculation is a bit tricky so I won't bother.
Remember SOC has injected $1.1b worth of assets into this fund too. After management fee, SOC will earn 12.5% (15% return less 2.5% fees) on investment, or $138m in dollar term.
The two add up to about $270m earnings a year. Note that SOC will earn just as much from the fund management side using OPM (other people's money) as from its own investment. I've not included any return from SOC's additional $1.2b subscription in the fund yet, which could be earning up to another $150m a year. No wonder SOC is very eager to market this DAD concept abroad. One should really have a close eye on the progress of the listing.
For valuation I'll put a sticker of $2.5b. It's a little below 10x p/e for a $270m earnings but I'm really guessing.
Summary
We have $4.9b for SOL, $2.25b for cement, $400m for construction, and $2.5b for DAD, which adds up to $10b. SOC has $3b of gross debt so the net value should be about $7b. At current price of $18, the capitalization (enlarged by CB conversion) is $6b. So there's some scope for appreciation (IF the spin-off goes through). Or you can see it as a cheaper way to buy into SOL with some freebie call options on DAD and cement.
DISCLOSURE: I hold both 272 and 983 at time of writing.
This is the old build and deliver construction business, which is unexciting and earns little profit. Profits for the last 2 years were more or less $50m. Most businesses are in HK and Macau but future opportunities will come from referral from SOL and the distressed property division in China. Since the scale now is really small I'll simply give it a 8x p/e valuation at $400m and move on.
Distressed property (or what Shui On calls DAD)
This is the newer and more interesting business as it's similar to what SOL does but on a micro level. DAD team will buy up abandoned or half-finished property sites from distressed owners or creditor banks and then complete it and sell for profit. Up to now there's 5 projects of similar nature being developed and 2 more projects will commence later this year (and there's 5 more on the pipeline being negotiated). Each deal is structured in form of a JV with different partners like JP Morgan and other institutional investors.
It certain looks like this DAD business is really promising that SOC is planning to spin it off on a stock exchange, maybe on the London AIM market since Deutsche Bank London branch will be the placing agent. This move is logical since SOC has the reputation and experience (it gained from SOL) to source enough deals but not the capital to secure it (SOC itself is pretty loaded with debt already). And it'd be time consuming to find partners and negotiate a separate JV agreement for every deal. Plus SOC gets to benefit from putting on a second hat as a fund manager and can earn additional fees.
According to preliminary information, property interests and shareholders loan valued at $2.3b (of which SOC portion is $1.1b) will be injected into the listco. DB London is expected to raise $4.3b cash from listing. SOC will subscribe some new shares too in cash subject to a cap of $1.2b and that it'll hold no more than 49% of the listco. I note that these properties cost SOC only $460m and thus it'll make 100%+ profit upon listing. I hope this will look impressive enough to the investors in London, where property prices are on a very high plateau already.
The listing is expected to close before the end of May. If everything runs smoothly the fund will have a NAV of $6.6b (note: I use 'fund' as the listco is like a closed-end fund). SOC will be both the fund manager and the chief contractor earning income from both sides. Management fee will be 2% on net equity (less 0.5% for expenses) and 20% performance fee on the portion of return above 10%. The all-in fee should be 2.5% p.a. assuming an average annual return of 15%, or $165m in dollar term. I don't know if or where taxes are to be paid so I'll simply discount it by 20% to get after tax earnings of $132m. Contractor fees will be 4% on each budget and some incentive fee from cost savings. This calculation is a bit tricky so I won't bother.
Remember SOC has injected $1.1b worth of assets into this fund too. After management fee, SOC will earn 12.5% (15% return less 2.5% fees) on investment, or $138m in dollar term.
The two add up to about $270m earnings a year. Note that SOC will earn just as much from the fund management side using OPM (other people's money) as from its own investment. I've not included any return from SOC's additional $1.2b subscription in the fund yet, which could be earning up to another $150m a year. No wonder SOC is very eager to market this DAD concept abroad. One should really have a close eye on the progress of the listing.
For valuation I'll put a sticker of $2.5b. It's a little below 10x p/e for a $270m earnings but I'm really guessing.
Summary
We have $4.9b for SOL, $2.25b for cement, $400m for construction, and $2.5b for DAD, which adds up to $10b. SOC has $3b of gross debt so the net value should be about $7b. At current price of $18, the capitalization (enlarged by CB conversion) is $6b. So there's some scope for appreciation (IF the spin-off goes through). Or you can see it as a cheaper way to buy into SOL with some freebie call options on DAD and cement.
DISCLOSURE: I hold both 272 and 983 at time of writing.
Subscribe to Posts [Atom]