Should you invest in Ecoworld?

There are not many new companies, i.e. new brands in the market which can get people excited. When Ecoworld was conceived some 3 - 4 years ago, I was surprised by how much it got people excited. Perhaps the Ecoworld brand is more than the company. It is its leader and Chairman Liew Kiew Sin, whom formerly helmed SP Setia and in the making created iconic projects, i.e. among them Setia Eco Park.

When PNB bought a controlling stake in SP Setia, he decided to leave and sold all his shares (at a hugely attractive price) in the company and started Ecoworld with several other partners.

That company is redefining again how a property developer should be - so much so that I feel that the SP Setia brand which he helped to create is now drowned by a new competitor in town. Now after having left (in fact, prior to him officially leaving), he had his proxies (including son) to manage the newly created developer. That has caused dilemmas among his competitors, and created excitement to property buyers as well as stock investors like me.

The excitement can be seen from the below chart where its share price went up more than 4 times as it did a reverse takeover of a little developer in Johor, called Focal Aims. At that time, as in my true nature as an investor, I was never going to chase after a stock that was spiking up especially when we do not know what their actual plan was.

Now their plan is much more clearer. They are very aggressive with their business (despite the slow down in properties market). Since then, Ecoworld has acquired vast strategic land banks. Among them, landbanks in Semenyih, Kota Kemuning, Batu Kawan (Penang) - later rescinded, 2000+ acres of land in Ijok and the latest a JV near the iconic Setia Alam. It has also managed to secure the old Pudu prison project which is now named BBCC in a JV which is owns 40%.

In the reverse takeover, it also injected several other landbanks which it acquired before the exercise. These has made Ecoworld the new kid on the block, which no one will NOT notice especially if you are a property buyer whether it is to stay or invest.

In a short period of 4 years, it is becoming the leader in the property market. Yes, there are Sime Darby, IOI, IJM, UEM, Mah Sing etc., but they cannot keep up with the style that Ecoworld launches its projects. Obviously, it costs a lot (of marketing expenses) as well in the process but it created such a buzz so much so it is I think it created a dilemma to its competitors.

Ecoworld has raised more than a billion ringgit over this period and it is not stopping with the latest, i.e. its plan to raise another RM770 million through another round of private placements. Notice that its main shareholders have committed to subscribe up to 76% of the placement portion at RM1.30 a share.

Part of the newly raised funds is to  subscribe 30% into its newly created Ecoworld International where it is having projects in London and Australia. This group really has huge appetite and are not afraid to execute. That's their strength.

With the softening property market and that has caused its share price to taper to now RM1.26, I have decided to purchase 8,000 units.

At this price, it is at a market valuation of RM3 billion and I think it is attractive due to the amount of investments that the group has put in to create the brand and company. Also, I can envision how big this group wants to be. It may not have the landbank that Sime Darby has but, there are prospectively some land owners that would want to work with them, such as the case in Cascara and BBCC. Even Tropicana (I think), would want to sell part of its land near Kota Kemuning, as Eco World would be able to enhance the value of properties around the same area where they have projects near each other.

Should one look at its PE to judge its value, I think it is the wrong benchmark at the moment as it is still building its value.
To those who are sceptics or do not really get what I am talking about, take a drive to any of its projects, be it in Penang, Selangor, KL or Johor than you will be amazed with how it has redefined building and selling properties.

Take note that when investing in companies such as Wal-Mart, Airasia - look for cost leaders. When it comes to property developers, look for the value they can create from per square foot of land it owns as against other competitors. Without specific data, in my mind, Eco World is probably one of the best.

Here is the latest portfolio.

A look at different developers GDV in Malaysia (as at April 2015)

One of the various measurement for property developers especially for those established ones in Malaysia can be the total remaining Gross Development Value (GDV) that each of them have. Of course in establishing that, one should also not discount the factor of location, balance sheet strength, business margin and their individual business strength.

While I am not really into buying property, I have made substantial visits to launches and new development over the last 2 years. In Malaysia, I would say several developers are in the upper league and these are large scale developers usually one which have township development. I would say those are:

- SP Setia;
- UEM Sunrise;
- Sime Darby;
- IJM Land;
- EcoWorld - whom have made a name in less than 2 years;
- Tropicana - through an exercise it has become a prominent brand with sizeable landbank;
- IOI Properties;
- Mah Sing;
- UOA Development - a company which focus on high rise and city development.

Few more are in the smaller development companies league and they probably have almost the same pricing power. These are Gamuda (due to lack of available GDV), TTDI, Paramount, I&P, OSK Properties, Malton, DRB-Hicom, Hong Leong Properties and several others.

In the past one year, one can notice that the prices of properties have sort of stagnated and total transacted properties have probably reduced. This is a positive sign and in the past few years from 2009 to 2012, I have wondered where does the rise in property prices stop at. If it is not in check, it may experience the past experiences of Japan (1990s) and US (sub-prime crisis).

In any case, I still think there are lots of opportunities for well-established (or regarded) developers as some of them have either the ability to sell at above average prices - such as EcoWorld and SP Setia - hence they have no problem in buying land at current high prices. Just look at the purchase by Eco on the Batu Kawan land. Understood that they were no other bidders. Some others have significant landbank which were owned at very low costs - UEM Sunrise, Sime Darby, IJM Land.

In terms of location, I would think that Klang Valley has the most potential and sustainability as they are just too many new young families that are to be brought up in KL and Selangor. The government has projected that Klang Valley will be homes to some 10 million people by 2020 - up from 7 million now. That represents 2.5 million households (4 people per household) at the very least and that also means the need for about the same number of homes by 2020. If one is to judge how many households are there in one township development - Kwasa Damansara which covers 2,330 acres of land is building homes for 28,000 households and IJM Land which is building Rimbayu on 1878 acres of land is building homes for 10,000 households. How many new homes and how many more townships of that size would there be by 2020 in Klang Valley?

Next in my preference is Penang, then only Johor in which case at the moment is facing oversupply situation, largely due the presence of developers from China. We just are not able to figure the scale the Chinese builders can do, I guess. (Read this where Country Garden Danga Bay just launched a RM18 billion GDV in one launch.)

So how do we value a property development company? I am not in favour of PE as for example in the case of Sunrise in the past, they were pretty much a very strong developer in just one area - Mont Kiara. But its brand and ability attracted UEM to purchase them. Whether it created value for UEM, I do not think so. Property developers need their most important raw material which is land.

Price to Net Asset is also not as preferred due to some land can be cheaper when purchased while its GDV approved may be higher in respect of GDV per square foot.

In any case, one of the stronger ways to look at the value of these guys is the GDV (shorter term i.e. 3 to 5 years) against their market valuation as well as their balance sheet strength. I have hence picked up several companies - those which are purely a listed property counter.

The above are basically those that have market capitalisation of RM1 billion and above (I did not include Sime Darby as it is just too complex and UOA Development.) As for comparison, not all of them are apple to apple comparison (example IOI has significant Investment Properties portfolio). IJM on other hand is a much bigger group which includes construction and plantation.

If one is to look at the market cap to GDV, I am attracted to Tropicana as not only it has a significant development over the next few years with strong GDV but its market value to those is substantially lower to as compared to Mah Sing, SP Setia or even IJM Land prior to it being absorbed into IJM two months ago. (Prior to the delisting IJMLand was valued at around RM5.4 billion.) Additionally, while it had problems with regards to its sizable debt, its sale of several businesses i.e. the Tropicana Mall(and office), Austin Powder, land in Kota Kemuning to EcoWorld and a piece to a Chinese Developer would have reduced its net debt to below RM1 billion.

Below are the presentation made by several developers in terms of acreage and GDV.

IOI Properties GDV. It has a significant landbank in Johor just like several others.

EcoWorld's GDV without including the Batu Kawan purchase

MahSing's GDV. Notice its significant landbank in Greater KL as compared to the rest

SP Setia.  Notice the very significant GDV in Battersea.

Tropicana. Still significant landbank and GDV in Johor, but as per above it is focusing in Central region which will keep it busy for many years

If one is to notice above, Johor seems to have more total GDV than Klang Valley and Penang combined. Is Johor so much more attractive? We have yet to include UEM and Country Garden which seems to have few hundred mbillion GDV in partnership with the Johor Sultan.

Trading Thoughts: What's brewing at Salcon???

Now this is one company which should not be within the radar of a fundamentalist - hence defies what I practice. Its PE is about 25x or even more. Revenue trend is unsure. The only saving grace is that the share price of RM0.62 is currently below the NA price of RM0.80.

What causes the stock to have a recent uptrend or attracting some attention is the signing of contract with Eco-World Development ("Eco-World"). Most people know (or speculate) that Eco-World is the proxy to Tan Sri Liew who has his son as a director and several of his ex-partners from SP Setia. He is after all leaving SP Setia come 2015. Definitely need something to carrying his brand and cash he has gotten from his sale of SP Setia's shares.

Eco-World is also in a hurry as it has bought up land worth hundreds of millions from MMC and DRB-Hicom and one or two more if not mistaken. What is not said in the article if we turn it around is the deal with DRB-HICOM, where Eco-World is allowed to do staggered payment which is going to be beneficial to the latter. Why would Eco-World negotiate for staggered payment? Cashflow! From this term, Eco-World would need to be aggressive NOW, hence the major launches and hiring of staffs in a hurry. Now we know that the third, fourth and fifth payment is over the next three years (as below) which could become significant in terms how much in a hurry Eco-World must be to get as much as possible from launches.

Trying to piece up together - one of the ex-director in SP Setia - Datuk Leong Kok Wah is a director in Salcon.

Cashflow is fundamental to Eco-World, as through the namesake and people involved, I think selling properties is not going to be a big issue given the vast experience these group has. One should also note that some of these guys have sold SP Setia's shares to the tune of hundreds of millions. Eco-World may need a vehicle though. Salcon is one company which behind the scene, there are some very rich people. Look through the Chairman's CV (who owns the largest chunk) as well as the second largest shareholder. They will not have problems raising funds. On top of that, it is not controlled by one major shareholder - as below - which is attractive for any party as large as Eco-World.

I sincerely do not know what's happening but these trend and connection - be it they want us to know or just pure speculation, I definitely am not able to confirm.

But yet again, these guys behind Salcon are rich, they do not need or I would think even bother about the play. What Salcon needs though is the boost in its business as it has been struggling to grow - although some reports say that they are in the midst of building a decent concession business. This I am not in the know to evaluate.

Notice another thing, after all these while, until recently some of the directors have started to exercise their ESOS at RM0.50 - could there be something brewing?