heeton holdings limited: credit initiation report...heeton holdings limited: credit initiation...

Heeton Holdings Limited: Credit Initiation Report

Important disclaimers at the end of this report

iFAST Research Team 6 December 2017

Debt Programme: S$300,000,000 Multicurrency Debt Issuance Programme

Issues Maturity Currency Amount Issued Payment Rank

HTONSP 6.100% 08May2020 Corp (SGD) 08/05/2020 SGD 75MM Sr Unsecured Source: Bloomberg, iFAST compilations

Summary and Conclusion

We are initiating Heeton Holdings Limited (Heeton) with a Neutral issuer profile. Heeton’s credit metrics have improved gradually since 2014, and the near-to-medium term outlook looks positive with the recovering Singapore property market. However, cash flows and interest coverage remained areas to be closely monitored, and gearing is likely to rise following capital injections into JV projects.

We deem Heeton’s overall financial risk profile as Significant and its overall business risk profile as Fair. Heeton’s indebtedness looks moderate measured against its tangible assets, and especially if compared with its small-to-mid cap peers. But the company’s credit metrics are impaired by its weak cash flows and interest coverage ratio. While the recent broad-based economic growth in Singapore and positive market sentiment benefit Heeton’s property business, the exuberance in the local property market has also brought about more aggressive land bids and increased competition.

We are Overweight on the HTONSP 6.100% 08May2020 Corp (SGD), one of the highest yielding SGD-denominated bonds in the property sector. We think the bond offers generous carry relative to Heeton’s credit risk, despite the small issuer size. At prevailing pricing, HTONSP 6.100% 08May2020 Corp (SGD) is trading at a YTM (ask) of 5.68%, and we like its relative valuation compared with similar-tenor issues from other mid-to-small cap developers in Singapore.

Company Overview

Heeton Holdings Limited is a real estate firm established in 1976 by Mr Toh Kai Cheng. The company’s main business segments

are property development, property investment, and hospitality operations and related services. Heeton was listed on SGX-Sesdaq

(Catalist) in 2003 before transferring to the SGX Mainboard in 2007, and it has a market capitalisation of S$179m as at 6 Dec 17.

As a property developer, Heeton has an established track record of completing 43 development projects with approximately 4,500

units sold (as at 30 Sep 17), with most of the projects being residential projects in Singapore. The company usually takes on larger-

scale projects via joint venture partnerships with other real estate companies such as Chip Eng Seng Corporation Ltd, Koh Brothers

Group Limited and Oxley Holdings Limited. As at 30 Sep 17, Heeton has three projects in Singapore and two projects overseas in

its development pipeline (see Table 1). Among the five listed ongoing projects, only the Leeds development is reflected on the

company’s balance sheet as development properties, while the rest is accounted as investments in associates/joint ventures.

Primarily due to sales from the 100%-owned Onze@Tanjong Pagar, which obtained TOP in January 2017, the property segment

generated S$27.3m of revenue in the nine months ended September, contributing 57.6% of total revenue (see Chart 1).

Table 1: Heeton Holdings Limited’s development project pipeline (as at 30 Sep 17)

Project Name Location/ Type

of Development Tenure Effective

Stake Approx GFA

(sqm) %

Sold Launch

Date Completion

Date

Trio Singapore/ Commercial Freehold 15% 3,445 37.2 May-14 2017

High Park Residences

Singapore/ Commercial and Residential

Leasehold term of 99 years from 8 Aug 14 20% 112,300 100 Jul-15 2019

Woodleigh Singapore

Leasehold term of 99 years from 11 Oct 17 20% 58,640 - - -

188 W Residences

Australia/ Residential Freehold 18.15% 28,000 -

To be confirmed

To be confirmed

Leeds/ Hampton by Hilton Leeds City Centre

UK/ Hotel and Residential Freehold 55.0% 84,568 -

To be confirmed

To be confirmed

Source: Company

https://www.bondsupermart.com/main/bond-info/bond-factsheet/AN3892790





Chart 1: Heeton’s total revenue and segment breakdown

In recent years, Heeton has been increasingly channelling its resources towards its hospitality and investment property segments,

looking to build a strong recurring income base. As of 30 Sep 17, the company owns a total of 16 investment properties and hotels

(see Table 2). Heeton announced on 5 Dec 17 that it has entered into a sale and purchase agreement for the disposal of The

Woodgrove at S$55.85m, which is S$22.85m higher than the property’s book value of S$33.0m at the end of September. The

investment properties, excluding Sun Plaza and 223@Mountbatten which are accounted as associates/joint ventures, generated

S$13.3m of rental income in FY16 (9M17: S$9.9m). According to Heeton’s results presentation for 3Q17, Sun Plaza and

223@Mountbatten provided S$12.3m and S$0.6m in FY16. Adjusting for Heeton’s effective stake in these two properties and

excluding the revenue from The Woodgrove (FY16: S$2.5m), we estimate that the company generates ~S$17.0m p.a. in rental

revenue from investment properties.

Heeton first ventured into the hospitality sector in 2011 when it purchased a stake in Mercure Hotel Pattaya in Thailand. The

company has quickly scaled up its hospitality portfolio since then, bringing the number of hotels it owns to eight operating

establishments as of 30 Sep 17, with another three hotel developments in the pipeline. In FY16, Heeton’s hospitality segment

generated S$9.8m in revenue (9M17: S$9.5m). Although the segment’s profit before tax was a meagre S$0.9m in 2016, it was

nevertheless a decent improvement from the S$2.1m loss in 2015. Looking forward, we expect Heeton’s hospitality segment to

play a more important in terms of revenue and earnings contribution, as the company consolidates its acquisitions and build

operations up to an efficient scale.



Table 2: Heeton Holdings Limited’s investment property and hotel portfolio (as at 30 Sep 17)

Project Name Location/ Type of Development Tenure

Occupancy Rate

Fair value (S$m)

Effective Stake

Tampines Mart Singapore/ Retail and Commercial

Leasehold term of 99 years from 1 May 93 96% 110.0 100%

The Woodgrove Singapore/ Retail and Commercial

Leasehold term of 99 years from 26 June 96 97% 33.0 100%

Sun Plaza Singapore/ Retail and Commercial

Leasehold term of 99 years from 26 June 96 100% 353.0 50%

62 Sembawang Road Singapore/ Transport Facilities

Estate in Perpetuity 100% 9.5 100%

223@Mountbatten Singapore/ Commercial

Leasehold term of 15 years from 20 Feb 12 64% 42.0 16%

Adam House UK/ Serviced Office Freehold 95% 25.5 75%

Super Hotel Sapporo - Susukino

Japan/ Hotel, Residential and Retail Freehold 93% 34.7 20%

Ibis Hotel Gloucester UK/ Hotel

Leasehold 125 years from 19 October 2009 78% 10.8 55%

Ibis Budget Bradford UK/ Hotel Freehold 85% 2.8 55%

Hotel ibis Style London Kensington UK/ Hotel Freehold 86% 49.6 80%

Holiday Inn Express Manchester UK/ Hotel Freehold 81% 30.4 30%

Luma Concept Hotel London UK/ Hotel Freehold 84% 49.4 60%

Mercure Hotel Pattaya Thailand/ Hotel Freehold 85% 21.4 86.7%

Hotel Baraquda Pattaya, MGallery Collection Thailand/ Hotel Freehold 82% 16.7 38.98%

29 Ranwell Lane Australia/ Hotel Freehold N/A 6.3 70%

Leeds/ Hampton by Hilton Leeds City Centre UK/ Residential and Hotel Freehold N/A 17.6 55%

Dry Bar UK/ Hotel Freehold N/A 7.1 50%

Source: Company

Quality of Management and Ownership (Strong)

Company founder Mr Toh Khai Cheng (Non-Executive Chairman) and his two sons, Mr Toh Giap Eng (Deputy Chairman, Executive

Director) and Mr Toh Gap Seng (Non-Executive Director), lead the board of directors rank at Heeton. Together, the Toh family

controls about 69% of the company’s shares. Besides the Toh family members, another substantial shareholder is Kim Seng

Holdings Pte Ltd (5.5%), which is controlled by Mr Tan Kim Seng and his brothers, Mr Tan Fuh Gih and Mr Tan Hoo Lang. The Tan

brothers, who are known mostly for their businesses in the oil and gas sector, seem to be passive shareholders of Heeton. Aside

from the substantial shareholding of the founding Toh family, we also like the fact that the Toh brothers and two independent

directors—Mr Chia Kwok Ping and Mr Tan Tiong Cheng—each holds a substantial amount of the HTONSP 6.100% 08May2020 Corp

(SGD). Based on exchange filings, they own S$4.25m notional amount of the bonds, which we estimate at prevailing pricing

constitutes about five times their annual remuneration.





Mr Toh Giap Eng had been the CEO and Managing Director of Heeton as early as the company’s listing in 2003, before relinquishing

the role to Mr Eric Teng Heng Chew in January 2016. At the moment, Mr Toh Giap Eng’s responsibilities include identifying and

securing investment and development properties in new markets, as well as helping his father to take care of the overall

stewardship and governance of Heeton. Mr Eric Teng joined Heeton as an outsider, and prior to that he was Advisor to Straits

Trading Company Limited and the CEO of the property division in Straits Trading from January 2010 to December 2013. He was

also concurrently the CEO of the Hospitality Division in Straits Trading from January 2011 to December 2013. Mr Teng has more

than 30 years of experience in marketing, communications, property and hospitality.

Financial Analysis (Financial Risk Profile)

We see Heeton’s overall financial risk profile as Significant considering the below analyses and factors, and the quality of its

management and ownership.

Pretax Interest Coverage (Aggressive)

Despite applying the percentage-of-completion recognition method for most of the revenue derived from its property

development segment (FY16: ~97%), which theoretically should provide for “smoother” accounting presentation of

income, Heeton’s operating income (and therefore interest coverage) has been mostly lumpy and fluctuates widely.

EBIT/interest (including capitalised interest) jumped to 9.2x in the twelve months ended September, a seemingly

tremendous improvement from the 0.3x posted last year (FY15: 0.5x). But the upswing was to a large extent helped by a

S$27.98m gain on disposal of a joint venture company, Buildhome Pte Ltd, which owned the residential project The

Lumos.

We think the bumpy operating income (which excludes revaluation gains from investment properties) can be explained

partly by the fact that most of Heeton’s larger-scale projects were done via the use of joint ventures or associated

companies. If we add Heeton’s share of results of associated companies and joint venture companies into operating

income, the company’s adjusted interest coverage ratio would improve to 1.7x in 2016 (FY15: 2.4x). In addition, Heeton

has been rather proactive in selling its slower-moving projects, for instance the 100%-owned iLiv@Grange in 2016 and

most recently the 50%-owned The Lumos in July. These “one-off” loss/gains on disposal introduce further volatility in the

company’s earnings.

Overall, we think Heeton’s rather-weak interest coverage ratio is one area that should be closely monitored. Moving

forward, we expect the company’s growing recurring income base (see Chart 2) to provide some stability to its operating

income and support its ability to service debt obligations. In the three-year period ended 2016, recurring income as

measured by revenue from the hospitality and property investment segments almost doubled to S$23.1m in FY16 (9M17:

S$19.4m) from S$11.6m in FY13. In comparison, interest incurred dropped to S$14.5m in FY16 from S$18.1m in FY15.



Chart 2: Heeton has been building its recurring income stream

Leverage (Aggressive)

Similar to its operating income, Heeton’s EBITDA excluding revaluation gains from investment properties has been

fluctuating irregularly according to the company’s schedule of asset monetization. Including its share of results of

associated companies and joint venture companies, Heeton’s debt-to-EBITDA ratio stood at 5.1x in the twelve months

ended September. That figure was a significant improvement from previous year’s, but again in large part due to the gain

on disposal of The Lumos. Overall, Heeton’s leverage as measured against its earnings capacity has come down

significantly over the years to much more manageable levels (albeit still on the high side), as its debt-to-EBITDA fell to

11.5x in FY16 (FY15: 8.3x) from 31.1x in FY11.

Net gearing (net debt/equity) has shown similar improvements as well, falling to 0.71x at the end of September from

0.78x in December 2016 (4Q15: 1.0x). In the meantime, the company’s debt-to-capital ratio dropped gradually but

consistently from 0.55x in 4Q14 to 0.44x in 3Q17 (4Q16: 0.46x). However, we expect gearing to rise in the near-to-

medium term due to capital outlay requirements from recent acquisitions. Heeton has a 20% stake in a JV with Chip Eng

Seng that announced in July the purchase of land parcel at Woodleigh Lane for S$700.7m, of which the company has

already forked out some S$34m according to its latest financial statements. In addition, Heeton owns 5% of a consortium

led by Oxley Holdings which acquired Serangoon Ville in July. The Serangoon Ville purchase came with a price tag of

S$499m, with another S$195m needed for the top-up of the lease and redevelopment of the site. Assuming that Heeton

funds these projects fully with debt, and adjusting for the S$55.85m proceeds from the disposal of The Woodgrove, we

estimate the company’s net gearing to climb to ~0.88x.

Although Heeton’s leverage looks high on its own and relative to some larger real estate developers, the numbers are

manageable if compared to the overall real estate development sector and some small-to-mid cap peers. According to

Bloomberg data, the median net debt-to-equity ratio of all Singapore-listed real estate developers was 0.5x (latest filing),

while the median debt-to-EBITDA ratio was 11.2x (latest financial year). Other small-to-mid cap operators like Chip Eng

Seng (which is classified under the construction & engineering industry) and Oxley sported net gearing ratios of 0.86x and

2.01x, respectively.



Chart 3: Improving debt ratio since 2014

Cash Flow (Aggressive)

Due to strong sales from Onze@Tanjong Pagar, Heeton’s cash flow from operations (CFO) spiked to S$34.0m in the nine

months ended September, compared to -S$4.6m in the corresponding period last year. Because of the factors mentioned

earlier—the percentage-of-completion method in accounting for most of the property development revenue and the

JV/associated company partnerships which are equity-accounted—it is difficult to ascertain the normalized amount of

cash Heeton brings in from its revenues. The company has swung irregularly between negative and positive CFO, but

overall, CFO has been weak, averaging a negative S$7.7m in FY12 – FY16.

To have a truer gauge of Heeton’s cash flow capacity, we think it is appropriate to include the payments coming from/

going to the company’s JV, associates and investee companies, in view of its preferred way of entering development

projects by investing with other partners. Adjusting for these net payments to/from affiliates, we estimate the company’s

average CFO in FY12 – FY16 at a significantly improved albeit still shaky S$2.6m. We are also comforted by the improving

trend in our adjusted cash flow measure, as it climbed gradually to S$14.3m in FY16 from S$13.1m and S$4.5m in FY15

and FY14 respectively (FY13: -S$9.0m).

Looking forward, we expect Heeton’s cash flow capacity to continue its upward trajectory, supported by the growing

recurring income base, and ongoing sales from Onze@Tanjoing Pagar (68.1% sold at the end of September) and other

properties completed this year (e.g. Westwood Residences, Rezi 3Two, Trio). As highlighted earlier, we estimate that the

company is generating yearly rental income of ~S$17.0m from its investment properties (excluding The Woodgrove), of

which ~S$6.2m comes from equity-accounted affiliates. The hospitality division only recently broke even in 2016 with

just S$913k of profits (FY15: S$2.1m loss). But we think the current positive results provide meaningful evidence the hotel

business is starting to take off, and with Heeton’s rapid build-up of capacity in this segment, we expect it to be an

important cash flow contributor going forward.

Net Assets/ Quality and Saleability of Assets (Modest)

Similar to its other debt ratios, Heeton’s debt-to-asset ratio has been on a downward trend since 2014, improving to

38.3% at the end of September from 51.2% in 4Q14. While the company’s total debt of S$304.5m (as at 30 Sep 17) seems

aggressive against its earnings capacity, we think the debt burden is mitigated by the substantial amount of tangible

assets which are periodically revalued. As of 30 Sep 17, Heeton carried S$182.2m of investment properties on its balance

sheet, comprising of Tampines Mart, The Woodgrove, 62 Sembawang Road and Adam House. Besides these majority-



owned assets, Heeton’s portfolio also includes equity-accounted investments in Sun Plaza, 223@Mountbatten and Super

Hotel Sapporo – Susukino.

On the hotel properties side, Heeton owned some S$137.2m of fixed assets at the end of September. These are mainly

made up of the company’s real estate properties in the hospitality segment—Hotel ibis Styles London, ibis Budget

Bradford, ibis Hotel Gloucester, Luma Concept Hotel London, a newly acquired property in UK, and a land site for hotel

development in Australia. Again, Heeton has substantial hotel investments that are accounted for under JVs and

associated companies. As of 30 Sep 17, Heeton carried S$274.9m of non-current net investments in joint venture and

associated companies. Lastly, Heeton holds S$22.0m worth of promissory notes that are subscribed for in relation to its

disposal of iLiv@Grange and The Lumos.

Working Capital (Significant); Liquidity (Adequate)

Thanks largely to good sales at Onze@Tanjong Pagar and the refinancing of its June 2017 bonds, Heeton swung from a

net current liabilities position (-S$51.0m) at the end of 2016 to S$21.5m of working capital in 3Q17. The current working

capital position is still rather tight in our opinion. At the end of September, the company held S$130.5m current assets

against S$109.0m of short-term liabilities, of which S$90.6m are borrowings from banks. Nevertheless, we think refinance

risk is low as most of these short-term bank borrowings are secured with real estate. We also took comfort from the

substantial amount of anticipated cash receipts in the near-to-medium term. Firstly, the receivables on Heeton’s balance

sheet have high certainty of cash conversion. These include a S$18.0m three-year promissory note and S$5.8m deferred

consideration in relation to the Buildhome deal, S$18.0m receivable from the disposal of iLiv@Grange (S$4.0m in the

form of a note payable in 2019), and S$11.1m trade receivables mostly from the sales of Onze@Tanjong Pagar. Also, as

mentioned earlier Heeton has announced its disposal of The Woodgrove for S$55.85m. The company will receive an

immediate payment of S$5.58m, with the balance payable upon completion of the disposal. Finally, Singapore’s property

market is seemingly set to break out of its prolonged slump. Amid the prevailing optimism, we think Heeton is likely to

move more of the remaining 31.9% unsold units of Onze@Tanjong Pagar, thus converting a large part of the S$59.7m

development properties (carried at cost) into cash.

Profitability (Satisfactory)

Heeton’s profitability has fluctuated widely much like its earnings numbers, with the large variances amplified by the high

gearing and irregular asset monetization schedule. The company averaged 7.0% ROE in the five-year period ended 2016,

which outperformed the broader real estate development sector (median five-year average ROE of 5.5% according to

Bloomberg data). But the average number is not predictive of Heeton’s performance in any single year, due to the wide

range of its ROE during the aforementioned period—with the lowest being 1.7% in FY15 and the highest was 20.1% in

FY12 (9M17: 15.4%).

To account for the substantial amount of leverage, we also examined Heeton’s return on invested capital (operating

income/invested capital), and included its share of results of affiliates into operating income. The resulting ROIC—an

average 3.1% in the same five-year period—was both more consistent and reflective of the rather mediocre profitability

prevailing in Heeton’s core businesses (if we strip out financial leverage). Looking forward, although the ongoing

expansion of the company’s hospitality operations should provide a steadier income base, we think profitability may be

dragged lower due to the segment’s capital-intensive nature and highly competitive environment.

Amortization/Maturity Schedule; Capital Structure (Fair)

Management seems to have embarked on a gradual deleveraging path since 2014, as total debt fell to S$304.5m in 3Q17

from S$395.1m at the end of 2014. In addition, the company in 2015 raised S$27.8m of equity funding via rights issue,

although we note that the proceeds were predominantly contributed by the Toh family (S$27.5m) and most of the

minority shareholders did not subscribe for the new shares. As of 30 Sep 17, S$90.2m of borrowing will come due within

a year, S$130.9m will mature between one to two years, and S$82.9m between two to five years. We believe most if not

all of Heeton’s real estate (including those held by the JVs and associated companies) are already encumbered by secured

borrowings, as substantially all of its debt except for the HTONSP 6.100% 08May2020 Corp (SGD) are secured.

Nevertheless, we think the constrained financial flexibility (for additional debt headroom) is mitigated by the large insider

holdings in both the company shares and bonds.




Negative Pledge, Financial and other Covenants (Fair)

The documentation for Heeton's S$300m Multicurrency Debt Issuance Programme, under which its bonds are issued,

provides the following protections to the bond investors. We note the lack of financial covenants that assure a minimum

interest coverage.

Negative Pledge: Yes, however this does not apply for any security over assets newly acquired, for the purpose of

financing the acquisition of such assets.

Financial covenants:

I. Consolidated Tangible Net Worth shall not at any time be less than S$220m.

II. The ratio of Consolidated Net Debt to Consolidated Tangible Net Worth shall not at any time be more than 2.0x.

We estimate this ratio to be 0.71x in 3Q17 (4Q16: 0.78x).

III. The ratio of Consolidated Secured Debt to Consolidated Total Assets shall not at any time exceed 0.65x.

We estimate this ratio at 0.28x in 3Q17 (4Q16: 0.31x).

Change of Control Put: Yes, at par, if a Change of Shareholding Event occurs.

A “Change of Shareholding Event” occurs when the Toh family controls less than 40% of the Heeton shares.

Delisting Put: Yes; when the shares of Heeton cease to be listed on the SGX or suspended for trading for a continuous

period exceeding seven days.

Cross Default: Yes

Other Qualitative Factors (Fair)

Foreign currency translation reserve narrowed to -S$7.6m in 3Q17 from -S$9.3m at the end of 2016 (4Q15: -S$0.2m).

According to Heeton, it is not in the company’s policy to hedge FX exposures from foreign operations, preferring instead

to fund its overseas operations with borrowings denominated in their functional currency as a natural hedge. At the end

of last year, S$205.6m or 35.7% of Heeton’s total non-current assets (S$575.7m) are located outside of Singapore, with

most of the foreign non-current assets in UK (S$148.2m). Also, UK was the only geographical segment outside of

Singapore that contributed substantial revenue in FY16, with S$13.6m or 20.2% of total revenue. Heeton does not

disclose the amount of foreign-denominated borrowings, but based on the company’s own estimates, every 3% of

movement in GBP/USD would bring about a S$1.5m impact on Heeton’s net income and equity.

We are overall positive on Heeton’s preferred asset-light model of taking on larger projects via JVs or minority stakes, as

it diversifies the company’s risk exposures to each project and reduces the required capital outlay. However, the JV and/or

associated company partnerships also introduce some structural subordination on the position of bondholders, as their

claims on the underlying assets are likely subordinated to the obligations at the individual entity level. At the end of 2016,

the total liabilities of Heeton’s material joint ventures and associated companies stood at S$965.4m (against S$1.48 billion

of assets). On the other hand, Heeton is likely liable for only its share of the loans and not the portion by its partners.

Industry Considerations (Business Risk Profile)

We see Heeton’s overall business risk profile as Fair, considering the below analyses and factors.

Economic Cyclicality (Strong)

The real estate industry as a whole generally tracks GDP growth closely. However, different types of properties can be

quite dissimilar in their correlation to the economy cycle. As at 30 Sep 17, 88.5% of Heeton’s investment properties

(weighted by fair value) are retail and commercial properties located in Singapore, with most of the revenue generated

from the retail sector (Tampines Mart and Sun Plaza). The earnings of retail properties are subject to the strength of the

local economy, and should benefit from the recent broad-based economic growth in Singapore. The remaining properties

comprised of a hotel building in Sapporo City (5.7%), serviced offices in UK (4.2%), and an estate in Sembawang (1.6%)

currently leased to Caltex.

Property development was still the biggest revenue contributor in the nine months ended September, generating

S$27.3m or 58% of total revenue (FY16: 64%). The property development sector has historically been very sensitive to

prevailing economic conditions. Nevertheless, since the local regulators eased some property cooling measures in March,

Singapore’s property market has seen a robust demand recovery and signs of residential prices bottoming out. According



to data from the Urban Redevelopment Authority, the prices of private residential properties rose by 0.7% in 3Q17—the

first sequential increase since 4Q13 (see Chart 4)—compared with the 0.1% drop in the previous quarter.

Chart 4: Private residential property prices have stabilized

Source: URA 3Q17 real estate statistics

Although on the whole Heeton’s expansion of its hotel operations should introduce more stability to its income, the

hospitality industry is closely linked to economic growth and market conditions. Room demand is elastic and sensitive to

prevailing economic conditions, as few people consider hotel stays as necessities. In addition, the hotel business is also

subject to volatility caused by geopolitical risks and terrorist attacks. At the moment, Heeton’s hotel revenue is

predominantly contributed by its hotels in UK. So far in 2017, UK hoteliers have withstood the negative impact from

recent terrorist attacks and uncertain outlook from the Brexit Referendum remarkably well. Supported by stronger global

economic growth and the falling GBP, the UK hotel market has enjoyed robust growth this year. According to a Knight

Frank report, revenue per available room (RevPAR) across UK is at record levels, with GBP89 for August YTD that

represented 7.4% YoY growth compared to the same period in 2016. Looking forward, accountancy firm PwC is predicting

a broadly positive outlook for the UK hotel sector. Nevertheless, PwC expects weaker growth in 2018 due to a slowdown

in the UK economy and continued Brexit-related uncertainty.

Growth Prospects (Satisfactory)

Amid the backdrop of improved economic performance and positive market sentiment, the recovery in Singapore’s

residential market strengthened this year. The latest URA data shows that after a 7.2% growth in 2016, developers

recorded 8,702 new sales of private residential units in YTD 3Q17, a 53.8% surge compared with 2016. Total New Sale,

Sub-Sale and Resale transactions volume was 6,693 units in 3Q17, the second consecutive quarter of a reading above

6,500. Looking forward, Morgan Stanley in April forecast that home prices in Singapore will double by 2030, which implied

a 5%-6% increase p.a. The current low interest rate environment and pent-up demand from both local and foreign buyers

should continue to support residential sales. In addition, the large number of displaced residents from the spate of en-

bloc deals who will enter the market in the near future should also support both home prices and transaction volume.

However, we note Heeton at the moment has limited financial flexibility to support further acquisitions or major projects.

On Heeton’s hotel assets, we think the long-term outlook for UK hotels remains firmly positive, and the industry should

be able to sustain a growth rate higher than UK GDP growth. Both Knight Frank and PwC predicted a tougher albeit

broadly positive trading environment for the UK hotel market in 2018, citing challenges such as the ongoing threat of

terrorism, political uncertainty and a lower economic growth environment. Nevertheless, the weakened pound is

expected to continue to provide a boost to the sector albeit with a weaker impact, and UK’s status as one of the most

popular tourist destination is not expected to go away any time soon.



Competition (Vulnerable)

The rebounding Singapore property market is a double-edged sword for property developers. While Heeton has seen

better performance from this segment, having moved more of its inventories in the last couple of years, the stronger

competition in government land sales (GLS) has driven up the premiums paid for land-banking. In May, a Chinese

consortium submitted a S$1.0 billion bid for a residential plot at Stirling Road, which is the highest absolute price paid for

a residential plot, according to URA data dated back to 2005. The average number of bidders for residential land tenders

has increased to 14 this year through July, compared to eleven and ten in 2016 and 2015 respectively. Besides bidding

for sites via the GLS programme, foreign developers have also entered the fray for land sites through the collective sale

process. For instance, Chinese developer Kingsford Huray Development acquired Normanton Park in October for

S$830.1m. Finally, the latest data released by URA indicated that out of the 42,276 private homes in the supply pipeline,

a little more than two-fifths (17,178) are unsold. In addition, there is a potential supply of about 16,700 units from

redevelopments of en-bloc sales (9,300) and available parcels on GLS sites (7,400). According to URA, a significant portion

of this new potential supply could be made available for sale in the next one to two years.

A report published by PwC in September warned that new hotel supply entering the UK market is running very high, and

this above-average new supply growth could hurt profitability if demand softens. PwC estimated that about 18,900 new

rooms will be added to the UK market this year, with another ~19,000 new rooms to open in 2018. The auditing firm also

suggested that the continued build-up in new branded budget supply has contributed to the underperformance of the

midscale/economy sector in 1H17. Heeton’s hotels compete mostly in the mass market space. While we think the low

levels of minimum efficient scale in the hospitality industry precludes any incumbent from enjoying significant economies

of scale, this actually benefits new entrants such as Heeton. However, with alternative accommodation options (e.g.

Airbnb) and online booking platforms eating into the lunch of mid-market/budget operators, we expect the company to

face intense competition in the hospitality segment.

Research and Development/ Technological Changes (Fair)

Aside from minimum environmental sustainability standards being increasingly implemented globally for property

development activities, which are unlikely to disrupt the industry in a major way, we do not observe other major

technology developments in the real estate development sector. In relation to Heeton’s hospitality businesses, the travel

landscape has seen several discontinuous innovations in recent years, with online private accommodation aggregators

threatening the pricing power of hoteliers, and sharing economy-based companies like Airbnb infringing on the turf of

mass market operators. In the long run, we expect hotels to co-exist with Airbnb, as the latter’s business model is one

that offers idiosyncratic travel experiences, in contrast to the brand consistency provided by hotels. However, profitability

for capital-intensive operators which own the physical buildings is likely to be mediocre.

Degree of Regulation/ Government Influence (Satisfactory)

More than three years after implementing new property cooling regulations and borrowing curbs, local authorities

reduced seller stamp duties (SSD) and slightly relaxed rules on loan thresholds in March this year. Under the changes

effective in March, homeowners will be able to avoid paying the SSD if they wait three years before selling their

properties, down from four years previously. The SSD rates are also cut by four percentage points for each tier. In

addition, the government revised the Total Debt Servicing Ratio framework, which is no longer applicable to mortgage

equity withdrawal loans with loan-to-value ratios of 50% and below. Although most analysts see the direct impact from

the relaxation of cooling measures as minimal—the demand-cooling additional buyer's stamp duty and loan-to-valuation

limits remain unchanged—it has nevertheless aroused much optimism in the local property market.

Three months after the aforementioned easing of curbs announcement, the Monetary Authority of Singapore (MAS)

clarified its stand on the cooling measures by stating in its annual report that these measures remain necessary, given

the low-for-long interest rate environment and strong foreign investor appetite. Mr Ravi Menon, managing director of

MAS, emphasized that the tweaks to the measures “do not signal the start of an unwinding of the property cooling

measures”. These guidance suggested that the city-state’s property cooling measures will likely remain in place for the

foreseeable future. In fact, the MAS voiced its concerns over “excessive exuberance in the property market” late last

month when it release its 2017 Financial Stability Review. The central bank warned of potential supply imbalance over

the medium term and relatively elevated existing vacancies, adding that it will “continue to monitor market

developments and where necessary, take appropriate actions to maintain a stable and sustainable property market”.



Bond Pricing and Recommendation

While the HTONSP 6.100% 08May2020 Corp (SGD) has traded strongly since September (see Chart 5) along with the overall yield

compression seen in the SGD market, it is still one of the highest yielding SGD-denominated bonds in the real estate development

sector. At prevailing pricing, the bonds are trading at a YTM (ask) of 5.68%. Among all bonds issued by companies categorised

under the real estate development or construction & engineering sub-industries (by the Global Industry Classification Standard),

the HTONSP 6.100% 08May2020 Corp (SGD) ranked behind only two bonds issued by AusGroup Ltd and TA Corp Ltd respectively,

in terms of yield. We think the two bonds do not serve as good comparisons as AusGroup is actually an oilfield service provider

which is currently in the midst of restructuring its debt, while TA Corp, a property and construction group in Singapore, carries

significantly higher indebtedness (net gearing in 3Q17: 1.57x) against a smaller asset base (S$709.9m).

Chart 5: Bond price has traded higher since September

Overall, we are Neutral on Heeton’s issuer profile. The company has a decent track record of monetizing its assets, and credit

metrics have generally improved in recent years. These credit positives are mitigated by the shaky operating cash flows and

interest coverage, and anticipated capital outlays for its project pipeline. Recent developments in the local property market such

as the en bloc fever and rising land prices also pose risks to Heeton’s credit outlook, should the company forego cost discipline in

the pursuit of more business. However, we think the acquisition risk is partially mitigated by Heeton’s modus operandi of

participating in large projects via joint ventures.

Table 3 lists some comparable bonds in the small-to-mid cap property developer space. Among these comparables, Chip Eng Seng

and Oxley are current partners with Heeton in its development projects. We think the HTONSP 6.100% 08May2020 Corp (SGD) is

priced favourably against its peers. Compared against the KOHSP 5.100% 27Oct2022 Corp (SGD), we think the trade-off between

the stronger credit profile of Koh Brothers, and HTON 2020’s pick-up in spread/yield and the shorter duration (by 2.5 years) is fair.

Despite Heeton’s substantially smaller size compared to Chip Eng Seng, Oxley and Tuan Sing, we like the relative valuation of the

HTON 2020 with its sizeable yield pick-up and arguably stronger credit profile (against all three issuers). As such, we assigned

HTONSP 6.100% 08May2020 Corp (SGD) an Overweight rating.




https://www.bondsupermart.com/main/bond-info/bond-factsheet/AP6600591




Table 3: Bond valuation comparison

Source: Bloomberg, iFAST estimates

Security Name Maturity

Outstanding

Amount (S$m) Ask Price

Ask YTM

(%)

Z-Spread

(Ask; bps)

Net Gearing

(30 Sep 17)

Debt/EBITDA

(TTM 30 Sep 17)

HTONSP 6.100% 08May2020 Corp (SGD) 8-May-20 75,000,000 100.932 5.68 412 0.71x 5.1x

CHIPEN 4.750% 14Jun2021 Corp (SGD) 14-Jun-21 120,000,000 102.557 3.96 226 0.86x 11.6x

KOHSP 5.100% 27Oct2022 Corp (SGD) 27-Oct-22 70,000,000 100.118 5.07 322 0.26x 4.4x

OHLSP 5.150% 18May2020 Corp (SGD) - Retail 18-May-20 150,000,000 102.155 4.21 265 2.01x 7.0x

TSHSP 6.000% 05Jun2020 Corp (SGD) 5-Jun-20 150,000,000 102.656 4.86 329 1.37x 33.1x



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