8/6/2014 ROXY-PACIFIC: On track for 10th consecutive year of record profit

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FY13 was a record year -- Roxy-Pacific's 9th.

ROXY-PACIFIC: On Track For 10th Consecutive Year Of Record Profit

Written by Leong Chan Teik

Monday, 04 August 2014 12:06

After Friday's results briefing: Roxy-Pacific executive chairman Teo Hong Lim (2nd from right)and CFO Koh Seng Geok (in maroon tie) chat with analysts and investors.

Photo by Leong Chan Teik

OF LATE, Chip EngSeng Corp has beenenthusiasticallydiscussed in onlineforums as a stock tobuy and to watch outfor because thecompany is set toreport bumper earningsthis year.

Forumers could do well todelve into another stock,Roxy-Pacific Holdings,which is on track to reportbumper earnings -- its10th consecutive year ofrecord profit.

Its recently-released 2Qprofit was S$22.8 millionon revenue of S$102.6million. A dividend of0.616 cent a share wasdeclared which isunchanged from lastyear's interim dividend ifone factors in the 1-for-4bonus share issue that took place in Sept 2013.

The boutique property developer-cum-hotel-owner has piled up S$37.7 million in net profit in 1H thisyear.

Going forward, Roxy-Pacific has S$955.4 million in revenue to book till FY17 from the pre-sale ofits property projects.

Revenue from the pre-sale of residential units will be recognised according to progress ofconstruction while non-residential projects will be recognised only upon completion.

In the 2H of this year, on top of progessive billings, Roxy-Pacific is expected to book revenue fromtwo projects at one go:

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8/6/2014 ROXY-PACIFIC: On track for 10th consecutive year of record profit

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>> S$141.4 million from its 100% sold Centropod@Changi commercial project and

>> S$148.8 million from its joint venture's sale of 93% of the space in investment property No.8,Russell Street, Causeway Bay, Hong Kong.

The HK investment, done in late 2013, was among the early forays into overseas markets by Roxy-Pacific.

Chairman and CEO Teo Hong Lim shared insights into his company's overseas experiences in aQ&A session with analysts and investors last Friday.

One of these was the acquisition, completed in July 2014, of No. 59, Goulburn Street in Sydney forAUD90.2 million, Roxy-Pacific's maiden venture in Australia.

(See video below for more info on the building features, location and investment merits.)

Q: Will you hold the Goulburn Street building solely for investment income?

Teo Hong Lim (executive chairman & CEO): Overseas, one of our objectives was to dodevelopment projects in Sydney and Melbourne. It's not difficult to buy a building in Melbourne asthere are many for sale. We looked at the market and found a lot of projects coming up, especiallyapartments. We decided to focus more on Sydney's CBD instead.

In Australia, many property players are property funds. All these years, development was not inplay and funding was difficult to get. So a lot property funds locked in buildings with 10-year or10+5+5 tenancies.

In Sydney, there are not many buildings which you can get vacant for development. Goulburn wasa unique property -- it has tenancy of over three years and enables us to get a net yield overfunding costs.

In three years, the tenancy for one of the major tenants will mature. It's a government tenant takingup more than half of the building space, from the 14th to 26th floor.

Our idea is to move in and do alteration to the building --- add more floors. The plot ratio is 10-11Xbut if you convert it to a hotel or residential building, you can go up to 15X. Indirectly, we havebought a landbank.

We bought this building at below AUD5,000 psm (or SGD500 psf) of built-up gross area. It's belowreplacement cost.

There are buildings nearby that were sold recently at AUD8000-9000 psm. Some were bought byfunds which want to lock in the higher rental yield of those buildings.

Q: What is the net rental yield and if you get approval to increase the plot ratio, do youhave to pay charges?

Teo Hong Lim: The charges are not as high as in Singapore, so that's not material compared tothe whole project cost. If it's an office building or part residential or hotel, we have the view that ifwe can increase the space by 50%, your cost psm will drop.

Our building is 90% rented. Our net income will be AUD6.5 million a year with some upside if wecan rent out the vacant space.

Q: What is the tax rate you will be paying?

Koh Seng Geok (Chief Financial Officer): It's 30%.

Q: How did you come to acquirethe Kyoto hotel and what's yourplan for it?

Teo Hong Lim: Japan has been anexciting market because ofAbenomics and prices have gone upand foreign funds have gone in. Thefocus was on commercial andresidential. The yield is about 4%but their funding cost is low and youcan earn a bit of spread.

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Share Prices [x]

Name Change Last

China New Town -0.001 0.071

China Sunsine 0.00 0.32

Chip Eng Seng 0.00 0.81

Cordlif e 0.00 1.125

Dukang 0.00 0.197

Dutech 0.00 0.275

Food Empire 0.00 0.375

Geo Energy Res -0.005 0.265

HanKoreEnv 0.00 0.855

Hiap Hoe 0.00 0.91

Hi-P -0.015 0.63

JES Intl -0.001 0.072

King Wan 0.00 0.325

Midas -0.005 0.43

Oxley 0.00 0.635

$ Rex Intl +0.005 0.60

Riv erstone +0.005 0.935

Roxy -Pacif ic 0.00 0.57

Serial Sy stem -0.003 0.134

SingHoldings 0.00 0.38

Sino Grandness 0.00 0.675

Straco -0.005 0.825

SunVic Chemical -0.01 0.50

$ Tritech 0.00 0.215

Tiong Seng 0.00 0.193

Uni-Asia 0.00 0.195

XMH 0.00 0.31

YZJ Shipbldg SGD +0.01 1.075

Updated:2014-08-06 09:38

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8/6/2014 ROXY-PACIFIC: On track for 10th consecutive year of record profit

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Last week (31 July), Roxy-Pacific agreed to buy HotelHarvest Kyoto comprising six floors and one basementand the land it sits on in Kyoto city, Japan, for ¥2.26

billion (about SGD27.5 million). Photo: tripadvisor.com

A negative is a lot of the rentalcannot be adjusted which is similarto the rent control situation inSingapore decades ago. You want toincrease the rent but the tenantresists and you can't boot him out,you may have to take him to court.

As for the hotel we bought, an ex-investment banker had proposed it tous. In Japan, most hotels have 20-to-30 year leases and you get 4-5%yield -- that's all.

Room rates can go up but your yieldis still only 4-5%. But this hotel is aunique opportunity because by nextyear, we will have a vacant building,and we can refresh it and repositionit.

Q: Over the next three years, youhave the scope to deploy, by mycalculations, as much as S$1billion of capital, includingleverage. Can you talk a bitabout where you will move Roxyto?

Teo Hong Lim: You are right thatthe liquidity we have access to isquite a lot. Our strategy is to keepsome liquidity, instead of using upeverything.

In overseas markets, we are not experts yet. To do property development, you need to know thecontractors there, how to control costs, etc. We have put in bids as JV partners in Australia but wedidn't get the sites. It's just like in Singapore previously where foreign developers tried to get sitesbut the local developers were more efficient in cost control and in building design.

We would like to invest in buildings like Goulburn which is an investment with a twist - and we cantake our time to do design with the architects there and enhance the value. It's not about justgetting a building with a long lease and make net 2% yield. Our shareholders will not be happywith that.

If we charge into buying a lot of properties in London and Australia, the next moment the Singaporemarket may recover and that's the one where all our skills set is in. We can't ignore our homemarket.

In Australia, you can buy land in a good location for AUD20-30 million but the construction cost isclose to AUD200 million for a 60-70 storey skyscraper. You can sell everything but you are allowedto collect only 10% upfront. There have been instances when the market slowed down in the 4-5years it takes to build and a lot of buyers disappeared.

That's why, in Australia and London, seasoned developers approach us with opportunities and say,"We manage things for you, I charge a fee, and share in the profit but I don't put in any capital."They don't want to carry the risk of a project.

Our strategy if we do 300-400 units is we may do it through a JV or we look for low-risedevelopment of five 6-storey blocks. We will sell in phases.

Q: Sales of your Trilive project (launched in June 2014) have been slow. Do you intend tooffer price incentives?

Teo Hong Lim: Unless it's 30-40%, a price reduction cannot cure the problem. Developers whodrop price by 20% can sell maybe another 10-20% of a project but they are still stuck with manyunsold units.

A lot of developers holding stock cannot come down 20% because the projects will start to bleed.And if you cut price by 20%, it doesn't mean buyers will come.

There are multiple issues -- oversupply in the market, and poor sentiment too. Some buyers'affordability are affected by government rules.

For Trilive, we can do some finetuning. Now we will just let the project rest. If the buyer sentimentis not there, there is no point pushing it.

Many developers are facing QC (Qualifying Certificate) issue. But for Roxy, those projects welaunched in 2012 are all 100% sold. We won't face any QC issue until 3 years later. Trilive wasacquired last year, so we have 5 years to sell for the ABSD issue, and 5 years to build and 2 yearsto sell for the QC issue. (For information on the intricacies of the QC and ABSD, see IRASguide and Rodyk and Davidson LLP guide) For Roxy-Pacific's Powerpoint materials for the 2Q results, click here.

Recent stories:

ROXY-PACIFIC: 1Q net profit up 27%, unbooked revenue stands at S$1 billion

ROXY-PACIFIC's AGM: Seek ing opportunities post-property boom in S'pore

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8/6/2014 ROXY-PACIFIC: On track for 10th consecutive year of record profit

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