A closer look at KSH FY 2022 Results

 

KSH has released its results and as mentioned previously, i will be taking a closer look at it.

Positives

1) Project Revenue has finally outpaced Cost of Construction.

	1H 2021	2H 2021	1H 2022	2H 2022
Project Revenue	32,622,000	116,416,000	111,219,000	121,847,000
Cost of Construction	37,639,000	111,551,000	106,615,000	115,713,000
Gap	-5,017,000	4,865,000	4,604,000	6,134,000

 

In FY 2021, there is actually no profits from construction projects due to the higher cost. However, this situation has improved in 2022 with a higher profit seen in 2H 2022.

 2)  Recognition of Associates and Joint Ventures projects gathering momentum.

While progressive billings have come down as recognition of revenue occurred, profits have hit a new high although a part of it would be due to fair value gains.

 

With losses recorded in FY 2021 due to expenses recognized based on percentage of construction, I believe that share of profit left should be more quality due to the projects nearing completion.

 

	1H 2021	2H 2021	1H 2022	2H 2022
Billings Estimated Left	480 million	416 million	318 million	212 million
Share of Profit of Associates and Joint Ventures	-327 000	-2,602,000	9,759,000	19,002,000

 

Gaobeidian will finally recognize a small portion of its profits in 2023, something that I have been looking at for some time.

 

To reconcile again, the phrase 1 of stage 1 release of 812 units is for sale with 596 units sold.  With 2180 units to be released in stage 1 total and an estimated amount of 15,800 units is targeted to be released altogether.

 

With sale prices of around 7600 and cost price of probably (4000?) This translated to a margin of around 40+%. Hence there will be a need to monitor to see if this is seen in the Progress billings recognized vs Share of profit.

(From Nextinsight)

How much profits they can recognize? Hard to estimate but maybe 10 million SGD from Phrase 1 Stage 1?

Time to look at the bad parts of the results

1) Gaobeidian phrase 2 selling prices seems to be lower. Coming in at 6000-6500 according to online sources. This is around 20% drop in the phrase 1 selling prices. While it is unknown yet how many units and all will be launched, this would affect the valuation in some sorts.

(2nd Phrase Price of 6000-6500)

2) SG Projects Pipelines currently somewhat dry. With the only new project upcoming being the Peace Centre / Peace Mansion property development portfolio, it is kinda lacklustre as 40% of the GFA will be used for residential with the other 60% being commercial. This means that it is more likely to be a recurrent income rather than a large profit over a smaller span of time.

(60% Commercial / 40% Residential)

3) Cost of Personnel increased. While the increase is attributed to performance bonus, I am not sure if it is really appropriate to be giving bonuses as this has close to fully eroded the construction profits. With personnel expense coming in at 10.3 million for FY 2022, the profit (Project Revenue – Cost of Construction) is 10.7 million. This meant that only $400 000 of profit is left to deduct other cost such as other operating expenses and finance cost.  Has performance really improved to justify the increase in fees?

To put in retrospective, the personnel expense is 8.9 million in FY 2020 which is pre-covid. The dividends declared was 2.2 cents for FY 2020 but in FY 2022 it is 2 cents when personnel expense is 10.3 million.

Conclusion

KSH is starting to look attractive as its construction margins have turned a corner and 'walking out of covid' should benefit its hotel segments as well. However, concerns still persist as a good amount (25%) of profits is actually from interest income that is derived from its loans to associates and joint ventures for projects. This amount should gradually come down as we head towards 2024 unless the new project of Peace Centre generates a good amount of loans.

After all, rewarding personnel is a must after a tough covid year, Gaobeidian prices still looks reasonable given the downturn in China Housing Market recently and projects/pipelines takes time to build and with only 1 completion in 2022 and 2 in 2024 (estimated), there is still time to replenish them.

All in all, it will still remain in the imaginary portfolio as i do not feel that there are too many bad things. I might considering adding some into the portfolio in fact.