Developers reaching out

Developers reaching out
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By now, the trend is clear. There is a wave of township developers going out into the region to tap into less mature markets that still have a lot of room to expand.

SP Setia Bhd's executive director Voon Tin Yow told Bloomberg on Thursday the company was negotiating to develop a township in Ho Chi Minh City, Vietnam.

SP Setia is Malaysia's biggest property developer in terms of its total market value of over RM6bil. The country's biggest and most successful developers are making the current advance into the region.

Voon did not disclose the proposed project's sales value, or gross development value (GDV) in industry jargon, but it would be sizeable to have any impact on Setia's overall profitability.

Gamuda Bhd has shown how large property projects in Vietnam can be. Although it is better known as a construction and infrastructure group, Gamuda has become a creditable developer. Its GDV was estimated by a brokerage at an amazingly high RM15bil.

That became so high because its Yenso Park project in Hanoi is estimated to have a GDV of RM3.5bil while the GDV for its Long Ah project in Ho Chi Minh City could be as large as RM5bil.

These sales figures would, of course, take a number of years to be realised. It also assumes Gamuda would be able to replicate its development skills in Vietnam.

Going further afield, Sunrise Bhd announced on Thursday it would buy three parcels of land for RM112mil in Richmond city, British Columbia, Canada. It is planning for a mixed development project on the land.

Sunrise is known as the country's best developer of luxurious condominiums.

There is conviction now that property development can be managed on a regional basis. Capitaland Ltd of Singapore proved that. A GLC, it has become a global group.

Among a wide array of interests, it has five Raffles City mixed projects in Singapore, Shanghai, Beijing, Chengdu and Bahrain.

CapitaLand has been rewarded for its global expansion with a total market value of S$22.6bil (RM50.4bil). Malaysia may have timber concessions three times the size of Singapore but its leading developer dwarfs all the property companies here.

Malaysian companies are rising to this challenge. CapitaLand provided the inspiration, and the challenge for Malaysian developers who are confident they have skills to match that of CapitaLand, Mah Sing Group Bhd managing director Datuk Leong Hoy Kum told StarBiz.

Mah Sing could be the next developer to extend its business to Vietnam.

“We intend to go overseas. We will identify a strong partner in countries like Vietnam, China, India, Indonesia and the Middle East, and Vietnam will be the first,” he said.

IJM Corp Bhd is a local contractor which stepped out into the region and proved it could become a regional construction group.

It is now also the Malaysian pioneer as a township developer in India, with a land bank of about 200 acres there.

No doubt, the impending listing of DLF Ltd, a property company owned by Kushal Pal Singh, in India would inspire IJM. DLF would be listing for an estimated RM70bil in market value.

While some observers will doubt or criticise the overseas overtures of the best and brightest among Malaysia's developers, the latter are putting their money where their mouth is and starting a transformation process to become regional developers.



New kid on the oil patch



Much has been reported on the transformation programme for government-linked companies (GLCs).

In the last two to three years, some of the public listed companies (PLCs), led by entrepreneurs, have also been transformed.

Like the GLCs, the transformation of other PLCs has taken many forms - expansion within a global or regional niche, offering products of higher quality, diversification into related products, other industries or other markets, or a new approach to cut costs or raise revenue.

Such transformation is necessary in the face of competition that is no longer domestic, but increasingly regional, especially from countries like China which seems to be able to manufacture more cheaply everything that is also made here.

It may surprise readers that many PLCs here are successfully transforming their business, and producing results.

We will, therefore, occasionally discuss PLC transformation in this column, mainly on companies not already widely analysed by brokers. We start this week with the aptly named Success Transformer Corp Bhd.

Little was heard of Success since its listing on Bursa Malaysia's second board in 2005.

That could be a combination of its second board status and a widely held view that Malaysia is no longer competitive in the manufacture of electrical products.

Since then, it has posted a net profit of RM10.3mil in its first year of listing and RM12.1mil last year, a growth rate of 17.5%.

That enabled it to fast track its transfer listing to the Bursa main board earlier this year.

Its earnings are expected to continue to expand through organic growth and an acquisition that was completed in March.

Success was first listed on Bursa as a manufacture of industrial lighting products and transformers.

Organic growth of these products would be led by increased construction activity in the domestic market and its biggest export market which is the Middle East.

The company has carefully nurtured export sales which have increased every year from 2001 when its exports amounted to RM4mil to RM16mil last year.

Exports continued to expand this year, accounting for 26% of its sales of electrical products in the first quarter this year from 19% last year.

The steady increase in its export trend shows the company is regionally competitive, and holding its own against exports from China.

Success entered the oil and gas (O&G) sector this year after it purchased a 60% stake of Seremban Engineering Sdn Bhd (SESB).

While it is not more than a foothold, it is a firm one, with SESB's vendors having guaranteed a profit after tax of RM5.4mil this year.

That would add a new base level of RM3.2mil each year to Success' earnings from its 60% stake in SESB.

SESB produces process equipment, pressure tanks and heat exchanges and is in the same product sector of the O&G industry as KNM Group Bhd and APB Resources Bhd.

The objective of the SESB acquisition is to expand with a company with core competence in a sector with favourable economics. “SESB was bought at a PE (price/earnings ratio) of 5.3 times.

The vendors sold because they wanted to be part of a listed company to expand. They stay on to manage SESB, and they still own 40% of the company,” Success' executive director Woh Way Cheang told StarBiz.

The owners of both Success and SESB share the same business philosophy. Both companies are financially conservative, with low levels of borrowings.

SESB, for instance, books sales into its accounts only after it has delivered the products to customers, not when it receives a purchase order or on percentage of completion, he added.

It is believed that given the buoyant industry conditions, Success would be able to increase its earnings by about 20% this year and next year to about RM21mil or earnings per share of 17.5 sen.

On that basis, Success traded at a prospective price/earnings ratio of 4.8 times at its share price of 84.5 sen on Friday.

During its short stint as a listed company, Success met its profit forecast, and increased its earnings the following year.

Management went beyond that in acquiring SESB to accelerate the group's growth, and the acquisition was made with cash so that there would not be any earnings dilution.