Sunday, 24 July 2016

Wong Fong Industries Limited



Wong Fong Industries Limited ("Wong Fong" or the "Company") is placing out 43m shares at $0.23 each for a listing on Catalist. There is no public offering and the offer will close on 26 July at 12pm. The market cap at IPO will be $54.1m

The Company is a provider of land transport engineering solutions and systems for various industries with a presence in Singapore, Malaysia and the PRC. The core businesses are:
  • sale and installation of equipment
  • design, customisation, engineering and integration of equipment and solutions
  • servicing and maintenance support
  • conducting training courses for industrial equipment users

Financial Highlights

As you can see from the table above, revenue from equipment sale made up more than 75% of the revenue each year with more than 90% of them derived from Singapore. As such, i will consider Wong Fong more of a Singapore-based business.

Revenue and profitability has been stable (or "stagnant"?) for the last few years. Revenue was around the $77m area and profitability at $5.3m. The net margin is about 7.2%. For FY2015, the EPS based on the post placement shares is around Singapore 2.4 cents. 

Based on the IPO price of 23 cents, the historical PER is around 9.58x. 

The NAV per share is about 18.8 cents (versus the IPO price of 23c).

Assuming the EPS remained the same at 2.4, the dividend per share is around 20% x 2.4 = 0.48 cents. This translate into a yield of around 2%.

Use of proceeds

Shareholders

The Lew family owns about 68.6% of the Company and the public holds 18.3%, with the balance held by Lee Chong Seng.

What I like about the Company
  • Long proven track record tracing back to 1964
  • It has been paying dividend and it intends to pay dividend of not less than 20% of net profits in FY2016 and FY2017
  • Stable business with a healthy order book
  • Strong cash flow from operating activities over last 3 years with $10.9m from FY2015
Some of my concerns
  • Small cap company
  • Competitive industry that is heavily dependent on foreign workers for operations in Singapore
  • Tightly held family run business  with related personnel in various departments
  • Lack of growth and scalability as revenue are mainly derived in Singapore
Fair Value

I struggled to think of a direct listed competitor in Singapore that is transport related. Given the stagnant revenue and profitability over the last 3 years, i will assume that it achieves the same level as prior year in FY2016.  Assuming a PE range of 8-10x, the fair value range is between 19 to 24 cents with the downside supported by its NAV of 18.8 cents.

Chilli Ratings

Since there is no public tranche, the rating is less relevant but I will give it a one chilli rating to show "support" for our local SME. ^_^

The IPO is fairly priced at the higher end of the fair value range at 23 cents and the growth prospectus is stable but not terribly exciting. I understand the shares were placed to friends and family of the Company. 


EC World REIT



EC World REIT is offering 188,125,600 Units at S$0.81 per Unit where 7.5m units will be made available to the Public while the rest are placed out. In addition to the offering, EC World raised another S$194m through the issuance of Cornerstone Units to Bank of Communications, Fosun International and China Cinda Asset Management.

EC World can also over-allot another 31.1m of Units for this offering in the event of high demand. 

The Sponsor is Forchn Holdings Group Co., Ltd and the IPO will close on 26 July 2016 at 12pm. The market cap based on the IPO price is $1,305.7 million.

EC World is established with the investment strategy of investing in income producing real estate used for e-commerce, supply chain management and logistics purposes with an initial focus in China (or more specifically Hangzhou).

Initial Portfolio

The initial portfolio comprises 6 properties located in Hangzhou as set out below. It is a diversified portfolio of assets comprising port, warehouse and e-commerce infrastructure. All the assets have 100% occupancy except for Stage 1 Properties of Bei Gang Logistics (at 55.3%).


It is good to see that the purchase consideration is below the "fair value" prices provided by Savills and Colliers.


While there could be synergy effect as the assets are mainly in Hangzhou, it could also mean that it is overly concentrated in one location and a SARs or localized natural disaster can "wipe out" the Company.

Projections for FY2016 and FY2017

The pro forma NAV per unit is $0.88 cents versus its IPO price of $0.81. This means a price to book of 0.92x.

Use of Proceeds

The use of proceeds is summarized below.


Projected Yield

EC World REIT is projecting a yield of 7.1% for FY2016 and 7.3% for FY2017. Without the "Master-Lease" arrangement, the yield for FY2016 will be 5.8% instead of 7.1%. The Master Lease arrangement will last for 5 years and the Sponsor believed the rental revisions thereafter will help breached the difference.


The distributions will be made every semi-annually to unit holders.

What I like about the EC World
  • The Sponsor expected to hold 45% of the REIT (assuming over-allotment is not exercised), providing some alignment of interest
  • Hangzhou is the "heart" of known e-companies such as Alibaba and Xiaomi and the business models evolved around efficient logistics and warehousing
  • The acquisition of the portfolio at 80% of the appraised valuations and its NAV is higher than the IPO price
  • The logistics and e-commerce sectors in China is expected to continue growing strongly
Some of my concerns
  • Out of the 6 properties, only 3 have been operational for more than 3 financial years.
  • Historical pro-forma was not provided for the last 3 financial years 
  • While i have not done any benchmarking, it seemed that fees are being layered everywhere with 10% p.a. of distributable Income as base management fee, performance fee of 25% of any uplift in DPU from prior year, "development management fee" of 3% of project costs incurred and property management fee of 1.5% per annum of the gross revenue of relevant property. I haven't even mentioned acquisition and divestment fees!
  • Dilution from the issuance of units for Management Fee for FY2016 and FY2017
  • Artificial yield support through "master lease" arrangement for certain properties for 5 years. The yield would have drop from 7.1% to 5.8% if there is no such arrangement or rental revisions therafter.
  • The remaining lease of the properties ranged from 37 to 45 years is pretty short. Not sure what will happen when the lease expires
  • The assets are concentrated in Hangzhou and will be tied to the economic health of that region too
Religare's view and Peer Valuation

Religare gave 5 reasons not to participate in this IPO. You can read it here.

(Source: Capital IQ)

EC World REIT is probably positioning itself for the tech and e-commerce angle but looking at the peers valuation, there are better options and they come without artificial financial support. 

Investors who want "REIT" exposure can consider some of the REITs in the table above such as Mapletree Logistics or Mapletree Greater China Commercial Trust.

Mr IPO's ratings

Questions to ask yourself before you apply:
  • Do you want to invest in another "logistics" REIT. 
  • Are you satisfied with the Yield from these investments? 
  • Do you want to have China exposure? 
  • Are there better comparables out there?
I will give it a zero Chilli rating - Avoid

I don't usually consider REITs for flipping, and will give it a miss for the concerns mentioned earlier - high fee structure, artificial yield support, low remaining leases (even though that is probably common in China) and better alternatives. 

Happy IPOing

Ps - I originally gave it a one chilli rating prior to going to bed, but felt that one chilli is probably too generous when I woke up.... and amended it to zero as it is more reflective of my review. ^_^





Thursday, 21 July 2016

Afterthoughts on Procurri ratings

Readers of my blog know that i hesitated quite a bit when I gave my ratings on Procurri over the weekend. In fact, i was quite hesitant to give it a 2 chilli rating but what eventually made me do it was the positive sentiments and demand from so-called "branded institutions" and you saw 4 of them in my update on balloting results.

Well, the beliefs that DBS was a "picky" manager and the presence of long only institutions is good for the IPO are probably "unfounded". The IPO didn't open as i expected and even tanked towards end of the day. 

While the ratings were done in good faith, I am actually quite upset with myself for not giving it a lower rating despite my reservation about its high valuation. As such, i am sorry to readers who was allotted shares based on my review.  

I would like to take this opportunity to share a few "lessons" on IPO for readers.
  1. Always invest based on your own analysis and understanding. My views should be just a reference and not a decision point
  2. Always have a plan when you subscribe for a IPO on the price level to take profit and the price level to cut losses. 
  3. If the IPO does not perform accordingly to your expectation, make sure you have a a cut loss plan and move on.
  4. IPO punting is not a substitute for retirement or long term investing. 
On a related note, readers always asked when the IPO review will be. You will have to be patient as this is not a full time job for me. I will try to do the write up over the weekends before the IPO closes.

Happy IPOing


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