Month: March 2016

Hock Lian Seng Group Investing Thesis



This is a company that I’m very familiar with, having held it since late 2012. I first initiated a position on Hock Lian Seng at $0.24.

Some background: Hock Lian Seng (HLS) is a civil engineering company with 3 divisions:

  1. Civil Engineering
  2. Property Development
  3. Investment properties

Here is HLS’s consolidated income statements for the past 6 years:

(SGD’000) FY10 FY11 FY12 FY13 FY14 FY15
Revenue 229,020 163,665 104,348 86,678 261,613 174,762
Cost of Sales -198,931 -122,953 -69,586 -49,860 -164,064 -136,012
Gross Profit 30,089 40,712 34,762 36,818 97,549 38,750
Gross Profit Margin 13.14% 24.88% 33.32% 42.48% 37.29% 22.17%
Other income 6,680 1,491 2,284 2,235 2,627 4,174
Distribution and selling costs 0 0 -770 -752 -942 -265
Administrative costs -5,309 -5,628 -4,518 -4,211 -7,002 -6,179
Changes in fair value of investment properties 1,086 2,479 -1,370 -2,780 -4,300 -2,381
Changes in fair value of investment securities 64 -2,107 104 -73 -279 535
Other operating costs -178 -186 -176 -125 -257 -255
Share of results of jointly controlled entities -1,761 43 8,012
Profit before taxation 32,432 36,761 30,316 29,351 87,439 42,391
Tax expenses -5,412 -5,685 -5,060 -5,453 -14,819 -5,691
Profit after tax 27,020 31,076 25,256 23,898 72,620 36,700
Net Profit Margin 11.80% 18.98% 24.20% 27.57% 27.76% 21.00%
Earnings per share (cents) 5.3 6.1 4.9 4.7 14.2 7.2
Earnings growth rate (%) 15.09% -19.67% -4.08% 202.13% -49.30%
Average earnings, past 3 years 5.43 5.23 7.93 8.70

When I first invested in HLS, the main reasons are it’s nice fat margins, the huge gulf in value and price, and the experienced and capable management. HLS’s management has previously spoke about protecting their margins, and the results do provide evidence of that. Look at the NPM! I have yet to find another construction company with this kind of margins.

To top it off, management has been very conservative. Their leasehold dormitory properties gets written off bit by bit every year. In recent years, HLS (As well as most other builders) have been facing fierce competition from foreign construction companies for civil engineering projects.

With all this in context, it is very impressive that HLS can maintain their NPM. I did a comparison with HLS’s peers (eg. KOH brothers) and HLS margins are way ahead. (Koh Bros NPM is around the 5% range).

So how does HLS maintain their margins when there are competitors doing what they’re doing and willing to accept much lower margins? Answer: By being very selective of the projects they take up. HLS does not do many things, but when they do take on a project, they are one of the most reliable in the business. They have won projects despite not being the lowest bidder. This is testament to their ability to execute as government contracts mostly put a large emphasis on the bidding price, and usually, the lowest bidder gets awarded the contract to build the infrastructure. In complex projects, HLS shines as they have a long track record of meeting deadlines and a stellar reputation for execellence.

This is their revenue and profit broken down into the 3 divisions:

 Revenue In $ millions 2012 2013 2014 2015
Civil Engineering 95.1 76.5 57.4 77.4
Property Development 0 0 193.5 89.5
Investment Properties 9.2 10.2 10.7 7.9
Total 104.3 86.7 261.6 174.8
Gross Profit In $ millions 2012 2013 2014 2015
Civil Engineering 28.6 29.7 37.5 11.0
Property Development 0 0 52.6 22.3
Investment Properties 6.2 7.1 7.4 5.4
Total 34.8 36.8 97.5 38.7

Most of their profit comes from government awarded civil engineering projects. In recent years, a huge chunk comes from property development (more on this later). The investment properties relate mainly to the dormitory business (which has since ceased in 2016)

Next, let’s take a look at their balance sheet. This is where it gets interesting. HLS’s balance sheet is easy to understand. They have minimal debt (always been net cash as far as I can find), ROE is crazily high and ranges from 16% to 35% from 2010 to 2015. The book value has also been steadily increasing (in cents):

FY 09 14.6
FY 10 17.5
FY 11 22.0
FY 12 24.9
FY 13 27.8
FY 14 40.3
FY 15 43.5

What’s interesting though, is the 2 industrial projects they’ve been developing that TOP-ed in end 2014 and early 2015. The revenues and profits of these projects are booked according to the “Completed contracts method” or “Completion of Contract” method (COC). What this means is that during the entire period of construction, the company does not recognise a single cent of profit or loss, and only upon completion of the project and handover to the client (TOP in this instance), does HLS finally recognise these in the income statement. In the meantime, they’d have paid marketing expenses to market and sell these units. All the construction progress, expenses incurred for the construction, and the amounts billed to the clients do show up somewhat within the balance sheet, so one can actually track the progress to a limited extent. In this instance, these 2 industrial projects (Ark@Gambas and Ark@KB) are parked under “development properties” within the current assets portion in the balance sheet. Since the cost of acquiring the land is known, and one can approximately guesstimate the breakeven cost to build the project, and the prices of the units already sold can be found easily, one can approximately work out how much is the profit to be recognised upon TOP of the project. This is why the earnings shot up drastically in the 2 years when TOP is reached.

This is the long term EPS (in cents):

FY 10 5.3
FY 11 6.1
FY 12 4.9
FY 13 4.7
FY 14 14.2
FY 15 7.2

Since then, the share price has risen substantially:



HLS has been one of the more successful investments for me. Besides a capital gain of close to 90% in just over 3 years, I’ve also received dividends of 1.8 cents, 4 cents and 2.5 cents (declared but have not received) in FY13, FY14 and FY15 respectively. At the initial entry price of $0.24, the yields are very healthy at 7.5%, 16.7% and 10.4%. I’ve also traded in and out, a small amount of my total holdings within the past 3 years. At 1 point, I held 1,000,000 shares in HLS.

Currently, I hold 750,000 shares. I am close to completing a re-evaluation of HLS and that will likely affect my position in HLS in the near future.