Hock Lian Seng – Staying a step ahead of Analysts


PhillipCapital has just yesterday (4th July 2016), initiated coverage of Hock Lian Seng Holdings with a sell/reduce recommendation:


“SINGAPORE (July 4): PhillipCapital has initiated coverage for Hock Lian Seng Holdings with a “reduce” recommendation and a target price of 31 cents.

Hock Lian Seng (HLS), the civil engineering and property development company, is likely to face challenges in its operating performance, despite forecasts that public sector construction demand in 2016 will be at its highest in 14 years, according to PhillipCapital research analyst Peter Ng.

The group currently faces increasing competition in public project tenders, due to the falling construction demand in the private sector. Coupled with higher labour and construction material costs, the group is expected to see compressed margins moving forward.

Ng added that the slowdown in the Singapore real estate market will also weigh down on HLS’s property development business. HLS’s FY2016 earnings are expected to be lowest in three years on the back of the absence of revenue contribution from property development and a muted property investment segment.

Weakened industrial property demand arising from oversupply and rising vacancies in the segment, will make it more difficult for take up rates to be high at the group’s new industrial property project, Shine@Tuas South. Revenue recognition will also only occur after the property is completed in 2018, and is “unlikely to fetch an attractive average selling price due to keen competition within the vicinity as well as the lower land tender prices since Nov 2015”, writes Ng in a note.

In the residential property segment, HLS’s 50% joint venture residential development project, The Skywoods, was 99.5% sold as at May 2016, and a large proportion of its development profits have already been booked.

Furthermore, the group’s main investment property, a worker’s dormitory, had ceased operations after its lease expired in Nov 2015. As such, Ng expects minimal revenue contribution from the group’s investment property segment until another investment property is purchased and begins operations.

PhillipCapital has forecast dividend payments to fall in the next three years on the back of declining earnings until the completion of its industrial property in 2018.

HLS shares closed at 34 cents on Monday.”

My thoughts

It’s no secret that I am usually critical of such analyst reports. While I understand that they are just doing their job, in my experience, the typical investor who blindly follows the recommendations of such “experts” will be in for huge losses.

I have seen many such reports who consistently get it wrong, then quietly and without much fanfare, simply cease coverage.

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Let’s think about the dynamics.This is a job to the analyst. The typical analyst would have a deadline for a certain report, he finishes it before the deadline, it’s a job well done. In the meantime, he goes to the office at 9am, knocks off at 6pm, looks forward to the weekend, and starts again on a Monday.

But most analysts will not be doing things that are tough. He won’t be researching while on leave, analyzing data during the weekends, digging for information late in the night, going out of the way such as doing site visits, asking hard questions of the management or spending his own money to get all these stuff done.

If the analyst is wrong, well i’m sure it hurts. But not nearly as much as it’d hurt me as an investor if I’m wrong. Because I have real, cold hard $$$ in the game.

My motivations are completely different. There is no working hours. There is no deadline. There is no boss. There is no report. There is no weekend break. Nothing.

My motivation is to get it correct, because if I’m wrong, I cannot just cease coverage quietly and move on. Well, I could, but it’d cost me big time.

So given such dynamics, why would the typical investor put so much emphasis on “analyst reports”?

But that’s the way the world works. Some of these reports do move the markets. Again, it’s human nature. I don’t agree with it, but it’s not going to change. It’s much easier to rely on what someone else who is presumably an expert, says, rather than do your own homework.

I’d be much more interested if at the end of the report, the analyst discloses that he has 50% of his net worth invested where his mouth is. That’d really make me sit up.

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Now, I know there are some analysts reading some of my posts, so let me be fair and disclose that I do follow analyst reports too. There is some value in them, mainly in data collection. Reports who compare across the industries with their peers are also useful, as the sheer amount of work that needs to be done to just get a peer comparison is madness.

Maybe there’s some program that allows one to do this, but as yet, I am still doing things the traditional way. Compiling figures number by number. Having an analyst report that looks at this, saves  me a lot of time.

Some analysts (not many), do take the time and effort to engage the company’s management too. These are useful too, as the management might otherwise ignore the small retail shareholder.  Having analysts with coverage of their company, helps to keep the spotlight and the pressure on the management.

Finally, I’d put things in perspective and note that these analyst reports are widely available and are free for the typical investor. I don’t think anyone can complain too much about free stuff.

My advice though, is “Always form your own conclusions”

Back to Hock Lian Seng.

There really isn’t much information in this analyst report that I haven’t already mentioned. Here, judge it for yourself from my earlier posts:

Post-mortem of Hock Lian Seng Divestment

Hock Lian Seng Group Investing Thesis

I’m glad I’ve divested completely BEFORE this sell recommendation. About a month before in fact.

Another problem with taking the counsel of such analyst reports is that you form part of the markets. If you sell when the report says sell, well, there are many others like yourself, reading the same report, drawing the same conclusions thereafter.

How does one beat the markets (which is surely the sole purpose of active investing), if one forms part  of the market?

I’d also add that some things in this report are a little bit misrepresented. For eg: “HLS’s FY2016 earnings are expected to be lowest in three years on the back of the absence of revenue contribution from property development and a muted property investment segment.”

Of course earnings will be the lowest in 3 years. The past 2 years has extraordinary gains from one off recognition of earnings as I described in my investing thesis. These gains are just accounting practices. In reality, the business operates as per normal. Only in the income statement is there suddenly a huge spike upon TOP.

A more accurate way to analyze would be to strip away all the extraordinary gains to see the normalized earnings without these one off gains.

One can even make the argument of averaging out the earnings over several years instead of just stripping it out.

Whichever the case, just saying that it’s expected to be the lowest in 3 years etc…. just isn’t very helpful. For the uninitiated guy reading about this company for the 1st time, it makes it look particularly bad. “Lowest in 3 years?!”

Finally, it’s time to give credit where credit is due. The analyst did write that the industrial project due in 2018, is “unlikely to fetch an attractive average selling price due to keen competition within the vicinity as well as the lower land tender prices since Nov 2015”

That’s something that I did not consider before. Afterall, industrial properties are valued by valuers who try to ascertain the “market price”. Obviously the selling prices of similar industrial properties and recent transactions within the vicinity, determine the prices Hock Lian Seng may achieve for them.

So some work should be done looking at similar developments in the vicinity, if any.

In any case, it’s hard to predict how it’d be like in 2018 so this is something to consider much later.


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