My Thoughts On Hock Lian Seng 9M16 Results


Hock Lian Seng kicked off the local earnings season for me, and they’re even kind enough to do so on a Friday so that I would’ve more time to analyze it leisurely.

To top it off, HLS’s financial results are my absolute favorite to analyze: It’s “clean cut”, they mention the reason for the changes for every item as best as they can, the business is relatively easy to understand and there are no fancy, techie type of words that make my simple brain pause and make me re-read it a few times to try to understand (re: my previous post about S i2i)

On a related note, some time ago I read a study that indicates that companies that release earnings results earlier, tend to outperform expectations compared to companies that release them later.

The study was retrospective and the conclusion is that “p” is significant aka meaning that the results of the study are valid. That’s just a thought that I’ve kept in mind ever since.

I went back to re-read some of my earlier thoughts to see whether it needs to be changed/updated. Thus far, nothing major has changed:

Updates on Hock Lian Seng Holdings (Post-Divestment) – August 2016

Hock Lian Seng – Staying a step ahead of Analysts

On a somewhat related note, I’ve often been asked in emails, about how does one go about analyzing a financial statement. I don’t really have a step by step process kinda answer to that. I think the best way is just to be guided by common sense, and dig deeper to answer each question that pops up in your mind.

It’s like asking a detective how does he go about solving mystery crimes. There’s a very broad structure (go gather the evidence, catalogue the evidence, roundtable with colleagues to discuss, spread the workload, compare results, identify potential suspects blah blah)

But the way to go about it specifically at each step, certainly has to be guided by one’s own thinking and questioning.

Let me use HLS’s FY16Q3 results as an example, because it’s financial statements are easy to read and understand.

Here, take a look:


One can glance through it, and be done with your analysis in something like 10mins. Then you’d have no competitive advantage over the markets.

But if one thinks logically about each step, the thought process and the thinking involved, as well as the subsequent digging to find answers, will probably take you hours. Perhaps even days if one is so adventurous.

Let me illustrate:

Income Statement

Here’s HLS’s FY16Q3 income statement:


At 1st glance, it’s not a pretty sight. Net Profit has dropped 26.3%, but that’s not the worst part. The worst part is the gross profit has dropped even more, by 69.6%, with the results being helped by the “Share of results of joint venture”, aka The Skywoods condo project.

The results are inline with my previous expectations, and should not be a surprise to any serious HLS shareholder.

We can expect that for the FY2016 results, the headline news though, wouldn’t be nice. I don’t think the share price can rise substantially with headline news reporting “……. Earnings slumped 27% y-o-y”

But all these thoughts are too simplistic. Let’s dig deeper:

Revenue dropped by 43.3%, Gross profit dropped by 69.6%, Net profit by 26.3%.

But wait! FY14 and FY15 results were boosted massively by “one-off” revenue and earnings from their Ark@Gambas and Ark@KB projects. So comparing it y-o-y like what the financial statements have done, really doesn’t tell us anything. Of course, it has dropped, what’d you expect?

What’s more accurate, is for us to analyze the normalized results, without these “extraordinary items”. Don’t forget that the revenue and profit recognition via the “Completed Contracts” method, is largely an accounting measure.

It doesn’t reflect what goes on in real life, on the ground.

So what’s more accurate, is to compare the results to that of FY13. With that, I drew up the FY13Q3 results to take a look:

290) HLS FY13Q3 income statement.jpg

Revenue in “normal” years, at this 9M stage, was $68mil in 2013 and $77mil in 2012.

This means that HLS’s current $85mil is actually rather impressive!

On top of that, 9M2013 revenue was boosted by a $7.6mil contribution from “Investment properties” aka their worker’s dormitory, which is no longer present now in 9M2016.

So, in short, the revenue that the civil engineering segment rakes in now is >>> in “normalized years” 2013 and earlier.

Perspective huh. Suddenly, the 43.3% drop in revenue in 2016… doesn’t look too bad afterall.

Well, here I’ve to temper any enthusiasm. The headline news is NOT going to be perspective. And whether one likes it or not, the news moves the share price.

Because not everyone is a value investor, and not everyone is going to spend their sat evenings peering at HLS results till 1am. But that’s not a bad thing. Otherwise, deep value investors like myself would’ve to find another hobby.

Alright, so now we’ve established that HLS’s civil engineering arm is actually not doing too badly, and considering that’s traditionally their main business, surely that’s good news.

The next logical part, is to assess their margins. I’ve mentioned in many earlier posts, that I view that as their competitive edge. And there’s not too good news here.

9M2016 Gross margins are 11.34%. I use gross margins first, to negate the effect of The Skywoods contribution, which is also one-off and extraordinary (yes, it lasts a few quarters because it’s POC method but as I’ll show later, my best guess is that it’s mostly over by the next quarter) (Also, if you find that you don’t understand some terminology in this post like “POC”, pls go read some of my earlier HLS posts)

In contrast, 9M2013 Gross margins are 30.62%. 9M2012’s is 26.93%. I further compared to Full Year Gross margins, just to iron out potential lumpy revenue recognitions quarter on quarter, and the results are outright ugly.

291) HLS GPM results 05112016.jpg

HLS’s current 9M2016 gross margins of 11.34% is the lowest amongst all the data I’ve compiled.

The only slight positive is that it’s risen from the 5.47% for 6M2016 and that it is higher than the civil engineering segment gross margins for 9M2015.

This is basically what I’ve predicted in my earlier posts, and one of my main reasons for divesting: the decimation of margins, which is why I vested in the 1st place, and the likely drop in earnings for 2016 and 2017, compared to prior years.

Alright, just to recap. Now we know that the revenue, although it looks bad currently, is actually… not too bad. The civil engineering segment is growing revenue-wise.

The bad news is that, the even though it’s raking in more $$$, it’s keeping less of it. Margins are much weaker than before, and it’s to be expected. The whole construction industry is working on razor thin margins, trying to bid for projects now. All the manpower issues come to mind too.

And, to put things in perspective, over the years I have analyzed many construction companies. 11.34% is actually very impressive if you compare to other peers.

It’s like if Ronaldo scores 15 goals in a single season, the fans are going to get on his back, the news will say he’s a goner, probably many pundits will analyze if he should just retire.

But 15 goals a season in many other teams, will probably mean you’re the top scorer. Again, perspective.

Alright, let me move on.

As we can see in the financials above, the 9M2016 results were boosted by a $10.7mil “Share of contribution from a joint venture”.

This is VERY significant. Why?

Not only is it significant in quantum terms ($10.7mil contribution when the net profit is $18.6mil), the profits from The Skywoods are already taxed at the joint venture company level, so this means that the $10.7mil flows directly down to the bottomline!

Again, guided by simple logic, seeing 9M results are so heavily reliant on a boost from The Skywoods contribution, the next question that any analyst would have to think about, surely must be: “How much more is The Skywoods joint venture going to contribute to HLS in the coming quarters?”

Makes sense right?

Again, based on logical reasoning, to know how much more the JV will contribute, one has to know what’s the approximate profitability of this project. Then one has to track the amount of contribution given already in previous quarters, before one can finally try to guesstimate if The Skywoods will come to save HLS in further quarters.

OK here it gets a bit more tricky, because it’s notoriously difficult to predict the profitability. Still, some ballpark figure would be better than no attempt at all.

Some details:

The Skywoods project is a 50-50 JV. The land was tendered at S$244,318,000 on 25 September 2012. ($616 psf land cost). I’ll assume development costs to be about $500 psf. From my calculations, the ave sale price for the entire development works out to be $1,210 psf. (Got this by adding up and averaging all sales transactions derived from URA)

That works out to be a profit of $94 psf, or a total profit of approximately $42.82mil. I’m going to be generous and assume a tax rate of only 10% (it should be 17% for corporate tax rate, but in recent years there are tons of tax breaks and benefits that the JV could’ve utilized.)

That means HLS’s share of profits would ultimately be about $19.27mil.

Thus far, HLS has received $10.73mil in 9M2016, $8.01mil in 2015 and $43k in 2014 for a total of $19.17mil.

Now, obviously my calculations for the share of profits are arbitrary, but the ballpark figures would give a hint that we shouldn’t be expecting mega profits to come streaming in subsequent quarters from the JV.

Perhaps all the calculations above are redundant. Why? Simply because the project has TOP-ed in June 2016 (last 2 units sold in June 2016 too), and based on POC, we’d expect the final profit distribution sometime after TOP. It’s the 3Q now, so for sure I’ll be expecting the JV to distribute profits.

Another hint is the return of the $60mil loan from the JV to HLS, as we can see in the CF statement.

Yet another hint is that the share of profits from JV was $1.07mil in 1Q16, $10.04mil in 2Q16 and $10.73mil in 3Q16.

The massive jump in 2Q coincides with the TOP of the project.

The conclusion is that for full year 2016, I expect the contribution from JV to increase only very minimally, if at all, from the current $10.73mil i.e. most of the profits are distributed.

By extension, this also means that I can somewhat predict that the full year profit for 2016, will drop > 26.3% compared to 2015.

Now, part of my interest in monitoring The Skywoods project, is not just because of HLS. Part of the JV includes King Wan, and since the JV has distributed $$$ to Hock Lian Seng, I’m expecting King Wan to receive it’s share of the profits in this quarter too.

This is a classic example of how in depth understanding allows one to derive a competitive advantage. King Wan’s 3Q results are not out yet, but if I am pondering whether the upcoming results will be positive or negative, or how it’d perform relative to the market’s expectations, surely such information would give me an advantage in determining that.

Now it’s not all gloom and doom though.

The BS is where shareholders can find comfort:

292) HLS BS 9M2016.jpg

Just look at the amount of Cash and cash equivalents! A large part comes from the $60mil reduction in “Loans due from a joint venture”

The cash on hand works out to be about 37 cents/share. And the share price now is 36.5 cents. Doesn’t make sense isn’t it.

And that’s not even including the non-current investment securities. From HLS’s earlier releases, these securities are mostly bonds type securities, so one can argue that they are technically cash equivalents.

In short, the company is incredibly cash rich, with very minimal debt.

Finally, from a CF perspective, the company is likely to have increased it’s cash holdings a lot  for FY16, simply because of the $60mil loan return from the JV.

HLS also has a great FCF record, only having a -ve FCF year back in 2012 due to investments to develop Skywoods.

From 2010 to 2015, the FCF record looks like this:

Free Cash Flow 32,125 30,892 -187,402 27,659 108,347 12,001


Well, it’s similar to my previous thoughts when I divested actually. The company earnings picture will not be fantastic this or next year. I’ve previously predicted the full year earnings to come in between 4.5-6.5 cents.

It’s still on track to be within this range, but in all likelihood, I’m expecting it to be below 6 cents.

Seeing how cash rich the company is, I’m expecting dividends to be around 2 cents. Yes, lowered from last year’s 2.5 cents but we must remember last 2 years had extraordinary earnings to justify that.

HLS continues to be a company that I’m interested in, despite having divested. I’ll continue to stay updated, to understand the company better than the markets, and hopefully capitalize on my knowledge.

The main reason for this post, is not just to analyze HLS actually. Rather, I was hoping to illustrate how one can do a cursory analysis of a financial statement, vs how one can dissect a statement in detail and derive much more useful and important data.

Have no doubt about this: it is hard and tedious work. But then again, almost any competitive advantage anywhere is derived from hard work. Or pure luck.

In other unrelated happenings, I’ve just divested my tiny 90,800 shares in Libra Group at $0.192 on Friday, for an equally tiny profit. Still, I’m pretty pleased to have divested at a profit, seeing how the general markets have performed.


  1. Hi TTI,
    Great post on ” dissecting a financial statement ” , is really good learning journey for me as a non-accounting background,, yah ! , indeed , ” the headline news is NOT going to be perspective ” ,, it always just to ” catch the eyes of readers ” !
    Cheers !


    1. Hi STE
      Yes, for sure, that’s a good point. Their job is to be eye catching, so it’s not fair to expect the news to be perspective, and if the news are absolutely perspective, the markets would then probably be too efficient for our liking.


  2. Enjoy n learn a lot from your analysis.
    May I ask where you get or how you calculate the FCF?
    Thanks for your generous n sincere sharing…


    1. Hi sk
      There’s a complex way to calculate FCF, but its hard to use that formula when looking at consolidated statements. So the simplest way is:
      FCF = net cash from operating activities – Capex (capital expenditures)
      In the case of HLS, the only capex that’s significant is the “Purchases of PPE”
      Sometimes, to be more conservative, I will deduct certain items that I notice is recurrent every year from the operating CF to derive FCF. It’s not the norm, but then again, the whole idea of FCF is to understand how much cash is left over for the shareholders after cash is used to maintain the operations of the business. If the item is recurrent, and will likely be present for the future CF statements, I just take it out of operating CF to be more conservative in my estimate of FCF.
      Hope this helps


  3. HI TTI,

    Great sharing again! You are always able to write so well which makes people understand your thinking process.



  4. Thanks as always sharing your thoughts, really appreciate the honesty and depth you present.

    Quick question on the though – I’ve been following you for a while and can’t help notice that your thesis often coincides with how quickly the stock price moves. Aside from Geo Energy, it usually spikes in 5%, before languishing back down.

    Any thoughts on buy and hold forever even for deadbeat stocks? When and how do you decide to call in your investment?


    1. Hi M
      Thanks for commenting.
      I don’t think there’s any correlation between my thesis and any “spike” in the stock price. To begin with, any thesis is usually written after some changes I’ve done, but the exact timing is absolutely random. It may be written and posted the day itself, a few days after or even a week or more after, although I try not to write it too late so that it’s relevant. So any trend or effect you notice is most likely to be coincidental.
      For Geo Energy, the share price was moving up rather rapidly, but again, it is coincidental. I was already researching the company, and as I mentioned, I was actually rushed into completing my due diligence and quickly taking up a position.

      As for the 2nd part of your question, ah that’s a good one. These days, I try to initiate a position only when I can find a catalyst. A undervalued scenario alone is not enough. This is because IMO, there will be many undervalued situations cropping up when liquidity is being drained. Without an obvious catalyst, these situations may remain undervalued for a very long time, particularly so in the local context. In US, Nikkei or HK markets, where there are many activists prowling the markets, undervalued situations may find catalysts more easily.
      The catalyst I look for may be something as simple as just increased earnings in the following year, or an increasing cash hoard from FCF generation, so it doesn’t need to be an event per say.
      The most obvious sign that it’s time to divest, is obviously when the parameters veer into the fairly valued or over valued range. That was my thinking previously. Again, now with deep value situations, I think divestment is an art itself, needing just as much thinking as the initial investment. So I constantly keep looking at the share price and updating the thoughts, in terms of valuations and where the company is going. In other words, it’s no longer as simple as a “Target price” and hitting the target price.
      On top of that, I also consider overall portfolio allocation: If I divest, what next? Do I keep cash? Or can I find better opportunities to reallocate capital?
      I may divest even when I think there’s more upside or that its NOT fairly valued yet…. but I can find more compelling situations and need to allocate more capital there.


    1. Doesn’t matter if it spikes or not… esp since you mentioned it’s like 5% or so?
      There can be a million and 1 reasons why any share price can rise suddenly temporarily and fall back down again, don’t think we should bother ourselves too much with it.


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