In a reverse takeover (RTO) move, Mainboard-listed VGO Corp issued 1.2 billion shares at 32.5 cents each, or $386 million in total, to Malaysia-based Hatten Group whereby the latter will own 92.8 percent of the Singapore-listed entity. The Hatten Group is owned by the Tan Brothers, Dato Colin Tan and Dato Edwin Tan.

Adopting the listing name of Hatten Land, the new listco will then issue up to 123.1 million new shares and the Tan brothers will sell 49.3 million vendor shares (compliance shares) as part of the RTO deal effectively giving the brothers approximately 80 to 85-percent control of the total share capital. Upon completion of the deal, Hatten Land will move its listing to the Catalist board of the Singapore Exchange.

Company Background

Hatten Land is a leading property developer in Malaysia focusing on integrated residential, hotel and commercial developments in Malacca. The company is the property development arm of the larger Hatten Group with core interest in property development, property investments, hospitality, retail and education.

The company has four key assets – Hatten City Phase 1 & 2, Vedro by the River and Harbour City – located strategically in the premium property segment of Malacca, and all four assets have enjoyed strong take-up rate providing the company with strong cash flow since its first launch of Hatten City Phase 1 back in 2011. Vedro by the River (65 percent sold) and Harbour City (Harbour City Suites 81 percent sold) were launched in 2013 and 2015, respectively, similarly contributing and top- and bottom-line.

Vedro By The River

Source: Company

Source: Company

China Backs Malaysia And Malacca

Headquartered in Malacca, Hatten Land is riding on the positive wave of geopolitical currents that see the Straits of Malacca as an important sea route that China is taking particular interest in. In a move regarded by many as a step to strengthen its economic and political ties with its ASEAN neighbours, China has invested huge sums of money in these countries so as to deepen multilateral ties. This augurs well for Hatten Land which owns a sizeable land bank in the historical city of Malaysia.

According to World Bank figures, Malaysia’s GDP grew by 5 percent in 2015 while Malacca – a high-growth city attracting plenty of foreign investments especially from China – outperformed the national economy by growing 5.5 percent in the same year.

A signal that there are greater investments to come from China is the weekly scheduled flight to and from Guangdong as well as the “One Belt, One Road” policy of President Xi Jinping is expected to boost China’s economic ties with Malacca

The growing importance of Malacca as an investment destination for Chinese investors are a major positive for growing the revenue of Hatten Land, which has been proven to be a premium developer.

Hatten City

Hatten city

Source: Company

Unlocking Value In Land bank

Hatten Land has the Right of First Refusal and call options to approximately 9.4 million square feet (215 acres) of land bank, of which about 82 percent are located in the high-growth city of Malacca where a sizeable plot can be found along the coastal area near the Malacca Gateway – a RM40 billion project unveiled by Prime Minister Najib Razak.

The company has access to acquire more than 20 land bank and development rights in Malacca, Cyberjaya, Johor Bahru and Seremban where it can, through the Right of First Refusal (ROFR) and call option granted to the company, conduct reviews on whether the land bank meets the criteria for further development. It has started plans to develop part of the land bank which can only be a positive for future earnings.

The most attractive investment merit, we opine, is the cost of the land that Hatten Group has on its books. In an announcement on 10 February, the company revealed that “the consideration for the acquisitions of the assets from the respective Land Companies, where applicable, is expected to range from RM30 per sq ft to RM 80 per sq ft (based on land area), taking into account, inter alia the plot ratio, the status and the location of the respective assets”. A further check with industry sources also confirmed that land cost, when Hatten Group took roots in Malacca, could indeed be as low as RM30-RM80 per square foot. Industry sources also revealed that construction cost for mixed development projects range from RM200-RM300 per square foot, putting total development cost – including land cost but excluding financing and related costs – at not more than RM400 per square foot.

On a blended average cost basis, land plus construction cost comes in at an average of about RM300 while selling prices of mixed development projects in Malacca can fetch an average of RM1,000 per square foot for residential units and RM2,750 per square foot for commercial units at current market prices.

As the cost of entry is low and profit margins are high for Malaysia developers, Hatten Land stands to benefit greatly from the high average selling price and low cost of its land when revenue is finally recognized .

Habour City

Source: Company

Source: Company

How To Value Hatten Land?

Hatten Land has the right to acquire a total land bank of 9.4 million square feet which, if assumed is fully developed based on a minimum plot ratio of six, will yield a total gross floor area of 56.4 million square feet or, if fully monetized at a lowly RM1,000 per square foot, bring in RM56.4 billion in revenue. This is, of course, an unrealistic way of calculating the value of a property company but just based on the four developments in Malacca (Hatten City Phase 1 and 2, Vedro by the River and Harbour City) that will see further revenue recognition from 2017 to 2023, revenue is unlikely to fall below the RM436.3 and RM412.3 million that was recognised in 2015 and 2016, respectively.

The Revalued Net Asset Value (RNAV) of Hatten Land stood at $506.4 million as at June 2016, which translates into a post-listing RNAV of about 39.6 cents. At 32.5 cents for the RTO deal, the controlling shareholders took a 18 percent discount off the RNAV while market sources revealed that the compliance shares could be priced at an even deeper discount to the RNAV as well as the price that the Tan Brothers paid for the RTO deal.

This definitely represents deep value for potential investors who are looking at a piece of property play in high-growth Malacca especially when potential realization of profits kicks in. The most attractive and sexy story of this property counter, in our opinion, is the extremely low prices that the company will be able to pay for the acquisition of new land bank.

Financial Highlights

Source: Company

Source: Company