What do most people look out for when buying a property? Location, location and location!
This is a term, according to language expert William Safire, coined by British real estate tycoon Lord Harold Samuel in his obituary when the latter passed away in 1987. However, the Americans disputed this claim and argued that this term was already popular in Chicago as early as 1926. Whatever and whoever it is, we should learn from the rich and successful if we want to be as rich and as successful as these people.
And what do most people look out for when buying a property stock? Management, management and management!
Without a good management team, investors are better advised to stay away from a property stock. Can anyone guarantee that City Developments will remain the same without Kwek Leng Beng? Would Ho Bee Land have been as successful without the foresight of Chua Thian Poh in spotting the goldmine at Sentosa Cove?
With this in mind, we explore and analyze why Capital City Group has the ingredients to be a successful property developer that will soon list on the Catalist board of the Singapore Exchange (SGX) through a reverse takeover (RTO) of Terratech Group – a loss-making company that may see some daylight after the RTO deal is completed.
The RTO deal involves Terratech Group acquiring Capital City Group for approximately $300 million, which will then see the former issuing 1,071,428,569 new consolidated shares at $0.28 per share immediately after a proposed share consolidation of every four existing shares into one share. After which, Terratech Group will subsequently be renamed as Capital World and to be listed on the Catalist Board of the SGX.
Who Is Capital City Group?
Capital City Group is an integrated property developer based in the region of Johor, Malaysia. It undertakes the entire project development from conception to design and implementation of integrated properties (mixed-use development).
It currently has three projects on hand that will keep it busy for the next five to eight years at least, of which two are in Johor Bahru (JB) and one in Perak.
Of the two JB projects, Project Capital City, located in the Tampoi region, is now 63.3 percent sold for the retail mall units available for sale and will continue to contribute to the top and bottom line as sales figures have been encouraging. Our own checks with industry sources indicate that mixed-use developments tend to breakeven at sales level of between 30 to 40 percent, which means that the group is now enjoying positive cash flow while every unit sold will be accretive to earnings.
Since the launch of Project Capital City, 63.3 percent of the retail mall units available for sale have been sold, 28.6 percent of the serviced suites units have been taken up while the third segment, the serviced apartments, comprising 690 units, has yet to be launched. From FY14 to FY16, Capital City Group booked a total accumulated revenue of RM120.7 million from the project registering an impressive compounded annual growth rate of 549.4 percent while net profit during that period jumped from a loss of RM13.7 million to a net profit of RM42.9 million in FY16.
In 1Q17, Capital City Group’s net profit increased to RM14.7 million from RM7 million in the corresponding period of previous financial year, while revenue almost doubled to RM27.7 million from RM14.9 million. We like the fact that the group’s net profit margin (NPM) is high. In FY15, which is approximately a year after the group launched its project, net profit margin came in at 31 percent and rose to 52.6 percent in FY16 and 53.1 percent in 1Q17 – much higher than our developers in Singapore that tend to yield an average of 20 to 30 percent. Even Bukit Sembawang, known to hold land at very low cost, managed merely NPM in the mid-30s range.
Sign Of Competitive Strength
Total accumulated revenue for Capital City Group from FY14 to 1Q17 stood at RM148.3 million. Based on the circular dated 29 March 2017 and as at 30 September 2016, 841 units of the 1,413 units not intended to be retained by Capital City Group were sold at an average selling price of RM2,853 per square foot. Going forward, apart from the unsold units, Capital City Group will approximately retain 242 units for future rental income or for sale in the future.
In the circular, the independent third party valuer has applied an average selling price of RM2,600 per square foot for retail units to be sold in FY17 and RM2,300 per square foot for FY18.
As at the latest practicable date 17 March 2017, Capital City Group has managed to sell another 54 units making the total sale and purchase agreements executed to 895 units and based on these units, Capital City Group still achieved a higher average selling price than that applied by the valuer.
Touted as an iconic thematic mall in JB, we believe that Capital City Group has the branding to sell its remaining units as well as maintain its selling prices despite rising interest rates that buyers will face, in addition to the competition from other development projects in Iskandar.
No, Not Iskandar Please!
To many investors, properties in JB are often mentioned in tandem with the Iskandar projects. We, however, beg to differ.
Many of the earlier Iskandar projects that have fared poorly are mainly on residential developments. However, Project Capital City is primarily a new retail concept, and residential units form only a small part of the entire development. Whilst retail projects are harder to design and execute, and hence avoided by other property developers, they play into Capital City Group’s strength of a strong management team.
The Tampoi region, although located at the outer belt of the JB city center, is only a 15-minute drive away from JB city centre. It is part of the JB core that has experienced an explosive growth in development that attracts primarily Malaysians as opposed to the Iskandar region where buyers tend to be foreigners.
The recent Forest City incident whereby Chinese buyers are faced with capital controls prohibiting buyers from paying for the rest of the property may have little impact on Project Capital City as its buyers consist mainly of locals.
Another prime advantage of Project Capital City is its location, which is conveniently located near to the Johor Port and the Pelabuhan Tanjung Pelepas port as well as neighbouring industrial areas where expatriates and can put up at the Hilton -managed hotel and serviced suites. We are optimistic, as Hilton, a global hotel brand, has chosen to partake in this project.
Management, Management, Management!
We are interested in the management of Capital City Group. Investors cannot ignore the qualitative aspect of a company as it is an important element to the business.
Siow Chien Fu, the Executive Director and Chief Executive Officer, is a veteran architect with 30 years of experience. He has spearheaded the design and development of various property projects in Malaysia and overseas, of which the more notable ones include Eco Tree Hong Kong and Malacca.
Having worked with property developers for the past 30 years, Siow brings with him a wealth of experience especially in the area of project management. Recognizing the importance of cash flow and the vulnerabilities of over-gearing with bank loans, he has developed a very unique business model that appeals to investors.
Partnering With Landowners
The Capital City Group’s unique business model of partnering with landowners ensures that the company is not exposed to the vulnerabilities of taking on bank loans. In a conventional property development model, financing the acquisition of a plot of land typically requires taking up the bank loans which may incur substantial interest cost and would sometimes cause undue due diligence checks by the lenders that could result in project delays.
On the other hand, Capital City Group’s model involves entering into joint venture agreements with landowners whereby Capital City Group would only pay the landowners a nominal deposit amount for the land entitlement at the start, with the remaining amount to be paid subsequently when Capital City Group receives the proceeds from its sales.
This arrangement helps to minimise the group’s capital outlay, in addition to the substantial interest savings from having to take up bank loans. Furthermore, the group only comes into the picture when the land is “ready for development”, and this mitigates project risk and holding costs.
This non-capital intensive and gearing-free model boosts the profit margin, something – we reiterate – that we really like. Highly-geared companies face too many risks, as investors have learnt in recent months through the problems faced by companies in the oil and gas industry.
Corresponding to its unique business model, we estimate that the Project Capital City’s construction costs could be as low as RM200 per square foot.
Although Capital City Group is a relatively new entrant in this industry, it has earned a feather in its cap with its maiden project which has secured the five-star award for the category of “Best Mixed-Used Development – Malaysia” and was highly commended for the category of “Commercial High-Rise Development – Malaysia” at the 2014 Asia Pacific International Property Awards.
The lack of similar malls in JB is a major plus for the group, which warrants attention with Siow Chien Fu at the helm. The gearing-free business model mitigates risks and, going forward, such business model will be duplicated in two other projects – Project Austin (JB) and Project Sitiawan Wellness Hub (Perak).