Bull Stock: Ho Bee 2 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
The property boom in Singapore is well-established by now, with all developers' share prices enjoying buoyant valuations not seen since probably the mid-1990s boom. Among these, those with well-defined market positioning have outperformed: among these, Capitaland as the easily identifiable market leader and its asset light-enabling REITs approach has done extremely well, as well as SC Global with its ultra high-end developments, but easily the best outperformer these few years (in terms of share price) has been Ho Bee, which has risen from being the smallest pure-play developer in the late 1990s-early 2000s to the verge of becoming a property heavyweight in the local market. The key reason for its success: one word --- Sentosa.

The company was a relatively new arrival to the SGX, listing in late 1999 at $0.48. Since its inception in 1987, it had been undertaking miscellaneous residential (condominium and landed) projects in Singapore, with the odd industrial development (interestingly, recently they have been expanding their industrial landbank again). Under founder Chua Thian Poh, the company also ventured into property development/investment in prime districts of central London in 1996, disposing of most of these investments at good profits by the late 1990s/early 2000s.

Nothing exciting, for they were considered small fish in the Singapore property market; property development after all was a capital intensive business, and it was conventional wisdom that the bigger the better. In fact, the company's share price tanked straight after listing, and remained in the doldrums for the next 3-4 years at between 15-30 cents, below NTA of ~40 cents; as were the rest of the property players in a depressed property market. It was worth noting however, that while the bigger players like Capitaland and Wing Tai went into the red at the turn of the millenium, Ho Bee remained profitable, albeit less so.

Another development was worth noting, with the benefit of hindsight. In December 2003, Ho Bee successfully tendered for two plots of land for residential development in Sentosa Cove, Sentosa Island. One of these eventually materialised into the first condominium development on the Sentosa waterfront district, The Berth by the Cove; the other contained the first terrace houses, The Berthside. The units in these two developments were snapped up by 2005.

It is worth exploring the pessimism surrounding Sentosa at the time of the property tenders in late 2003. The macroeconomic environment of course, was tentative; sentiment had bottomed with the SARS crisis just half a year earlier, and the stock market had barely recovered (of course, nobody knew then it was preparing for a multi-year bull charge). Zoom in to individual district level: Sentosa was perceived to be a declining tourist resort, with the only commercial attraction nearby being the new Harbourfront retail mall (aka World Trade Centre). In 2002, Sentosa's management authority had embarked on a ten-year strategic plan to rejuvenate Sentosa, but the fact that most mainstay property developers avoided the December 2003 tenders reflected the lack of their belief that this masterplan could succeed.

The extent of the pessimism was reflected in the ~$200 psf ppr for the terrace parcel, and the $350 psf ppr for the condominum parcel. For comparison, the recent Sentosa Cove acquisitions (for condo development) by Ho Bee: the Waterfront Collection (Dec 06) and the Seaview Collection (Mar 07) were transacted at $900 psf ppr and $1300 psf ppr respectively; how times have changed! Selling prices for Sentosa condominiums are now projected at north of $2000 psf.

The whole rejuvenation of sentiment surrounding Sentosa has been driven by two hot property themes that are somewhat inter-related: the rise of "waterfront living" and the development of the Sentosa IR. Real estate often seems to elicit an emotional resonance within many people, which accounts for the vast disparity in property prices across areas in close proximity. Successful marketing of a certain lifestyle associated with the property can stir these emotions, and this is what has happened with the idea of the waterfront lifestyle which has captured the imagination of foreigners and affluent locals alike. While areas like Meyer Road claim good sea views, Sentosa developments (especially landed properties) can claim true proximity to the ocean --- just a few steps away. The success of developments at Marina Bay (The Sail) and at initial developments at Sentosa perpetuated the positive feedback process. For this, Chua Thian Poh should be credited for his foresight and conviction in the value of Sentosa as a residential area.

In mid-2005 the Singapore government announced plan to develop two "IRs" (aka casinos) by the end of the decade, and eventually it surfaced that Sentosa would be one of the locations. One wonders if the Sentosa IR had been in the political backburner all along; after all the Sentosa masterplan had been drafted in 2002, to develop the Sentosa-Harbourfront precinct as a world-class integrated leisure and lifestyle destination. Indeed, Vivocity was probably conceived before the IR announcement, but with the impetus of the formal Sentosa IR decision, there was now a buzz around the region, with new entertainment outlets springing up in the form of St James Powerstation and talk of a regional cruise hub developing around the cruise terminal. Meanwhile, the Harbourfront commercial developments by Keppel packed in new prestigious tenants like Merrill Lynch, and residential developments across the bay from Sentosa, ie. Carribean, captured strong demand. District 4 had become THE place to be (see developments at Harbourfront).

Hence, perhaps Ho Bee's success in bottom-picking Sentosa had been a combination of foresight, that intangible known as luck, and connections (its chairman also headed the Chinese Chamber of Commerce). The government's conviction to develop the precinct was probably apparent quite early, though not the detailed plans. That may have been enough to bet on Sentosa in late 2003.

And so Sentosa boomed, and with it, Ho Bee, and along with it, the share price. It is as simple as that, though the company also developed other prime properties in districts 9/10/11. The company is now developer of more than a quarter (totalling >1M sq ft land area) of the allocated residential space on Sentosa Cove, as it built on its momentum following its successful 2005 launches and continued adding to its Sentosa landbank at increasing prices. The fully sold Sentosa projects and future launches can be seen on its website.

The company is now considered one of the larger mid-tier property players at >S$1.5B market capitalisation. At $2.36 last count, the share price has done a near eight-bagger over 3 years. Its FY07 profit is expected to run into several hundred million dollars as it books the profit on its earlier Sentosa developments. Supernormal profits for good property acumen, indeed.

References:
(1) Sentosa Masterplan projects
(2) Ho Bee IPO prospectus 1999
(3) Shares Investment Issue 256 report on Ho Bee