Tuesday, August 26, 2014

[SGX Portfolio] Buy: Hock Lian Seng

I like the backstory of this company. A construction company since 1969 that got itself listed in 2009. They do a lot of civil engineering work for a lot of the infrastructure in Singapore. Think MRTs and expressways. Not bad, right?

Lately they have been trying to diversify away from just civil engineering. I really like that. I believe that businesses need to choose 1 of 2 routes to survive. Either be extremely specialized and be the best in the industry or to remain competent and competitive, but diversify into related or unrelated businesses for stability. I personally think that the latter is the better route that most companies should adopt once their primary business is already quite established. But I digress.

Their business isn't a very complicated one.

Anyway, why am I buying into them, and at this price? I think it is mainly because of their latest quarterly results, which is much better than their annual report.

Based on their half year earnings, they are now generating net cash, so that's good. Now, how much of their Net Assets is cash? 91%. The company is 91% cash. They have enough cash holdings to pay many more years of dividends. Dividend yield at this current price should be a pretty whopping 6.9%

What is their net asset value? $0.267 per share. I decided to stop trying to penny pinch and just enter at $0.27. Like I said, in a few years time, it's not going to matter if my entry price was $0.265 or $0.27.

So I paid $0.27 for a company with net assets work $0.267, and cash equivalents of $0.245. Not bad I think.

The only thing that irks me is the fact that their debts are a huge 65% of total assets. I am not a fan of debt, but I suppose that debt really can't be avoided in certain industries.

So far, my best stock picks has been REITs and Trusts. My normal stock picks like stocks like this hasn't done much!


  1. Debt is not bad if one knows how to manage it. Having no debt on the other may be bad since one is not leveraging enough.

    1. Hi Anon,

      Yes, I must concede that you are right. In today's situation where interest rates are rock bottom low and debt is cheap and easy to come by, it makes sense for the best capital allocaters to borrow as much as they want.

      However, I am skeptical to how much debt is actually used by most companies for Capex and R&D. I would say most are not allocating capital efficiently. I still am impressed by the amount of cash that HLS has on their balance sheet though, so I still view them as clean even though their gearing is so high.

      The reason why I like companies without debt is a simple reason. Without debt, it is terribly hard for a company to go bankrupt. They might barely break even or even make losses some quarters, but unless there is a serious fundamental flaw in their business or business model, low debt companies can weather through an extended period of turmoil.


  2. 1) interesting factor of HLS is the succession of its top officers as there might be a few shuffle soon if what i heard has been correct. that may or may not affect your valuation/analysis, however do note that in the construction sector, top management's personal network is an influential factor in securing future contracts.

    2) debt is a concern, which you pointed out. however i'm not sure if you took it as net debt or total debt, if it is the former, then there is quite strong cause for concern considering the capital intensity of construction/engineering works.

    3) WIP is always a cause of concern when reporting revenue for the quarter/year for construction companies.

    4) might want to look into the outlook of the construction and property sectors outlook as well.


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