Is Wing Tai a Value Trap? (Part 1 of 2)

Value Investing Case Study 10-1:  This post focuses on the company analysis of Wing Tai and illustrates the difference between what accountants look for and what investors look for in the company's financial statements.

As of 26 Feb 2021, Wing Tai Holdings Ltd (Wing Tai or the Group), Singapore's leading property and lifestyle group, is trading at SGD 1.91 per share compared to its book value of SGD 4.15 per share (as of the end of Dec 2020).

As a property group, a significant part of the value is tied up in the assets. With a price that is about half of the book value, the first thing that comes to mind is whether this is a value trap.

To dismiss a company as a value trap, you have to show that its assets are not going to be impaired and that it will continue to generate positive free cash flows. Next, you have to show that there is ample margin of safety between the current price and its intrinsic value before you conclude that there is a buying opportunity. 

To be able to show all these, you have to carry out a fundamental analysis.

Join me in a 2-part series as I share the basis for why Wing Tai is not a value trap. I present Part 1 here and will publish Part 2 in 2 weeks’ time. An update was published on 10 April 2022.

Is there an investment opportunity?  Well, read my Disclaimer.

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This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Contents

• Is there Anything Special about the Group’s Expertise?

• Is there Concern about how it Uses its Funds?

• Is the Current Performance Outstanding?

• Tracing the Group’s Rich and Unique History

• Is there a Great Future?

• Pulling it all together

Valuation Date	26 Feb 2021
Company Name	Wing Tai Holdings Ltd
Stock Name in SGX	Wing Tai
Company’s SGX Trading Code	W05
Listing Date on SGX	Feb 1989
Financial Year End	June
Latest Half Year Results	Dec 2020
Shareholders’ Equity	SGD 3,194 million (31 Dec 2020)
Market Capitalization	SGD 1,471 million (26 Feb 2021)
Corporate Website	https://www.wingtaiasia.com.my/
Table 1

Case Notes In undertaking a fundamental analysis I rely a lot on the company’s financial statements. According to Damodaran  “...there is a difference between what accountants try to measure in financial statements, and what financial analysts would like them to measure. Some of this difference can be traced to the differences in objective functions - accountants try to measure the current standing and immediate past performance of a firm, whereas financial analysis is much more forward-looking.” This case study is a good example between accounting treatment and investment analysis. There are 2 items here: Perpetual securities. Investment in associates and joint venture. In the Wing Tai Balance Sheet, perpetual securities are treated as part of equity.  But there is a commitment to make regular payments.  And there are no shareholders’ voting rights associated with the perpetual securities. This is more debt-like rather than equity-like. As such I have re-classified perpetual securities as part of long-term debt in my analysis. Secondly, the Wing Tai Income Statement treated the associates' and joint ventures' contributions as non-operating income. Since these are large, I have treated them as part of operations when analyzing the Group revenue and profits (ie based on a Look-Thru basis). This Look Thus basis is inspired by Warren Buffet. Warren Buffett created a metric for the average investor known as look-through earnings to account for both the money paid out to investors and the money retained by the business. The theory behind his look-through earnings concept is that all corporate profits benefit shareholders, whether they are paid out as cash dividends or ploughed back into the company.  Look-through earnings can be calculated by taking an investor's pro-rated share of a company's profits and deducting the taxes that would be due if all profits were received as cash dividends. Accordingly, my Look Thru basis is to include the pro-rated share of the associate/joint venture company’s revenue and profits as part of the Group revenue and profits.  With a number of different ways to analyze and value companies, how do you determine which to use? This is where experience comes in.  So, if you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses.  There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.

Case Notes

In undertaking a fundamental analysis I rely a lot on the company’s financial statements. According to Damodaran 

“...there is a difference between what accountants try to measure in financial statements, and what financial analysts would like them to measure. Some of this difference can be traced to the differences in objective functions - accountants try to measure the current standing and immediate past performance of a firm, whereas financial analysis is much more forward-looking.”

This case study is a good example between accounting treatment and investment analysis. There are 2 items here:

• Perpetual securities.

• Investment in associates and joint venture.

In the Wing Tai Balance Sheet, perpetual securities are treated as part of equity. 

But there is a commitment to make regular payments.  And there are no shareholders’ voting rights associated with the perpetual securities. This is more debt-like rather than equity-like. As such I have re-classified perpetual securities as part of long-term debt in my analysis.

Secondly, the Wing Tai Income Statement treated the associates' and joint ventures' contributions as non-operating income. Since these are large, I have treated them as part of operations when analyzing the Group revenue and profits (ie based on a Look-Thru basis).

This Look Thus basis is inspired by Warren Buffet.

Warren Buffett created a metric for the average investor known as look-through earnings to account for both the money paid out to investors and the money retained by the business.

The theory behind his look-through earnings concept is that all corporate profits benefit shareholders, whether they are paid out as cash dividends or ploughed back into the company. 

Look-through earnings can be calculated by taking an investor's pro-rated share of a company's profits and deducting the taxes that would be due if all profits were received as cash dividends.

Accordingly, my Look Thru basis is to include the pro-rated share of the associate/joint venture company’s revenue and profits as part of the Group revenue and profits. 

With a number of different ways to analyze and value companies, how do you determine which to use? This is where experience comes in. 

So, if you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses.  There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.

Is there Anything Special about the Group’s Expertise?

Wing Tai was founded in 1955 in Hong Kong as a small garment manufacturer. Since then, the Group has expanded both regionally and sector-wise so that today it has 3 main business segments:

• Property Development with both residential and commercial properties.  Current projects are in Singapore and Malaysia.

• Property Investments with serviced residences, office buildings, data centres, and hotels. These were developed across several geographical locations.

• Lifestyle Retail. The Group has many branded stores in Singapore and Malaysia with many lifestyle brands as Uniqlo, Topman, and Dorothy Perkins.

From a corporate structure perspective, there are 2 listed entities within the Group:

• Wing Tai Ltd (Wing Tai) which is listed on SGX.

• Wing Tai Properties Ltd (WTPL) which is listed on HKEX. Wing Tai owns 33 % of WTPL. 

In terms of Total Assets employed, the Group is a property group. 

The chart below showed that on a Look Thru basis the majority of the Group’s assets are tied up in properties.  There is about an equal amount in Property Development and Property Investment.

Chart 1: Total Assets by Business Segments

Notes: Based on Jun 2020. The "Others" is a negative value in 2020

Is there Concern about how it Uses its Funds?

The Group has a total capital employed (TCE) of SGD 4,291 million as of the end of Dec 2020, with SHF and loan accounting for about 74 % and 24 % respectively.  Note that in my analysis, I have classified the perpetual securities as part of Long-Term Debt. 

About 42 % of the TCE is deployed for its operations.  Another 40 % tied up in investments in associated and joint venture companies, the majority of which are investments in WTPL.

Items	Ref	SGD million
Shareholders’ Equity	SHF	3,194
Minority Interests	MI	74
Debt, Perpetual Securities	Debt	1,023
TCE		4,291

Items	Ref	SGD million
Net Operating Assets	Net OA	1,790
Net Financial Assets	Net FA	787
Associates/Joint ventures	Non-OA	1,714
Total		4,291
Table 2: Based on 31 Dec 2020

Chart 2: Sources and Uses of Funds

The Group did not provide any information on how its funds are deployed regionally.  

However, it provided a regional breakdown of the non-current assets on a Look-Thru basis (ie including the investments in associate and joint venture).

As can be seen from the chart, Hong Kong accounted for the biggest portion with 58 % followed by Singapore with 29 %.  

Chart 3: Non-Current Assets Deployed by Countries

Is the Current Performance Outstanding?

For the YTD ended Dec 2020, the Group reported revenue and PAT that was 33 % and 74 % higher than those for the same period last year. Part of the improvement in PAT was due to the gain on disposal of investment property and plant, property, and equipment.

While this is good news, as a long-term value investor, I prefer to analyze performance from a long-term perspective. 

I classify the Group as undergoing a turnaround because of its performance over the past few years.

I tracked the relative performance of the Group from 2008 to 2020 based on 3 metrics as shown in the chart below. 

• Although revenue grew from 2008 to 2013, it declined since then so that over the past 4 years, annual revenue has been below that of 2008.

• PAT has been volatile over the past 13 years, reaching a peak in 2013 where it was 3 times that of 2008. It declined from then and from 2015, annual PAT has been below that of 2008.

• Gross profitability has also declined to be below the 2008 level from 2015 onwards.

Chart 4: Performance Index

Note: I normally look at 12 years of performance and as such would start charting from 2009. However, as the PAT was very low in 2009, it would have meant that the 2013 PAT index would be about 25 times larger than the 2008 index. This would have made it difficult to have the 3 indices in one chart.  As such, I have used the 2008 value as the base index for all the metrics. 

The turnaround situation is because the average ROE and gross profitability of the past 3 years have declined considerably compared to those for the period from 2008 to 2010. 

• From 2008 to 2010 the average ROE was 9 % compared to the average of 3 % for the past 3 years. 

• From 2008 to 2010 the average Gross Profitability was 9 % compared to the average of 4 % for the past 3 years.

• The average revenue for the past 3 years is about 39 % lower than the average revenue for 2008 to 2010.

Table 3: Past 3 years performance

To get a better understanding of whether all the business segments have been pulling their weight in terms of returns on the funds employed, I have analyzed the segment performance as shown below. 

Chart 5: Segment performance

The analysis showed that the poor returns for the Group are because of poor returns by both the Property Development and Property Investment segments. 

The investment in associates and joint ventures accounted for 40 % of the Group Total Assets.  This is sizeable. As such it may be more appropriate to look at the business performance on a Look Thru basis.  The table below shows one such basis.

• Both the Property Development and Property Investment segments have similar EBIT contributions on a Look Thru basis.

• The Retail segment has only a small Look Thru EBIT contribution although it has the best return at 11 %. 

Table 4: Look Thru Returns

Any turnaround would depend on both the Property Development and Property Investment segments improving their respective returns. 

Tracing the Group’s Rich and Unique History

Wing Tai started out in Hong Kong in the 1950s as a small garment manufacturer. It eventually extended its operations into Singapore and Malaysia in the 1960s. (Source: Singapore Infopedia).

In 1984 it ventured into the retailing of ready-made garments in Singapore and extended this to Malaysia in 1989. Currently, it is one of the largest fashion retail companies in Singapore and Malaysia. It retails such brands as Uniqlo, Topshop, and Dorothy Perkins.

Wing Tai ventured into the property sector in 1978 with its first residential project in Singapore. Today its property activities in Singapore and Malaysia are far larger than the retailing operations.

It added investment properties to its portfolio in 1991 with the completion of Winsland House, a grade A office block in Singapore. 

Before 2017, the Group comprised 3 listed entities - Wing Tai Holdings Ltd, WTPL, and Wing Tai Malaysia Bhd.  In 2017, Wing Tai Malaysia was successfully privatized and delisted and its results are now consolidated as part of the Group results. 

Wing Tai has a long history of forming strategic alliances to expand its business. For example:

• In 1984, it formed a joint venture to retail clothes designed under the G2000 brand.

• In 1993 it entered into 2 Singapore government-back consortia to develop properties in China.

• In 2000 it established a real estate fund with AIG to develop 2 prime properties for sale in Singapore.

One such result is that today Wing Tai's investments in associates and joint ventures accounted for 40% of its Total Assets. It was only 19 % in 2008.

As such any meaningful analysis of its business should be carried out on a Look Thru basis.

On a Look Thru basis, Wing Tai has become a more regional player over the last 12 years expanding its Assets to Hong Kong, Australia, and Japan.

Chart 6: Look Thru Assets by Country

As illustrated in the Performance Index Chart 4, the 2020 Group accounting revenue is at about the same level as that in 2008. 

However, on a Look Thru basis, you can see that 

• Revenue has actually grown.

• The profile of the revenue has changed. While the Property Development segment revenue has declined from 2008 to 2020, the Property Investment and Retail segments revenue have actually grown bigger. 

• The Retail segment accounted for 45 % of the Total Look Thru revenue in 2020 compared to 36 % in 2008.  This was the result of the Uniqlo joint venture that was formed in 2009.

• In 2020, about 2/3 of the Property Investment Look Thru revenue was from Hong Kong.

• In 2020, almost all the Property Development Look Thru revenue was from Singapore and Malaysia

Table 5: Look Thru Revenue and EBIT 

In terms of geographical locations on a Look Thru basis, Singapore is the biggest contributor in 2008 as well as 2020 with 51 % and 55 % of the total Look Thru revenue respectively.

Table 6: Look Thru Revenue by Regions

In terms of EBIT, the Look Thru analysis showed that 

• The Property Development segment is still the major contributor although it has declined over the past few years.

• The Property Investment segment contribution has declined over the past 2 years.  This is because the fair value gain from investment properties has been a significant part of the segment EBIT in the past. There were fair value losses in the past 2 years. 

Chart 7: Look Thru EBIT 

What is the implication of the Look Thru analysis?  In looking at the business prospects of the Group we have to focus on the activities in Singapore and Hong Kong.  In terms of bottom-line contribution, Property Development and Property Investments are key.

Is there a Great Future?

Based on the Look Thru analysis, Wing Tai turnaround hinges on the Property Development and Property Investment segments.

Property activities are not only cyclical but also tied to the economic activities of the relevant countries.

Wing Tai and WTPL did not provide country revenue for each of the Property Development and Property Investment segments. However, in the respective Annual Reports, I could extract the following information by country:

• Property Development segment - the gross floor area of the projects.

• Property Investments segment - the lettable areas 

Based on this, I was able to compute the Look Thru development and investment areas by country as shown in the charts below. As you can see

• For the Property Development segment, Malaysia accounted for most of the floor area constructed. 

• For the Property Investment segment, Hong Kong had the largest lettable area. Over the past 2 years, the lettable areas in Australia and UK lettable areas have increased and even overtaken that of Malaysia.   

Chart 8: Look Thru Property Development floor area

Chart 9: Look Thru Property Investments lettable floor area

Thus, in looking at the prospects of the Group I considered both the Look Thru revenue and the Look Thru floor area. Based on this, the prospects for Wing Tai will depend on

• The demand for residential properties in Singapore and Malaysia. Note that although there is a larger development floor area for Malaysia compared to Singapore, the selling prices in Malaysia are much lower than those in Singapore.  That is why I have considered both Malaysia and Singapore as important markets for the Group.

• The demand for commercial properties/office space in Hong Kong

In this context

• The demand for residential properties in Singapore and Malaysia for the next decade would not be too be different from the past decade.

• From 2009 to 2019 the prices of residential properties in Malaysia more than doubled while that in Singapore increased by 30 %. 

Refer to the chart below for Singapore and the articles “In Malaysia, which has better returns: Stock market or Property” and “Is UOA Ltd a value trap”.

The price trends in both countries do not suggest any price decline. It is a safe bet that prices in the coming decade for both countries would be higher than what they are now. 

For Wing Tai, you can expect the same level of revenue from both these countries as it had achieved in the past. A reasonable future.

Chart 10: Singapore Private Residence Price Index.  Source: Dept of Statistics, Singapore 

The challenge is Hong Kong given that it is the most expensive global property market. The future of Hong Kong is also clouded by the new national security law. 

From 2009 to 2019, the price of residential properties in Hong Kong more than doubled while the office rent went up by about 85%.

Chart 11: Hong Kong Property Price Index.  Source: HK SAR Rating and Valuation Dept

Using the Price Index as a proxy for demand, I conclude the following:

• I expect to see continued demand for residential properties in Hong Kong. However, I do not expect the historical price increase. 

• For the investment properties, I do not expect to see the historical level of fair value gain as these were driven by the increase in rents.  Given that there was a 50 % drop in the mid-90s to mid-2000s, would there be a similar quantum of decline this time?

At this juncture, I am more inclined to view the contribution from Hong Kong in the future to be less than that in the past. 

Chart 12: Hong Kong Rental Index  Source: HK SAR Rating and Valuation Dept

Pulling it all together

• Wing Tai is a property group as the Retail segment assets are less than 5% of the Total Assets. At the same time, the Retail segment has only a small contribution to the Group EBIT. 

• Both the Property Development and Property Investment are about the same size based on assets. Based on Look Thru EBIT, the contribution from the Property Development over the past 13 years is about 50% larger than that from the Property Investment.

• Wing Tai is undergoing a turnaround with a past 3 years average returns of 3 % compared to the 3 years average return of 9 % a decade ago.

• Part of the losses in the past few years was due to the fair value loss from investment properties. Another part is due to the slowdown in the property development activities.

• The Group is financially strong with a debt-equity ratio of 0.3 and SGD 787 million cash.

• The Group's main property development markets - Singapore and Malaysia - are currently facing a soft market.

• The Group's main property investment market is in Hong Kong which is currently facing falling property prices. 

The financial performance of Wing Tai for the financial year 2021 has yet to take into account the full impact of the Covid-19 economic fallout. So, I would expect 2021 to be another year of poor performance with possible further impairment. 

But, I do not expect any impairment to reduce Wing Tai assets by 50%. Thus, the book value currently has enough margin of safety.

However, any firm conclusion that Wing Tai is not a value trap should be after we have determined the intrinsic value of the Group.

End of Part 1 of 2

Part 2 of 2 was published on 21 Mac 2021

An Update was published on 10 April 2022

Reading guide

If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation.  I suggest that you check up the Foundations series - Fundamentals 01,  Fundamentals 02, and Fundamentals 03.   I also have a Definitions page in case you are not familiar with the terms I have used. 

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I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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