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

Value Investing Case Study 10-2:  This covers the valuation and risk assessment of investing in Wing Tai.

I have shown in Part 1 that about half of Wing Tai Holdings Ltd (Wing Tai or the Group) Total Assets are tied up in Investment Properties.  A large part of these is in Hong Kong. 

There is the danger of fair value losses if the rental and property values in Hong Kong declined. In the mid-90s to mid-2000s property cycle, property values in Hong Kong dropped by about half. 

If history repeats itself, the impact to Wing Tai would be about 18% impairment of its Hong Kong investments. This would mean a reduction in its Total Assets by about 8 %.

Given that the current market price is about half its Book Value, I would argue that there is still enough margin of safety for Wing Tai not to be a value trap.

But any conclusion about whether Wing Tai is a value trap should also take into account its Earning Value.

Join me in Part 2 of this series as I undertake this assessment of Wing Tai. An update was published on 10 April 2022

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Contents

• How well did Top Management Seize Opportunities?

• Is there a great Buying Opportunity?

• Will Shareholders’ Value continue to be created?

• How to minimize Risk and secure your Investments

• How to Gain from the Case Study

How well did Top Management Seize Opportunities?

Wing Tai Holdings Ltd Board comprises 10 members with the following profile:

Category of Directors	No of directors	Average age (Years)	Average tenure with Group (Years)
Executive	3	42	34
Non-Executive Non-Independent	1	60	40
Non-Executive Independent	6	67	5

Table 1: Board profile

The Executive Directors own more than 50 % of Wing Tai Holdings Ltd. I would consider this as an owner-managed Group.

5 key managers were featured in the 2020 Annual Report who had been with the Group from 7 to 46 years with an average of 28 years.

With such a long tenure, how did the senior management team perform?

Operations

To assess management performance, I usually compare the company's performance with those of its listed peers.

The challenge here is that there is no other SGX listed company with property and retail operations. In 2020:

• Wing Tai Retail segment accounted for 45 % of the Total Look Thru revenue. 

• Singapore accounted for 55 % of the Total Look Thru revenue. Revenue from Singapore’s property activities accounted for 38 % of the Total Look Thru revenue.

As such, I selected the top SGX listed property companies with large overseas investment properties.

Revenue-wise, Wing Tai outperformed the peers in the first half of the comparison period. But it became the worst performer in the second half as can be seen from the chart.

Chart 1: Peer Revenue Index

In terms of ROE, Wing Tai was among the better performer in the first half of the comparison period but was the worst in the second half.  However, on an overall basis, Wing Tai achieved an average of 8.5 % ROE for the period from 2008 to 2019, making it the second-best performer among the peers.

Company	Average ROE for 2008 to 2019
Wing Tai	8.5 %
CapitaLand	7.7 %
City Developments Ltd (CDL)	8.1 %
GuocoLand	6.8 %
Hongkong Land	9.3 %

Table 2: Peer Returns

Chart 2: Peer Returns

You should not be too surprised that Wing Tai's performance is not “synchronized” with the peers.  This is because it operates in different countries. 

• 82 % of GuocoLand 2020 revenue was from Singapore.

• 44 % of CapitaLand 2019 revenue was from mainland China.

• 45 % of Hongkong Land 2019 revenue was from Hong Kong.

• 45% of City Development 2019 revenue was from Singapore.

Capital allocation

Over the period from 2008 to 2020, the Group generated SGD 1.29 billion cash from operations. Of these

• SGD 0.66 billion was paid out as dividends. This was equal to an average 26 % pay-out ratio.

• SGD 0.09 billion was invested (net of disposal) in new PPE, investment properties, joint ventures, and associates (including loans to joint ventures).

• Cash in the bank increased by USD 0.16 billion. The debt remained at about the same level.

• A large part of the balance was kept as retained profits.

In Part 1, I showed that the average ROE for the past 3 years had declined to 3 % compared to the 9 % average from 2008 to 2010. Part of this decline can be attributed to the larger shareholders' funds due to the retained earnings. 

Wing Tai Malaysia Bhd (WTMB)

At the beginning of 2017, WTMB was a 66.2 % subsidiary of Wing Tai.  It had property development, property investment, and fashion retail operations in Malaysia.

In May 2017, a voluntary unconditional cash offer was made for all the remaining shares in WTMB not already owned by the Group at a cash offer price of RM 1.80 per share.

On 8 August the compulsory acquisition threshold was crossed and WTMB became a subsidiary of Wing Tai. WTMB was delisted from Bursa Malaysia on 30 August 2017.

The offer price of RM 1.80 per share was about 48 % to 71 % premium to the various volume-weighted average market prices of WTMB. (The periods ranged from 5 days to 6 months of full trading days before the service of the Notice of Unconditional Take Over Offer.)

In reality, the offer price was actually below the intrinsic value of WTMB.

• The NA was RM 2.73 per share at that juncture.

• The Independent Adviser estimated that the fair value of WTMB ranged from RM 3.55 to RM 3.59 per share (Source: WTMB Independent Advice Circular).

• Another minority shareholder (Pangolin) estimated that the Revised Net Asset Value of WTMB to be RM 3.63 per share.

You can see that the acquisition was at a price that was lower than the intrinsic value of WTMB. As such it added value to the shareholders of Wing Tai. 

You would commend Wing Tai's management from a capital allocation perspective. They took advantage of the market conditions to privatize WTMB at such a price.

Leaving the WTMB case, my conclusion is that senior management performance is average.  

Case Notes On a personal note, I was a shareholder of WTMB at that juncture having invested a year or two ago at an average price of RM 1.78 per share. At that the time when I purchased the shares, there was a 30 odd % margin of safety. This was based on the NTA as the intrinsic value. In hindsight, the discount to the NTA did not provide enough margin of safety.  The margin of safety is a concept introduced by Benjamin Graham in his book “The Intelligent Investor”.  It refers to purchasing stocks at prices that are at significant discounts to the computed intrinsic values. As the computed intrinsic values are based on assumptions, you want to ensure that there is some safety factor for any purchase you make. As all my case studies have shown, valuation is not an exact science. You will get different intrinsic values depending on the valuation approach as well as the assumptions used. Since the idea of value investing is to buy cheap stocks, you want to ensure that the purchased price is cheap.  You achieve this by ensuring that the purchase price has some 20 % to 30 % discount on the computed intrinsic value. The margin of safety is more than a numerical discount. You also introduce a “qualitative” margin of safety with  Having conservative assumptions in the valuation. Ignoring growth in the valuation. Using different valuation approaches

Case Notes

On a personal note, I was a shareholder of WTMB at that juncture having invested a year or two ago at an average price of RM 1.78 per share. At that the time when I purchased the shares, there was a 30 odd % margin of safety. This was based on the NTA as the intrinsic value.

In hindsight, the discount to the NTA did not provide enough margin of safety. 

The margin of safety is a concept introduced by Benjamin Graham in his book “The Intelligent Investor”. 

It refers to purchasing stocks at prices that are at significant discounts to the computed intrinsic values. As the computed intrinsic values are based on assumptions, you want to ensure that there is some safety factor for any purchase you make.

As all my case studies have shown, valuation is not an exact science. You will get different intrinsic values depending on the valuation approach as well as the assumptions used.

Since the idea of value investing is to buy cheap stocks, you want to ensure that the purchased price is cheap.  You achieve this by ensuring that the purchase price has some 20 % to 30 % discount on the computed intrinsic value.

The margin of safety is more than a numerical discount. You also introduce a “qualitative” margin of safety with 

• Having conservative assumptions in the valuation.

• Ignoring growth in the valuation.

• Using different valuation approaches

Is there a great Buying Opportunity?

I generally use two approaches in assessing the intrinsic value ie Asset-based and Earnings-based. 

For Wing Tai, the Asset Value is straightforward as it can be broken down into Graham Net Net, NTA and Book Value. As there is no intangible captured in the Balance Sheet, the NTA = Book Value.

When it comes to Earnings Value, I break this down into Non-Operating Assets, Earning Power Value (EPV), and Earning with growth. 

I have two reservations about using my normal Earning-base valuation for Wing Tai:

• Given the declining revenue, I am not sure whether it makes sense to estimate the Earning with growth value.

• About 40% of the Group assets are for investments in associates and joint ventures.  These are captured as part of the Non-Operating Assets. Given this size, it may be more realistic to consider these as Look Thru earnings.

My valuation of Wing Tai has included an EPV based on Look Thru earnings with the following assumptions

• The Beta weights are based on the Non-Current Assets deployed in the respective countries.

• I have assumed that cash and debt is on a Look Thru basis

Chart 3: Valuation

The chart and table sum up Wing Tai valuations:

• The base EPV is less than the Asset Value. This is not surprising given the large investments in associates and joint ventures.

• On a Look Thru basis, the EPV is about the same as the Asset Value.

• Over the past 5 years, the market price has been less than the EPV and Asset Value.

Table 3: Valuation metrics

The above is of course a simplistic valuation analysis.

• If you believe that the future would be better than that projected, the EPV would be higher than those computed. 

• If you believe that the future would be worse than the base case, then the EPV would be lower than those computed.   

Case Notes It is obvious that the value of Wing Tai is the value of the operating assets plus the value of the investments in associates and joint ventures. There are 3 ways to value the investments in associates and joint venture. Treat the investments in associates and joint ventures as non-operating assets.  You can then take the book value of the non-operating assets as their intrinsic values. Compute the DCF value of the associates and joint ventures and take the proportionate value as the intrinsic values. Treat the associates and joint ventures as part of the “operations” based on a Look Thru basis and value them accordingly. I have employed the first and third approaches in my valuation. As you can see, valuation is more than merely applying some formula. So, if you are just starting out to value companies, it may be helpful to supplement it with third-party valuations. 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 and valuation.

Case Notes

It is obvious that the value of Wing Tai is the value of the operating assets plus the value of the investments in associates and joint ventures. There are 3 ways to value the investments in associates and joint venture.

• Treat the investments in associates and joint ventures as non-operating assets.  You can then take the book value of the non-operating assets as their intrinsic values.

• Compute the DCF value of the associates and joint ventures and take the proportionate value as the intrinsic values.

• Treat the associates and joint ventures as part of the “operations” based on a Look Thru basis and value them accordingly.

I have employed the first and third approaches in my valuation.

As you can see, valuation is more than merely applying some formula. So, if you are just starting out to value companies, it may be helpful to supplement it with third-party valuations. 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 and valuation.

Will Shareholders’ Value continue to be created?

I looked at the following metrics when considering whether shareholders value will continue to be created:

• Returns achieved by the company relative to its cost funds.

• Growth in shareholders’ funds assuming that no dividends were paid and no new injection of capital.

• The gain achieved by a “buy and hold” shareholder.

• Whether share buybacks were carried out at prices less than their intrinsic values.

• Q Rating. The Q Rating is a relative rating.  I have used this only for assessing Bursa listed companies as I have enough valuation sample size (about 80 companies). 

In the context of Wing Tai, the Group has an average ROE of 7.8 % from 2008 to 2020 compared to its cost of equity of 6.9 %. 

From 2007 to 2020 assuming no dividend was paid, the shareholder's funds would have increased at 5.5 % CAGR.  As there was no new capital introduced during this period, the increase is due to retained profits.

If a retail investor had bought a share at the end of 2008 and held onto it till the end of 2020, he would have RM 1.87 total gain (capital gain + dividend). This is equal to 5.7 % CAGR

Item	SGD per share
Market price at end Dec 2020	1.96
Purchased price at the end of  Dec 2008	0.86
Capital gain	1.10
Dividends 2009 to 2020	0.77
Total gain	1.87

Table 4: Gain by a shareholder

On a positive note, Wing Tai has been buying back its shares at prices over the past decade at prices that were < SGD 2.00 per share, well below the respective years NTA. 

The conclusion is that while there were some value-added for the shareholders, there were not all at rates that were higher than the cost of equity. 

How to minimize Risk and secure your Investments

I normally look at two types of risks - privatization and business risks. 

In the SGX context, the privatization rules are different than those for Bursa Malaysia.  SGX rules require any privatization to be fair and reasonable. This means that the offer price should reflect the value of the securities and not just the market price.

This is unlike Bursa Malaysia where an offer can be unfair but reasonable.  It does not reflect the value of the securities but is in line with the market price.

For example, the privatization of WTMB was deemed as “unfair” but “reasonable” by the Independent Adviser.  This was because the offer price was less than fair value but at premiums to market prices.

As such if you invested at a discount to intrinsic value, there is less concern about suffering a loss through the privatization of Wing Tai.

The main risk for investing in Wing Tai is then the business risk. The key questions in this context are 

• Is property development and/or property investment a sunset industry?

• Is fashion retailing going to be disrupted by digital technology?

I believe that there will still be a demand for residential properties in Singapore and Malaysian. As such this is not a sunset industry. 

Refer to the article “UOA – will it continue to create shareholders’ value? (Part 3 of 3)” for other discussions on risks to the property industry.

But there are risk issues with property investments and retailing.

Property investment

One of the most significant impacts of the Covid-19 pandemic has been on the work from home trend. According to a recent article by NAREIT 

“The trend toward densification of office space that occurred over the past decade will be reversed... The combination of flexible WFH (work from home) but greater spacing within an office may result in more moderate changes in overall demand for space.”

The consulting group McKinsey has the following opinion.

“Before the crisis, flexible space solutions held about 3 percent of the US office market. Their share had been growing at 25 percent annually for the past five years...McKinsey's research indicates that office-space decision-makers expect the percentage of time worked in main and satellite offices to decline by 12 and 9 percent, respectively, while flex office space will hold approximately constant and work from home will increase to 27 percent of work time, from 20 percent...Over time, some organizations could reduce their real-estate costs by 30 percent”

While the above refers to the US market, I expect this WFH to be eventually a global trend. There are two possible scenarios for Wing Tai:

• Move into co-working space.

• More investments in the non-office spaces eg data centres, 

In the short to medium term, I do expect some further impairment of its Hong Kong assets. But as shown in the introduction to this part of the post, the impact on the Group is likely to be about 8 % of the Total Assets.

In the mid to longer terms, there is likely to be a shift towards the more non-office types of properties. But property investment will continue to be an important business segment for the Group.

Digital disruption and fashion retailing

It is generally accepted that fashion is one of the key industries that is currently being redefined by digital disruption.  According to the consulting group BCG in "Why Fashion Must Go Digital - End to End",

“Fashion, an industry of craft and creativity, needs to go digital both to survive attack and to thrive in the next decade….” 

Another consulting group, McKinsey opined that some apparel, fashion, and luxury companies won’t survive the current crisis; others will emerge better positioned for the future. Much will depend on their digital and analytics capabilities.

As one of the leading fashion retailers in Singapore and Malaysia, Wing Tai is not immune from this threat.

At this juncture, there is no sign of how the Group is going to meet the challenge of digital technology. It will have to address this if it is to remain a leading player in this sector.

About 3 decades ago, the Group reinvented itself from garment manufacturing to fashion retailing. It will have to reinvent itself again if it wants to continue to be in the fashion retailing sector.

How to Gain from the Case Study

As Wing Tai's current price is about half of its book value, the analysis and valuation have been focussed on whether it is a value trap or bargain.

I would summarize the findings as follows:

• I rate Wing Tai's senior management performance as an operator and capital allocator as average.

• The current market price is more than a 50% discount to the Book Value, the normal Earning Power Value, and the Look Thru Earning Power Value.  

• As any impairment of the investment properties in Hong Kong will be about 8% of the Total Assets, I would conclude that Wing Tai is not a value trap.

• While there is growth in shareholders’ value over the past 13 years, it is not clear-cut that it had grown at a rate higher than the cost of equity. 

• Wing Tai's long-term prospects in the Property Investment and Retailing segments will have to depend on how it addresses the “work from home” trend and digital disruption in the fashion retailing industry.

For a long-term value investor, there would be enough margin of safety for any investment in Wing Tai.

• The Group is financially strong and will be able to meet the challenges of a prolonged soft property market. 

• Its operations have been diversified to several countries and have recent expansions to new markets (eg Japan, Australia)

End of Part 2 of 2

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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Disclaimer & Disclosure

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.

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.

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