Is Wing Tai one of the better SGX stocks?

Value Investing Case Study 10-3. I initially covered Wing Tai in Mac 2021 based on the Annual Reports till FYE June 2020. This post is an update taking into account the Annual Report for FYE June 2021.

Is Wing Tai one of the better SGX stocks?

Last year, I had concluded that Wing Tai Holdings Ltd (Wing Tai or the Group) was not a value trap. At that juncture (26 Feb 2021), it was 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).

That conclusion was based on the following:
  • Wing Tai's senior management performed averagely as an operator and capital allocator.
  • As any impairment of the investment properties in Hong Kong will be about 8% of the Total Assets, I concluded that Wing Tai was not a value trap.
  • Wing Tai faced two potential disruptions and its long-term prospects depended on how it addresses them. For its Property Investment segment, it is the “work from home” trend.  For its Retailing segment, it is the digital disruption in the fashion retailing industry.
  • The market price then was more than a 50% discount to the Book Value, the normal Earning Power Value, and the Look Thru Earning Power Value.  

In this article I will focus on other business downside protection. They can help strengthen the investment case. Join me as I discuss why Wing Tai is one of the better SGX stocks to invest in.

This post assumes that you have a working knowledge of the Group. If you are not familiar with the Group, I suggest that you first read the following articles. 

Should you go and buy it? Well, read my Disclaimer.

Contents

  • Investment Thesis
  • Rationale
  • Property profile
  • Fundamentally strong
  • Valuation
  • Conclusion
  • Methodology
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Investment Thesis

Wing Tai is a property Group with about an equal amount of assets in the Property Development and Property Investment segments. About 50 % of the assets are in Singapore and 35 % are in Hong Kong. The diversity has provided the Group with some protection against any slowdown in the property market.

While its performance had declined from the 2013/14 peak, the Group seemed to have arrested this decline. I do not expect losses going forward. Wing Tai is currently trading at a significant discount to its Book Value and EPV. There is a sufficient margin of safety to invest in Wing Tai. 

Rationale

  • Wing Tai is a Property Group. An equal amount of the Group’s assets are tied up in the Property Development and Property Investment segments. Singapore and Hong Kong are important markets for the Group. 
  • The Group is dependent on the performance of the residential development and office rental markets. The residential activities are in Singapore, Malaysia, and Hong Kong. The office rental operations are in Hong Kong and Singapore.
  • The Group operates in different countries. It also covers the rental and property for sales markets. The diversity offers some downside protection as the various property cycles are not in sync. 
  • Wing Tai is fundamentally strong. It has the financial resources to withstand a soft property market. It has a good performance track record and has managed to be profitable in 2021.
  • A valuation of Wing Tai showed that there is a good margin of safety at the current price.

Details of the rationale are presented in the following sections.

Property profile

Chart 1 shows how the total assets of the Group are distributed based on a Look Thru basis. In 2021, the Property Development segment accounted for 50% of the Total Assets. The Investment Property segment accounted for 46 %. Notwithstanding its fashion retailing history, this is a Property Group. 

The perspective is of course different when viewed through the standard “Accounting” lens. This is because the segment details are hidden when accounted for under the investment in associates/JV.

When analyzing the business as a long-term investor, the Look Thru lens will show a more realistic picture of what will affect the prospects.

Wing Tai comparative total assets
Chart 1: Total Assets
Notes
(a) Property Development - most of the projects over the past 12 years are residential units
(b) Property Investments. The majority directly under Wing Tai (excluding WTPL) are commercial units. About 10 % of WTPL properties are residences and the majority of the balance are commercial units

From a geographical perspective, about 50% of the Total Assets are in Singapore while 35 % are in Hong Kong. Note that this was based on a Look Thru basis.

Wing Tai Look Thru total assets 202
Chart 2: Look Thru Total Assets

Deployment of assets is only one metric. Another way to look at the significance of each of the segments is to look at the floor areas involved as shown in Charts 3 and 4.
  • Based on the development floor area, Malaysia is an important region for the Property Development segment. 
  • In terms of lettable floor area, Hong Kong took the lead. Over the past 4 years, the lettable areas under the Others have become significant. But these have yet to translate to significant bottom-line contributions.
Wing Tai Look Thru property development floor area
Chart 3: Property Development Floor Area

Wing Tai Property Investment Lettable Area
Chart 4: Property Investment Lettable Area

Please note that these are not surprising findings as they are consistent with what was mentioned in last year’s article. 

Property Market

Based on the profile in Charts 1 to 4, I would break up the Group’s property market into 2: 
  • Residential market - property development. These are especially important for Singapore, Malaysia, and Hong Kong.
  • Office rental market - These are relevant for the Property Investment portfolio in Hong Kong and Singapore

Wing Tai is a property company in a cyclical sector. When looking at the prospects of Wing Tai, it is more appropriate to look at them from a property cycle perspective. This can give insights into where the Group is heading in the short term.

Residential market

Charts 5, 6, and 7 provide an overview of the house price trends for Singapore, Malaysia, and Hong Kong respectively. Over the long term, they all exhibit uptrends but you can see that they are not synchronized.

Prices in Hong Kong seemed to have stabilized over the past few years while those in Singapore are still trending up. 

While there is an uptrend, I see a slowdown in Malaysia for the House Price Index.  However, there does not seem to be any growth based on the other property cycle metrics such as Residential Starts and Number of Transactions. For more details, refer to “How to identify property cycles for equity investment opportunities” 

Wing Tai Singapore Residential market index
Chart 5: Singapore Residential Market Price Index    Source: Trading Economics

Wing Tai Malaysian Property Cycle
Chart 6: Malaysian Property Cycle

Wing Tai Hong Kong House Price Index
Chart 7: Hong Kong House Price Index    Source: Trading Economics

Office Rental market

The office rentals in both Singapore and Hong Kong are currently lower than those 3 years ago.  We see a similar trend for the residential market in Hong Kong.

Wing Tai Singapore office rental index
Chart 8: Singapore Office Rental Index    Source: Dept of Statistics, Singapore

Wing Tai Hong Kong rental indices
Chart 9: Hong Kong Rental Indices    Source: Rating and Valuation Dept, HK

The key takeaway from this analysis is that the Group has downside protection for its property business. This is because it is diversified into different countries. Then within each country, the rental market is not exactly synchronized with the property for the sales market.

Case Notes

In my 2021 analysis of Wing Tai, I introduced the concept of the Look Thru analysis. 

This Look Thus basis was inspired by Warren Buffet. He created a metric for the average investor known as look-through earnings. This is to account for both the money paid out to investors and the money retained by the business. The concept is that all corporate profits benefit shareholders, whether they are paid out as dividends or retained. 

Look-through earnings can be calculated by taking an investor's pro-rated share of a company's profit.  My Look Thru basis includes the pro-rated share of the associates/joint ventures' revenue and profits as part of the Group's ones.

My rationale is that Wing Tai’s investments in associates/JV are about 38 % of the total assets of the Group. This is sizeable and looking at their contribution through a normal accounting lens may not show the true picture of the business. 
  • I will use the term “Accounting” to denote the normal way that Wing Tai has presented its financials. In the consolidated financial statements, they are accounted for using the equity method of accounting.
  • I will use the term “Look Thru” to denote the pro-rated view.

Refer to the Methodology for examples of how I estimated the Look Thru values for Wing Tai. This was extracted from my upcoming book “Do you really want to master value investing”.

The point is that there are several ways to analyze companies. As a newbie, there may be situations when you are not sure what to do. One way to get around this is to look at third-party advisers for guidance. Examples of people who do this well include 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.




Fundamentally strong

I would consider the Group fundamentally strong:
  • It is financially sound.
  • It has a good performance track record.
  • It has performed well in 2021 relative to some of its peers.

Financial strengths

I would rate the Group as financially strong for the following reasons:
  • At the end of Dec 2021, the Group had a Total Capital Employed of SGD 4.1 billion. 79 % of these are funded by shareholders’ funds with the balance from Debt. Note that I included the perpetual securities as part of the Debt.
  • Look Thru cash accounted for about 21 % of the Total Look Thru Assets.
  • From 2010 to 2021, Wing Tai generated cumulatively SGD 1.4 billion Cash Flow from Operations.
  • From 2010 to 2021, WTPL generated cumulatively HKD 6.8 billion Cash Flow from Operations. There is no information to estimate the Cash Flow from Operations from the two Uniqlo units. But conservatively, I would say that on a Look Thru basis, the Group had been able to generate positive Cash Flow from Operations.
  • Wing Tai Debt Equity ratio for the past 3 years averaged 0.27 while that for WTPL averaged 0.16. 
Wing Tai Sources and Uses of Funds
Chart 10: Source and Uses of Funds

Strong track record

The Group was profitable every year for the review period (2008 to 2014).

From an Accounting perspective, the worst performance was in 2016 when it achieved a PAT of SGD 16 million. You can see that Revenue, PAT, and gross profitability in 2021 shows sign of improvements compared to the past few years. Refer to the Performance Index chart.

On a Look Thru basis, Charts 12 to 14 also indicated that the 2021 performance was better than that of 2020. 

Wing Tai Performance Index
Chart 11: Performance Index

Wing Tai Look Thru EBIT
Chart 12: Look Thru EBIT

Wing Tai Look Thru Revenue
Chart 13: Look Thru Revenue

Wing Tai Look Thru EBIT
Chart 14: Look Thru EBIT

Performed well in 2021 compared to its peers

I used 2 metrics to compare the Group’s performance with those of its peers - revenue trends and ROE trends.
  • In terms of Revenue, the Group in 2021 was no longer the worst performer. Note that the Revenue index tracks the revenue of each company relative to its respective 2008 revenue.
  • In terms of ROE, 2 of the peers suffered negative returns in 2021.
Wing Tai Peer Revenue Index
Chart 15: Peer Revenue Index

Wing Tai Peer ROE
Chart 16: Peer ROE

Valuation

I valued the Group based on both Asset Value and Earnings Power Value (EPV).  For the EPV, I estimated it based on both Accounting earnings as well as the Look Thu earnings. 

The key assumptions used in my valuations were:
  • In deriving the EPV, I have based the earnings on the past 12 years’ average earnings. This covered at least one property cycle.
  • The Accounting EPV was estimated based on the Free Cash Flow to the Firm Model as per Damodaran and the Residual Income Model as per Penman. I took the average value from both these methods as the Accounting EPV.
  • The Look Thru EPV was estimated based on the Free Cash Flow to the Firm model. The Debt was based on a Look Thru basis.
  • The Non-Operating Assets were based on cash on a Look Thru basis.
  • The Beta was based on the build-up model as per Damodaran. 

You can see that at the current market price of SGD 1.69 per share (as of 15 March 2022):
  • The Asset Value of SGD 4.18 per share provided a 147 % margin of safety.
  • The Accounting EPV of SGD 3.19 per share provided an 89 % margin of safety.
  • The Look Thru EPV of SGD 4.00 per share provided a 137 % margin of safety.

Wing Tai Valuation
Chart 17: Valuation

Conclusion

In my post last year, I had concluded that Wing Tai was going through a turnaround. The 2021 performance suggests that the turnaround is gaining traction. The implications here are:
  • There is a low probability of further significant impairment of its assets. In other words, the Asset Value is a good indication of its intrinsic value. 
  • The EPV was based on the past 12 years’ performance. If you accept that the property sector is cyclical, this is a better reflection of the cyclical performance.
  • The Group is fundamentally strong and has the resources to withstand any further slowdown of the property market. Its diversification provides downside protection.

While the Group has a profitable Retail segment, the contribution is small relative to the property activities. 

There are 2 ways to interpret the current market price:
  • The market is being irrational.
  • The market expects the intrinsic value of the Group to deteriorate significantly.

I have shown that the latter is unlikely. Hence the former is the likely interpretation. As such Wing Tai is one of the better SGX stocks to invest in.

Methodology

In 2020, Wing Tai had the following associates and joint ventures:
  • 34.1 % in WTPL.
  • 49.0 % in Uniqlo (Singapore).
  • 45.0 % in Uniqlo (Malaysia).

Information on the % shareholding can be found in the Notes to the accounts. Chart M1 shows the % for Uniqlo (Singapore) and Uniqlo (Malaysia). Refer to the items circled in red.

Wing Tai Methodology M1
Chart M1

On a Look Thru basis, it meant that 34.1 % of WTPL revenue and profits belong to Wing Tai. Similarly, 49.0 % of Uniqlo’s (Singapore) revenue and profits belong to Wing Tai and so on.

We can then use this % to determine the Look Thru revenue and profits for Wing Tai. This is because we are interested in the segment revenue and profit. 

The contributions by Uniqlo (Singapore) and Uniqlo (Malaysia) are straightforward. This is because these companies only operate in the retail segment. But WTPL has 4 business segments:
  • Property development.
  • Property investments.
  • Hospitality.
  • Others.

To determine the Look Thru segment revenue and profits for Wing Tai, we have to dig deeper into the WTPL’s segment results.

Look Thru segment analysis

Chart M2 was extracted from Wing Tai 2020 Annual Report. It shows the segment revenue and segment EBIT. The PBT after accounting for Interest Income and Finance costs was SGD 26.827 m. Refer to the item boxed in red. 

Wing Tai Methodology Chart M2
Chart M2

Compare the profit in the segment report with that shown in the P&L as per the red box item in Chart M3. You can see that the SGD 26.827 m included the contribution from associates and joint venture companies of SGD 5.772 m. Refer to the item boxed in blue.

Wing Tai Methodology Chart M3
Chart M3

If you refer to Note 17 in the accounts, you will see that this SGD 5.772 m was derived from: 
  • WTPL - SGD (25.331 m).
  • Uniqlo (Singapore) - SGD 5.996 m.
  • Uniqlo (Malaysia) - SGD 12.818 m.
  • Others - SGD 12.289 m.
  • Total = SGD (25.331 m) + SGD 5.996 m + SGD 12.818 m + SGD 12.289 m = SGD 5.772 m. Refer to the item boxed in blue in Chart M3
Wing Tai Methodology Chart M4
Chart M4

The conclusions from this analysis are:
  • In Wing Tai Consolidated Income Statement, the revenue and profits for WTPL, Uniqlo (Singapore), and Uniqlo (Malaysia) were not part of the reported Group revenue and Group Operating profits. 
  • This meant that Wing Tai segment revenue did not include those of the associated companies/joint ventures. For example, the Retail segment revenue of SGD 91.509 m did not include those from the 2 Uniqlo joint ventures.
  • But the segment EBIT included the share of the profits of these associates and joint ventures. Noticed that there is an asterisk after the term “EBIT” in Wing Tai segment information. The note at the end of the segment report had the following.
Wing Tai Methodology Chart M5
Chart M5

Note the anomaly here. The segment revenue was presented differently from the segment EBIT. These have implications on how you calculate the Look Thru segment revenue and EBIT.

Look Thru segment revenue

I followed a 3-steps process to determine the Look Thru segment revenue for 2020.

Step 1 - identify the segment revenue at the associate/subsidiary level.

Step 2 - flow the revenue to the holding company.

Step 3 - add the revenue flowed in Step 2 to that of the holding company.

In the case of Wing Tai, there were two challenges:
  • The Financial Statements for Wing Tai are reported in SGD while that for WTPL is in HKD. How do you convert HKD to SGD?
  • The FYE for Wing Tai (end of June) is different from that for WTPL (end Dec). How do you synchronize the Financial Statements for these 2 entities?

To address the former, I used the WTPL revenue as presented in SGD in Wing Tai Financial Statements. I then apportioned this revenue based on the relevant segment revenue in WTPL 2020 Interim Financial Statements. 

The Interim results are the first-half results for 2020 for WTPL compared to the full-year results for Wing Tai. A more apple-to-apple apportionment would be to use the 2nd half-year results for 2019 together with the first half results for 2020 for WTPL. I did not do this for this illustration.

Step 1

The information for Step 1 can be found in the Notes to the 2020 Wing Tai accounts as boxed in red in Chart M6. For the year 2020, they were:

SGD 424.012 m for WTPL.

SGD 260.51 m for Uniqlo (Singapore).

SDG 270.286 m for Uniqlo (Malaysia).

WTPL half-year ending Jun 2020 segment results are shown in Chart M7. 

The Property development segment revenue to flow up to Wing Tai = SGD 424.012 m × (1,591.6 - 0.7) / 1,956.5 = SGD 344.779 m. Refer to the items boxed in red. 

Where:

(1,591.6 - 0.7) = external revenue for the Property development segment.

1,956.5 = total external revenue.

Wing Tai Methodology Chart M6
Chart M6

Wing Tai Methodology Chart M8
Chart M7

The Property investment revenue to flow up = SGD 424.012 m × (319.7 - 8.2) / 1956.5 = SGD 67.508 m.

Then the revenue to flow up for the Others = SGD 424.012 - SGD 344.779 m - SGD 67.508 m = SGD 11.725 m.

Both Uniqlo (Singapore) and Uniqlo (Malaysia) revenue flew to Wing Tai Retail segment.

Step 2

For Step 2, you would need the % shareholding in each of the associated companies/joint ventures held by Wing Tai. The revenue contribution is the subsidiary revenue multiplied by the % shareholding.

For Wing Tai 2020, we thus have from WTPL:
  • Property development = SGD 344.779 m × 34.1 % = SGD 117.570 m.
  • Property investment = SGD 67.508 m × 34.1 % = SGD 23.020 m.
  • Others = SGD 11.725 × 34.1 % = SGD 3.998 m.

For Wing Tai 2020 Retail segment, the contributions are from the 2 Uniqlo joint ventures = (SGD 260.51 m × 49.0 %) + (SGD 270.286 × 45.0 %) = SGD 249.279 m. 

Step 3

The final step is to add the holding company segment revenue with those that flowed up from the associates/joint ventures.

The holding company segment revenue was extracted from the Wing Tai segment report as shown in the chart below.

Wing Tai Methodology Chart M8
Chart M8

The Look Thru revenue was then derived as shown below.

Wing Tai Methodology Table M1
Table M1: Deriving the Look Thru Revenue

The Look Thru revenue shows that the Retail segment revenue is about the same size as that for Property Development. You could not tell this from the accounting revenue (as represented by the holding company segment revenue).



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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. 

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