Wing Tai: Developers unlikely to drop prices despite virus outbreak

Wing Tai deputy chairman Edmund Cheng says developers here have capacity to ride out crisis

Wed, Feb 19, 2020

LEE MEIXIAN


SINGAPORE'S property market is in a good position to withstand the Covid-19 spread, says Wing Tai's deputy chairman and deputy managing director Edmund Cheng.

He believes property developers here are not likely to drop prices in a knee-jerk reaction as they have the wherewithal to wait for the crisis to pass.

While showflats are quieter as window shoppers stay home, genuine buyers have not been deterred, he says.

"In terms of property prices, I think that in Hong Kong, definitely fewer people would go to to the showflats and some developers have actually priced their units lower in order to sell," Mr Cheng says.

"(Whereas) in Singapore, since news of the virus broke, there have still been people who have visited showflats."

Wing Tai's latest project, The M at Bugis, opened for public viewing over the weekend and attracted more than 2,000 visitors, exceeding the developer's expectations.

He believes that in Singapore, any drop in transactions may be temporary. Prices are expected to remain steady.

UOB Kay Hian analysts Loke Peihao and Nicola Ho on Feb 13 initiated coverage on Wing Tai with a "buy" call, describing it as a late-cycle economy play.

They have a target price of S$2.54 - representing potential upside of about 25 per cent against the stock's closing of S$2.02 on Feb 18.

They like that the stock is trading at an attractive 46 per cent discount to its revalued net asset value and that the company has a strong balance sheet, low gearing, and benefits from "superior" returns on equity (ROE) from its Uniqlo joint venture in Singapore and Malaysia.

According to the brokerage, Uniqlo's margins in Singapore have grown from 5.6 per cent to 12.2 per cent between FY15 and FY19, and are expected to keep expanding on the back of greater scale, operating leverage and efficiency gains.

Wing Tai, however, faces some risks in Hong Kong.

According to UOB Kay Hian, as at end-June 2019, Wing Tai had 926,000 sq ft of attributable gross floor area from unsold units and properties under development, spread across six projects in Hong Kong.

Among them, two projects in Tuen Mun - The Carmel (78 per cent sold) and Oma Oma (50 per cent sold) - had achieved "respectable" residential sales, supported by demand from first-time home buyers and low interest rates.

However, since June 2019, accelerating social turmoil has slowed down the primary home-buying market, causing Hong Kong developers to slash prices.

Some of the units at Oma Oma were discounted by as much as 20 per cent below the prices of units at Sun Hung Kai Properties' Mount Regency phase two, also at Tuen Mun.

But Mr Cheng still believes property investment and home-buying are long-term decisions that are less affected by short-term crises. The virus' impact on overall property prices should, therefore, be limited.

"This is also because developers look at a longer window of five years to build and sell their units. Unless they have shallow pockets, they are not likely to dump stock."

The same cannot be said for Wing Tai's retail business, which has been "very tough" even before the onset of the Covid-19 threat.

The exception to this trend has been Uniqlo, but even the Japanese casual wear brand's sales have been slower compared to the previous years due to the shift in shoppers' buying pattern to e-commerce.

Wing Tai is in a joint venture with Tokyo- and Hong Kong-listed Fast Retailing to operate Uniqlo stores in Singapore and Malaysia.

Management plans to add standalone Uniqlo suburban stores to widen coverage outside shopping malls in both Singapore and Malaysia.

Besides Uniqlo, the group's retail footprint in Singapore also includes G2000, Fox, Topshop & Topman, Adidas Originals and Warehouse.

Its total retail footprint spans over 1.3 million sq ft across 243 stores in Singapore and Malaysia as at end-June 2019.

Wing Tai has also flagged Australia and Japan as destinations for potential acquisitions because there are still reasonable returns to be made on investments.

In Australia, it is looking to invest in data centres and office properties in Sydney and Melbourne.

In Japan, it is eyeing offices in Tokyo - preferably in off-market deals due to the better pricing offered.

He acknowledges that capitalisation rates for commercial buildings have tightened in these cities, but the group can still look for opportunities.

In Malaysia, it will continue to purchase land for residential development in Kuala Lumpur and Penang, while its associate company Wing Tai Properties, which is listed in Hong Kong, will also continue to acquire land there.

As at June 30, 2019, Wing Tai had a 33 per cent stake in Wing Tai Properties.

Wing Tai also plans to continue bidding for well-located residential land in Singapore.

Mr Cheng says the government is moderating its release of new supply into the market, cognisant of the ample supply here.

"Demand may not be able to immediately soak up the supply in the market, but we expect the market to be quite steady. "The health of the property market will depend on how long this virus is going to last but I think that we will see a better performance this year than last year," he says, adding that the fact that private home sales in 2019 rose 15 per cent to 10,104 units is a sign that the market has adjusted to a new normal after the series of cooling measures introduced in 2018.

UOB Kay Hian analysts believe Wing Tai has room to increase its leverage and ROE, given that its average ROE across 2014 to 2018 has been a lacklustre 3.8 per cent, versus its Singapore peers' average of 10.1 per cent.

They think Wing Tai can potentially increase its net gearing from its current 0.2 time to 0.5 time, which would give it a S$900 million acquisition headroom to buy more investment properties to boost recurring earnings. (see amendment note)

Amendment note: An earlier version of this article cited UOB Kay Hian analysts using leverage and net gearing ratios that were not directly comparable to each other. This article has been amended to reflect the clarification.