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Interview: Pek Lian Guan, Executive Director and CEO of Tiong Seng Holdings


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Can you continue to grow your orderbook in 2012 and 2013 considering the expected slowdown in construction demand from the private sector, in view of subdued residential market sentiment and the government’s recent measures to cool the property market?

Although overall construction demand is expected to soften in 2012 and 2013 due to lower expenditure from the private sector, prospects for the segment remain healthy due to the strong demand for HDB projects, institutional building and civil engineering projects.

Over the last three financial years, Tiong Seng has successfully grown its orderbook for the construction contracts segment at a compound annual growth rate (CAGR) of approximately 21 per cent to a record S$1.4 billion in FY2011. This compares with the industry’s CAGR of 19 per cent in the same corresponding period.

Importantly, we have always been an early adopter in technology investments, and we firmly believe that these will be vital to its continued growth. The group’s sales of goods segment witnessed strong growth last year, with revenue surging fivefold to S$8.8 million largely due to the growing business of ‘green’ technology provider Cobiax Technologies AG, which was acquired in August 2010.

Adopting Cobiax not only enables architects to achieve building efficiency, but also reduces unnecessary deadweight of concrete slabs by up to 30 per cent, therefore reducing carbon emissions as well. Given the growing importance of reducing emissions to combat climate change, we believe Cobiax will gain market share in the long term.

The group also looks set to grow its pre-cast segment with the completion of the new Tiong Seng Prefab Hub in mid 2012, which will double its current output capacity of pre-cast components to 100,000 cubic metres per annum.

 

How does the Tiong Seng Prefab Hub give you a competitive edge? When will the Prefab Hub be completed and operational?  What is your optimal utilisation rate for the Prefab Hub and how will the group benefit in terms of costs savings / margins?

Tiong Seng will be the first in Singapore to establish an automated pre-cast facility for manufacturing pre-cast components. Automated state-of-the-art equipment from Germany will be deployed to perform complex work processes such as marking out of dimensions with high precision, while automated pallet circuits will be installed to transport products from one workstation to another for processing.

A centralised computer system, which reads information from computer-aided drawing (CAD) data files, will control the entire manufacturing process as well as maintain production data and records. The new pre-cast facility will also feature a curing chamber to reduce time spent on curing the pre-cast products.

Due for completion in mid 2012, the Prefab Hub is expected to boost the group’s efficiency in manufacturing pre-cast components, as well as reduce labour required by 50 per cent to 70 per cent, while ensuring the consistency and quality of products. Furthermore, the facility is capable of operating a 24-hour production process to boost its output to meet demand for pre-cast components.

With a challenging operating landscape encompassing higher construction costs, higher material costs and foreign workers’ levies, reduction in the number of foreign workers, and stiff competition from large foreign contractors, we believe that the Prefab Hub will play an important role in mitigating these challenges for higher productivity and efficiency.

 

It was reported that China will register at least a 20-per cent drop in residential property price in 2012 and that the government will not be relaxing its grip on regulating the property market in the short term.  What are your counter measures?

Market sentiment for property is expected to remain subdued in 2012, and similarly, slower sales of residential units are expected, at least during the first half of 2012. Currently, the selling prices of our properties in China remain relatively attractive when compared with other developments in the area. All our landbanks in China are fully paid for. We will be utilising incentives to encourage sales, while continuing to closely monitor changes in government policies.

Although we foresee a slowdown in sales this year as a result of uncertainty arising from the governmental policies, we remain optimistic about the long-term potential of China’s property market in view of the country’s economic growth and its current urbanisation rate of 47 per cent, which still lags behind the 85 per cent in developed countries. The urbanisation rate is expected to grow by 1 percentage point every year for the next 20 years to approximately 70 per cent by 2030.

 

What are the prospects for the Cobiax segment of your business?

As Cobiax removes unnecessary deadweight of concrete slabs by positioning void formers within, concrete volume is therefore reduced by up to 30 per cent without modifying flexural strength. This empowers architects with the ability to design larger and clearer span structures, and also optimises the foundation works of buildings and removes unnecessary beams in the structure, thereby increasing productivity during construction. The reduction in the concrete used in Cobiax systems also translates to a direct reduction in carbon dioxide emissions.

We expect the growth prospects for Cobiax in the region to be healthy as the movement for ‘green’ construction continues to proliferate. The pledge on emissions reduction will continue to drive increasing demand for ‘green’ solutions in Singapore, and to date, Cobiax products have been used for seven different projects in Singapore encompassing a mix of residential, commercial and industrial buildings.

We also have plans to expand our market share in Singapore and beyond given the success of Cobiax in Europe, of which some landmark projects involving Cobiax include the Vodafone Campus in Dusseldorf, Germany, and the Hafen City University in Hamburg, Germany.

 

Why did your net profit drop in FY2011?

The group’s revenue soared 64 per cent year-on-year to S$414.5 million in FY2011 due to higher revenue contributions from all business segments. However, net profit attributed to shareholders declined 6 per cent to S$27.2 million largely due to a one-time gain on bargain purchase of S$9.9 million arising from the acquisition of Cobiax group in 3Q2010. This gain of S$9.9 million, out of which approximately S$2.3 million have been provisionally recorded in FY2010 results, has been recorded under other income in the group’s restated FY2010 results following the finalisation of the acquisition accounting in accordance with the Singapore Financial Reporting Standards.

Excluding the net effect of the one-time gain on bargain purchase, profit for FY2010 would have been approximately S$21.2 million, resulting in an increase of S$5.7 million or 26.3 per cent in profit for FY2011 as compared with FY2010.

 

Gross margins from the construction contracts have been declining over the last two financial years. Why is this so and will this trend continue? Will margins in 2012 be lower given the higher foreign worker levies? Should the government raise the levy again after July 2013, how will it affect your business and strategy?

Gross margins of construction contracts have declined largely due to intense competition and higher costs of labour and building materials. Although these factors will continue to be of concern to construction companies, we are well prepared to take on challenges ahead.

Tiong Seng has enjoyed good historical growth. With a track record of over 50 years, we have established ourselves as a reliable builder with the technical expertise and ability to deliver quality projects on time at competitive costs, which has led to repeat business, recommendations and referrals from our customers. We are an A1 graded contractor, which enables us to undertake public sector construction projects with unlimited contract value. The group has also received numerous awards and accolades in recognition of its quality management, safety track record and environmentally-friendly efforts.

Over the years, our investments in a wide range of machinery and equipment, such as our own fleet of machinery and equipment, have kept costs in check during periods of high rental costs arising from strong construction demand.

The upcoming prefab hub will provide a boost to our productivity and cost efficiency, while we’ll continue to diversify earnings through our property development business in China and the sale of Cobiax in Europe and Asia-Pacific.

 

Gross margin from property development in FY2011 has dipped significantly to 7 per cent. What was the reason behind the drop? Will this trend continue?

The group recorded a 135-per cent increase in revenue from property development largely due to the sale of 443 units of Phase 1 of the Sunny International Project, a four-phase residential development in Cangzhou, China. Residential projects typically register lower margins compared with commercial projects.

Also, it is common that we record lower margins in the early phase of a property development project as this is the period during which most costs are being recognised. Hence, the group recorded lower margins in the second half of the financial year. That said, barring unforeseen circumstances, we expect each of our property development projects to continue to generate healthy gross margins.