Recently, I had 2 friends who asked me these questions regarding Chip Eng Seng (CES), a company which I was bullish on:
1. ” Do you see Chip Eng Seng to be a long-term compounder?”
2. “Should I invest in Chip Eng Seng?”
And even more recently, after the latest results of Chip Eng Seng (CES), I found myself in an internal struggle with these 2 questions:
1. “Should I hold my stake?”
2. “Should I sell some of my shares?”
Before I seek to answer these 2 questions, I will give readers who are reading about this stock for the first time some details and background.
CES was founded in 1975 as a subcontractor for construction projects and started diversifying into property development in 1990s and then subsequently listed on SGX in 1999. It is now a main con for HDB’s many residential projects. (Check out your BTO.) It has recently released its FY2014 results boasting profits gains of 383% and a NAV of $1.17. ( As I am writing this, CES is trading at 0.975.) This company has been doing very well for the past five years as you can see from the graph below taken from Yahoo Finance.
Sadly, in my early years of ‘investing’, I was trading it based on Technical Analysis and only reaped paltry gains of 20-30% each year. If I had just bought and sit still, I would have exceeded 250% gains. Quick moral of story: Just buy and hold…dammit!
Do I foresee Chip Eng Seng to be a long-term compounder?
I would just like to say I am not an expert in the property development industry. But from what I know, it is a project-oriented business. In layman’s terms, project management companies survive by constantly winning projects. The company will bid for land, call for subcontractors-who in turn bid against each other, gather architects and stakeholders, erect buildings, and sell. It’s a dog-eat-dog, free for all battlefield in this business. Relationships, track record, and tender price are factors of consideration for every project.
To be a long term compounder, CES has to constantly be increasing its Net Asset Value, (NAV), which could be possible, and according to the 5 year track record so far, it has done very well!
But personally I find it hard to see Chip Eng Seng to be a long-term compounder on the basis that it doesn’t really have a substantial economic moat in a business full of fierce aggressive competitors. Sure it has a distinct advantage of a long track record and probably many relationships built in the industry. But are they finding innovative and unique ways to reduce costs in construction and differentiate themselves from competitors? There are no signs of it. Construction and Property Development companies in Singapore are not known for its innovativeness.
Long story short – project management is tough tough tough tough and hard to scale! It does not have the scalability of Starbucks or Chipotle ( -open shop, increase profit.) The company must constantly manage costs so it does not go bust during tough times. Long term compounder? I dare not say…
Should I invest in CES
A friend messaged me, excited about CES FY2014 results of record breaking profits, asking about my thoughts on it.
YES – If you have full faith in the management (which I can’t deny, is rather impressive). Then, yes go ahead. But do take note that what you are looking for is for the NAV to increase and not for consistent earning growth. Property developers can realise earnings in a very short period or realise it slowly over years. So investing based on earnings growth may not be relevant here. Besides, CES gives out steady dividends and this year’s yield is at about 6%. That’s impressive. It has also survived several recessions and continued grinding on.
NO – CES increased its NAV over the recent years due to the TOP of many of their projects. Currently, there doesn’t seem to be much left in their pipeline. Of course, this may change as time goes by, but still, at this point of time the signs are hazy. And also, for the reason that property development is a tough industry with fierce competition, I have totally no idea whether CES can continue with its strong performance. It’s overseas projects in Australia is still having teething problems. Also, the property market in Singapore doesn’t seem to be picking up any time soon. This may make it hard for CES to continue with projects in Singapore in the near term.
Personally, I wouldn’t recommend the faint of heart to buy this stock.
My Internal Struggle
It’s hard to part with a stock that has constantly made money for me in the past 5 years. But why do I want to part with it in the first place? The DEBT.
CES ended FY2014 with 938 million in loan and borrowings. This is the highest debt CES has incurred in history. It’s cash equivalents pales in comparison to the debt but its 960 million worth of Development Properties more or less gives one some confidence…?
Notes accompanying the balance sheet. No.6 – The loans were drawn for working capital and investment in a landbank and development of a property project at Fernvale.
When I expressed concern about the nosebleed high debt of CES, a fellow investor at Valuebuddies told me to focus on the Interest Coverage Ratio.
Interest Coverage Ratio = (323,676 + 4,453)/ 4,453 = 73.6x
A value of 73.6x is considered safe.
Or is it? (Investment Gurus, please comment.)
I had bought CES at 0.73 and again at 0.755. It’s aggressive share buybacks gave me confidence. But is it wise for a company to buy back shares while it has a mountain of debt? Is it wise for CES to increase dividends when it has a mountain of debt? What if – by some freak black swan event, we enter a recession again? Furthermore, the sudden departure of Raymond Chia, the ex-CEO could hint of some internal conflict?
I am currently sitting on 30% unrealised capital gains. So back to the question – Should I hold or should I sell some of the shares?
I usually make decisions pretty fast. The fact that I have to spend so many days thinking about CES and weighing the pros and cons shows that I am not confident of its future. It shows that I don’t know shit about the property development industry, how it uses leverage to bid for land parcels and negotiate payment terms. It shows that I might have over-invested in CES; I had an overconfidence streak early last year 2014 and invested heavily in a few companies. In fact, it just revealed that I bought Chip Eng Seng knowing that its NAV was going to rise for FY2014…. and then adopted a ‘wait-and-see-how approach” for the future because I have no idea what to do after that.
Over the years, my investing style has also changed, instead of just buying ‘cheap’ companies, I am looking to buy dominant companies with strong balance sheets and finances that gives me confidence.
CES is not dominant enough in an industry with so many players. Have you tried being a small fish in a big pond?
CES is also taking up a lot of my brain space. I have to work my cluttered brain really hard these few days just to make this decision and even write this stupid article (why are you reading this??). Surely, that’s not good for my sanity!
I am a freaking entrepreneur trying to get a start-up off the ground for 1 year! I got 99 problems, and now CES makes it 100. I should be holding companies which don’t give me so much ‘brain teasers’!
I guess I will slowly make a graceful exit from CES these coming months.
Goodbye CES, it was great being your shareholder.
Readers,you can check back on this post in 2017-2018 to see if I am a genius or an idiot.