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If you’ve followed our post since day one, you know that property developers and constructors don’t appeal to us that often. The reason being problems in the property market at the current moment where houses built aren’t being sold completely having more than 5% left overs sitting in the company’s inventory doing nothing.

So what’s with Ho Hup? I came across Ho Hup in my daily traffic congestion where it is caused by one of their projects involving the construction of a flyover near my residence. The project is causing abnormal congestion and it’s pretty annoying since lanes were merged from 3 to 1 causing a bottleneck during rush hour. Looking at the same word every day eventually I told myself might as well look at what they do and that is how one thing led to another.

First of all, let’s make things clear. This company is small and by that I mean really small compared to its peers and it’s just not right comparing them to giants like Gamuda or whatever big names you could think of.

Other than being small, I still don’t think that it is wise to invest in this company on a long term basis. In fact, you could stop reading if you are seeking for a long term investment because this really isn’t. I’m here to make double digit percentage gains on this counter and then I’m off. There’s just too many uncertainties in this sector as well as the company itself.

So Why am I Interested?

Straight off looking at the PE that it is trading, I would say it is one of the lowest I’ve seen in a cash making, zero loss (past 3 years) company. One could argue with me that the number of upcoming contracts remained weak and that is why nobody is paying a premium for this stock. I totally agree with it! With just 20% of their order book fulfilled, it isn’t anywhere close to satisfactory from what I see.

But the current share price and the premium paid on earnings are already so low, we can assume that most of the growth problems had already been factored into the share price.

The empty order book is likely to be an opportunity rather than a threat at this price. But of course no land banking meant that the property segment isn’t going to grow much for the next few years which solidifies my argument of not holding it long term. But as said earlier, this is just a trading position and waiting for the break when new contracts start to fill the orderbook.

At the moment, company states that their order book’s worth is around RM600 million versus their full capacity at RM3 billion.

Rights Issue

Coupling the current weakness with rights issue proposed by the company earlier in April, this propelled the stock price even lower. As a matter of fact, the rights pricing was set at RM0.80 which is what the stock is currently trading at. Technically this meant that there’s zero discount for the new share price other than a bonus of a free warrant to compensate for one’s subscription. We could only assume that the rights price would end up even lower than the pre-determined RM0.80 meaning less cash would be raised and that directly affects their original plan.

Quite often, most companies that proposed a rights issue eventually see their share price weaker where it seems like nobody likes to fork in extra cash although the proceeds would be invested to grow the business even more. The Malaysian market had been this way and I see this as a good opportunity to buy when a company demands cash for a good reason but ended up having the market punishing the stock price for doing so.

I see HOHUP entering similar conditions now where the current weakness proves to make it cheap but before we conclude anything, let’s talk about the financials.

Financials

I know this is a good trade when I see a good support below RM0.80 and the selling pressure tapers off. If the selling pressure turns low around RM0.80, immediately it forms a double bottom and most probably everyone knows what a double bottom leads to. But I don’t like to buy a position relying on Technical Analysis alone.

I like to prepare myself a backup plan in case it decides to drop 10% within a day. That being the case, financials come in to the evaluation.

With a total debt to equity of 59% or long term debt to equity of just 27%, it felt that this is healthy for a constructor where it could stretch this number even more from where it is now. By taking in more debt, the company could increase its leverage to take up bigger contracts that translate to bigger returns.

I don’t see debt problems troubling them since the order book value far exceeds what their debt number which is safe in my books. Since debt isn’t a problem it is safe to say that issues such as bankruptcy won’t put your money in jeopardy. Having room for debt is also a signal that it could aggressively fill its order book immediately. At least it is not having debt/equity levels above 100% and possesses an empty order book, that would be suicide!

The cash generation is strong from this company where it continuously generates positive cash from operations except in 2014 where much of the cash didn’t came in yet due to delayed progressive payment from its housing segment. As usual the revenue from selling houses were capture before the full payment would be made.

Risk

The only risk that worries me is their ambitious expansion into the property market in Kota Kinabalu and Johor next year. Not sure about the market there and the company’s plans on what type of development that it might turn out to be. If units are priced above average, then it might turn into a problem since demand for these units are still weak and would continue to be weak.

In the meantime, it’s buy and wait approach for me and keep the cut loss limit tight! Would appreciate it if you could comment since there are so many cons for this counter. I really hope sharing your ideas could clear up my fog in this counter.

Thanks…

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