Wolf Money(APAC Realty)

(Image credit: APAC Realty)

The below article is for educational purpose only. Kindly refrain from taking any action. It shouldn’t constitute as an investment advice. Please read the disclaimer.

I have taken a small position in APAC Realty. I previously took a stand of not investing in small cap stock with capitalisation below $250m. This is more like a random buy sparked by the recent news of renewed interest in new property projects.

APAC Realty runs ERA, the second-largest property agency after PropNex. The agency business is quite easy to understand as compared to a property developer. I like the agency business because it is purely a service business without the usual risk associated with a property company. Very little money is spent on buying fixed assets. It is largely a human business. I see the agency business as a number game. When the property transactions are up, the profit of agencies will go up. Below are the few points which I have observed.

1.) ERA has the bulk of their businesses tied to new project launches. Given the recent new launches by developers in Oct and Nov, more sales will be made. The new launches by developers are experiencing a resurgence in demand. The lowering of interest rates had a positive impact on property sales. Close to 10,000 units will be launched in q4 2024 and q1 2025. This figure is substantially higher than last year numbers. There was a significant jump in new home sales in Oct. Nov numbers are likely to be strong too. Based on industry knowledge, more than 2000 units in the newly launched projects were already sold in Nov alone, higher than the 738 units sold in Oct.

(Source: Business Times)

2.) More people are joining the industry due to pull or push factors. Another number to watch is the number of new agents joining the industry, which has reached 35,000. The top three players are gaining market shares from the other smaller players. A consolidation in the industry is likely to occur.

3.) The profit numbers for real estate agencies are likely to show an uptick only in 1H25 as it takes time to conclude a sale and receive commission from developers. They might still report one or two quarters of weak results.

4.) The main underperforming of the local real estate market is in the CCR region, where a typical profile of those prime units are the wealthy foreign buyers. With the 60% ABSD hurdle, some foreign buyers are put off by the high taxes. It is my opinion, and my unfounded suspicion, ABSD will be twitch downward only after the general election, which could happen anytime from March to Sept next year. Any reduction of ABSD will increase demand for condo in the CCR region.

5.) APAC Realty has grossly underperformed the general market due to its falling profit. With share prices slumping close to 25% this year, nearing their 52 weeks lows. I believe their earnings will recover at least for the first half of 2025 inline with the improvement in new home sales. I think it is difficult to look beyond 1H2025.

6.) More new projects will be coming on stream as the developers can’t delay their launches indefinitely due to the qualifying certification which requires developers to build and sell their projects within 5 years or risk paying a heavy penalty for those unsold homes. 

(Source: ERA; Good pipeline of launches in the coming months)

7.) APAC Realty pays a high percentage of their profit as dividends. It ranges from 50% to 80% of net profit. The stock trades at a 0.85x price to book. Dividends payments move inline with profit generated.

8.) Morgan Stanley Private Equity Asia paid 61c for it majority stake in APAC Realty in June 2022. Given, a typical private equity fund has a 3 to 5 years mandate. A privatisation offer to “average down” their cost is a remote possibility. Given they are called private equity fund, it might run against their main objective by investing in a publicly listed entity. Morgan Stanley Private Equity Asia is down 37% from their initial purchase price of APAC Realty excluding dividends at the time of writing.

9.) Support can be seen at 37c and 33c

Risks

1.)  The sticky high interest rate might be staying longer. If there is a renewed inflationary environment, interest rate might move up again, affecting property sales in general.

2.) Losing agents and market share. Agents and market shares are important numbers for any real estate agency. Housing agents and clients’ loyalty are hard to come by given the competitive nature of the industry.

3.) Commission price war among agents might cause profit for agencies to drop. I have seen more agents offering low fixed commission for their brokerage services. It is likely to be the trend going forward among agents who want to be more competitive. 

4.) The counter has poor liquidity. Only a few hundred thousand shares change hands each day. 

5.) Property related stocks are most affected by government cooling measures. If property prices move ahead of fundamentals, one can almost be certain some form of cooling measures will be imposed.

6.) This is company specific. I feel the APAC Realty Centre should be sold to improve ROE. Given the high sora rate. I am not sure if the property is generating positive cashflow for the company given the high borrowing cost. There is also the factor of leases decaying. The building was built in 1970s.

More information at the month end review. Thank you. God Bless.

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Disclaimers 

All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for education only. Buyer beware,do you own due diligence.