GSH Corporation Limited (GSH) is a Singapore-listed real estate developer in Southeast Asia. As at 30 June 2019, its asset size amounts to S$1.1bn.

Income generating segments

• Property – Income from sale of properties as well as rental income from investment properties owned by the Group. Mainly engaged in property development in Malaysia. The Group has two luxury residential properties currently for sale. It also owns two land banks, one of which will be a 50% joint venture 1,880-unit condominium luxury residence in Kuala Lumpur’s Petaling Street, to be launched next year.

The Group also owns a 30% stake in an associate company, Henan Zhongyuan Group, which owns and operates one of the largest food logistics and warehousing hubs in China, Zhengzhou in Henan Province.

• Hospitality – Owns and operates the Sutera Harbour Resort in Kota Kinabalu, comprising of two five-star hotels and a 27-hole championship golf course, as well as the Sutera@Mantanani Resort, a 30-room resort in Kota Belud. All hospitality assets are situated in Sabah Malaysia.

Overview:

(+) Management largely vested in GSH’s bonds and shares

(+) Healthy sales from development properties despite high supply in Malaysia

(+/-) Stable recurring income from food logistics and hospitality businesses, however, impacted by increased competition

(+) Manageable gearing levels allow room for financing planned developments

CREDIT VIEW

(+) Management largely vested in GSH’s bonds and shares – After the maturity of Group’s 07/06/2019 5.15% bonds, it is estimated that GSH’s management still owns a total of S$38.5mn of its outstanding bonds (or about 32% of total outstanding bond issues). We view this as a credit positive as the vested interest helps align management with bond investors’ interests.

Along with its bonds, management is also highly vested in GSH’s shares, with over 59% interest by Sam Goi, GSH’s executive chairman. Known as Singapore’s “Popiah King”, Sam Goi is ranked 15^th amongst the top 50 richest in Singapore in 2019 and is the chairman of Tee Yih Jia Foods, a world-leading manufacturer of popiah skins as well as other frozen convenience food products. We view this as a credit positive, allowing GSH to tap on a strong network for funding channels.

Other established stakeholders include the Group’s CEO Ee Guan Hui (8.09%), and Far East Organization (5.04%).

(+) Healthy sales from development properties despite high supply in Malaysia – Despite the saturated property market in Malaysia, the Group’s 2018 launch of 100 units of its Coral Bay luxury residential project in Kota Kinabalu was oversubscribed. This was mainly due to its quality location, situated at the coastline within GSH’s Sutera Resort as well as near the city. The Group plans to launch more units to foreign buyers in the coming future.

The Group’s other luxury residential development, Eaton Residences in Kuala Lumpur, is over 70% sold. It sold well mainly to foreigners due to its prime location, boasting unblocked views of the Royal Selangor Golf Club and the Petronas Twin Towers. Malaysian government policies restrict the remaining 30% of units to Bumiputras (native Malays). Negotiations are underway to reduce the restrictions. Construction is expected to complete in 2020.

As of 30 June 2019, cumulative revenue of S$181mn for sold units are to be progressively recognized over the next 2 years, helping to improve the Group’s financials moving forward. The spike in profits in FY2017 was mainly due to a one-off disposal gain of SGD74.5mn from the sale of the Group’s entire stake in Plaza Ventures Pte Ltd, a substantial owner of GSH Plaza in Singapore. Proceeds were used to pare down debt levels.

Regarding future developments, the Group plans to launch a 50% joint venture premium 1,880-unit condominium in Kuala Lumpur’s Petaling Street towards the end of 2019 or early 2020. Located a 5-minute walk from Chinatown, it captures the views of the Petronas Twin Towers, Lake Gardens, KL 118 Tower, as well as Kuala Lumpur Sentral. Aiding its ability to sell, management stated that unit prices range within local buyers’ sweet spot, guiding for 50% sales to middle-class locals. The land obtained a high plot ratio of 14, allowing construction of more units and higher income potential. Construction is expected to last 5 years.

Overall, GSH’s management has shown diligence in selecting quality locations for development, prudently navigating the difficult Malaysian property sector.

(+/-) Stable recurring income from food logistics and hospitality businesses, however hospitality impacted by increased supply – The Group generates recurring income from its food logistics property in China as well as its hotels in Sabah. In FY2018, the Group’s hospitality business contributed ~63% of profit after tax from income-generating segments. Plans to expand the 30-room Sutera@Mantanani Resort to 75 rooms by 2020 should help boost recurring income in the future.

The Group, however, posted a 5.8% decline in revenue for its hospitality business year-on-year for 1H FY19 as a result of increased competition from new hotel openings in the city. The decline has also been attributed to the US-China trade war dampening Chinese travel appetites.

In spite of this, management has guided a recovery for 2H FY19 figures as organic growth in tourist arrivals to Sabah remains strong. Tourist arrivals to Sabah have seen double-digit growth over recent years, with the Group’s hotels enjoying occupancy rates of around 80% for FY2018.

(+) Manageable gearing levels allow room for financing planned developments – The Group’s current ratio stands at a manageable 2.41x, however, its quick ratio of 0.59x requires near-term refinancing. Net gearing ratio of 0.81:1 is low compared to the Group’s financial mandate of 2.25:1. According to the management, 1:1 would be within comfort levels. As at 30 June 2019, ~48% of the Group’s properties, development properties and cash have been pledged for bank loans, leaving room for more pledged financing.