Hong Lai Huat – Long term proxy to Cambodia’s booming growth

Unknown to many, Cambodia's economy has achieved an average real growth rate of 7.7% between 1998 and 2019, making it one of the fastest-growing economies in the world. However, 2020 saw its growth get hammered by COVID-19 as its economic growth is mainly driven by garment exports and tourism (both of which are impacted greatly). On a bright note, according to the Asian Development Bank (ADB), Cambodia’s economy is predicted to grow 4.0% this year and 5.5% in 2022, as the economic recovery in major trading partners boosts demand for Cambodia’s exports. Hence, it bodes well for Hong Lai Huat Limited ("HLH") since majority of its assets are based in Cambodia. Below is a quick background of HLH…

Background of HLH

HLH is a real estate and property developer with 33 years of successful track record with its initial projects coming from Singapore. Some of its notable developments in Singapore include D’Ecosia, D’Lithium, D’Kranji Farm Resort and D’Centennial. In 2008, the Group diversified into the agricultural sector in Cambodia and had since completed the development of approximately 10,000 hectares farmland that cultivates fresh cassava, as well as a cassava starch production factory capable of producing 120 tons of starch on a daily basis. The Group also expanded its property development in Cambodia with the successful launch of its first freehold mixed-use project in FY2019 called D’Seaview. It is one of the first and largest mixed-use developments in Sihanoukville, Cambodia. Following the success of D’Seaview, the Group launched its 2^nd freehold mixed-use project Royal Platinum in FY2019 in Toul Kwok district, Phnom Penh, the capital city of Cambodia. Construction works have began in May 2020. Check out the youtube video below for the Royal Platinum mixed use development: More recently, HLH hit an important growth milestone – it secured an official approval from the Cambodia’s government to convert its existing agriculture land into a mixed-use development land for the Group to develop the mega Cambodia-Singapore Agriculture Hub (“Agri Hub”).

Agri-Hub to set foundation for next 20 years

It may sound too good to be true for a mega project to sustain a company’s growth for the next 20 years until you see the humongous size of HLH’s mega project. To put things into perspective, the Agri-Hub land size stands at 100,000,000 sqm (Approx. 1/7 size of Singapore)! According to HLH’s investor presentation, it has also come up with the development roadmap for the next 15 years and beyond. Under the initial Phase 1 from 4Q2021 – 2024, HLH will focus on upgrading the infrastructure and create zones to include value added food processing factories, warehousing facilities and logistic hub, renewable energy (like solar power), livestock farms, construction material zone, plantation zone, aquaponics, water treatment facilities, light industry zone, commercial and community living concepts etc. Based on the development zones as approved by the government in phase 1, approximately US$1 billion Gross Development Value (GDV) will be generated from leasing of land, sales of land use rights as well as revenue recognition from joint cooperation model already. Here’s the picture to showcase the near-term (Phase 1) business model: In short, there will be multiple income streams for HLH from sale of disposal of land/completed properties, leasing recurring income and also joint ventures’ profit sharing agreements. Already, the Group has secured interests from potential partners including Joe Green Pte Ltd for the development of a light weight concrete panel manufacturing plant to be built in the hub and to prepare for the future development of the Agri-Hub.

Significant Value to be unlocked

Despite the upcoming sales of Royal Platinum and exponential profit growth from Agri-Hub’s multiple income streams, HLH’s share price has not been reflecting these exciting developments, which may give potential investors an attractive at current prices. In fact, based on its S$0.095 share price, HLH’s potential net cash position of S$28.6 million will form nearly 60% of total market cap of S$49.1 million. On top of that, it is trading at an attractive valuation of 0.4x Price-to-Book Value and its is backed by mainly hard assets of cash, properties and land. Last but not least, there may also be significant uplift in the agricultural land asset value following a change in use of land for development of Agri-Hub.

Conclusion

With the founding Ong Family having a 46.5% stake in the company and a potential ~S$500 million worth of ongoing property development portfolio (without even including the Agri-Hub), there seems to be much hidden value to be unlocked here. That being said, investors will also want to do their homework on the Cambodia’s economic growth because HLH will be a direct proxy to Cambodia – much like how Yoma Strategic is to Myanmar in its early days.