Plan to double market cap in five years

This article first appeared in City & Country, The Edge Malaysia Weekly, on November 6, 2017 - November 12, 2017.

The good thing about us is that we have a whole range of products and our strong branding helps a lot in a soft market.” — Khor

Khor (third from left) with The Edge Media Group publisher and group CEO Ho Kay Tat, president of the Malaysia-China Business Council and prime minister’s special envoy to China Tan Sri Ong Ka Ting, managing director and editor-in-chief Au Foong Yee and City & Country editor Rosalynn Poh

The integrated transport terminal KL Eco City is a major development in S P Setia’s portfolio

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No. 1 – S P Setia Bhd + Best in Quantitative Attributes

S P Setia Bhd is on a roll. The property developer came back with a vengeance after completing a consolidation exercise, regaining the No 1 position in The Edge Malaysia Top Property Developers Awards 2016 after an absence of two years. And it has repeated the feat this year.

Financially, S P Setia has done well despite the current soft market. In its financial year ended Dec 31, 2016 (FY2016), the group achieved total sales of RM3.82 billion, exceeding its revised target of RM3.5 billion. It also achieved a record profit before tax of RM1.18 billion in the 12-month period.

In August, the developer announced that it had generated sales of RM2.07 billion in the first half of FY2017, making the prospect of it achieving its RM4 billion sales target very likely. Then, it grabbed the headlines by announcing the acquisition of I&P Group Sdn Bhd from Permodalan Nasional Bhd.

S P Setia’s remaining land bank of 5,452 acres as at June 30 (estimated gross development value of RM80 billion), combined with I&P’s 4,263 acres, will make it the largest owner of prime land in the country.

All of this is making president and CEO Datuk Khor Chap Jen a happy man. Indeed, much of S P Setia’s success can be attributed to Khor and his team’s perseverance and hard work. Never one to rest on his laurels, the soft-spoken CEO has big plans for S P Setia. A major focus will be to double its market capitalisation within five years.

We sat down recently with Khor to talk about the company’s performance, its strategy and challenges.

City & Country: How have the last 12 months been for S P Setia?
Datuk Khor Chap Jen: The past 12 months have been pretty exciting. Last year, we decided it was time to come out of consolidation mode. That is why we came out with this five-year plan to double our market cap. At the time, it was about RM9 billion. We want to hit RM18 billion within five years, which will be in 2021.

We started to expand our land bank with our first acquisition being the Telstra land in Melbourne’s central business district in April last year (the site will be home to S P Setia’s Sapphire by the Gardens). Then, in November, we won the bid for a 1,675-acre tract in mainland Penang. This is the first time we have acquired such a large piece of land to build a signature township in Penang. This will be a new market for us.

Then, we saw that the property market in Singapore was doing better and bid aggressively for a parcel in Toh Tuck Road. There were 24 bidders and we won by a nose. We will launch the residential project in the middle of next year.

In the Klang Valley, it was quite difficult to find a good large tract. So, we went to our shareholders and asked if they could sell us a 342-acre tract in Bangi. Then came the acquisition of I&P, which is a nice synergy.

Over in Australia, we have had good results and experiences as well as in London. We are focusing on delivery. Sometimes, it’s hard to imagine that it was only a few years ago that people were talking about a Malaysian consortium redeveloping Battersea Power Station. Now, we are preparing for the handover. Everything has turned out quite nicely. Interest is coming back and things are starting to pick up again.

We don’t have many new projects locally. The market is still soft, so we have focused mainly on our existing townships. We already have new projects, such as Sky Seputeh and Trio and, of course, the biggest launch was Sapphire by the Gardens in Melbourne. The Melbourne launch was just before the Australian government imposed the new stamp duty, so the timing was just right. Also, bringing in Shangri-La Hotel as the operator enhanced our branding of the project. And lastly, we have started construction on Phase 2 of Setia City Mall in Setia Alam, which is part of our plan to build our assets for recurring income.

Despite the challenging market conditions, S P Setia did well in FY2016 and has performed this year too. What are the contributing factors to its success?

The first thing is, obviously, our teamwork. People are very important, whether it is a soft or a boom market. If you do not have good people, not even a great market will help you. This has always been one of our strengths.

The fact that we are a township developer also helps; we know that there will be good and bad cycles. We know how to handle it. The good thing about us is that we have a whole range of products and our strong branding helps a lot in a soft market. People want to buy from a developer they can trust.

For example, when customers buy into our township developments, they know that the accessibility will be there when they move in. Since the launch of Setia Alam, we have built new interchanges and roads. After that, we will continue to hold your hand. We know you will need amenities, places to work and your children will need to go to school. We build the entire township. Customers know this about us, so the brand inspires confidence.

When it comes to luxury high-rise residences, we are not there yet. It is something new for us. We know this because getting good quality workers in Malaysia is still a problem but customers know we will be there for them. If there is anything wrong, we will be there to fix the problem. S P Setia is a reliable developer.

Lastly, we have the advantage of different geographical locations. Last year, our overseas projects were not doing too well but we were able to push the sales of our domestic projects to achieve the target. This year, the local market is soft and the overseas market is helping to push up sales. That is the balance.

How confident are you of ending FY2017 on a high note?
We are fairly confident. The market is very challenging but in terms of sales target, I think we will be able to achieve it. Because of the soft market, we had to change some of our products — do smaller built-ups and offer more mid-range, affordable properties. When it comes to profit margins, there will be a bit of a squeeze. We will be the first to admit that.

What is your plan and strategy to grow the domestic market?
We think the worst is over domestically. We find the underlying demand still strong but only for certain products. The demand for mid-range landed homes is still strong in the Klang Valley and even in Johor Baru. So, these are the ones we will be targeting.

On Penang island, we can only do high-rises. That’s why we are going to the mainland and rushing to launch the new township. Other opportunities are transport-oriented developments such as Trio, which is about 300m away from the Bukit Tinggi LRT3 station, and KL Eco City, where we will have an integrated transport terminal. We are also looking at building our investment assets.

We are not looking at second-tier towns yet but because of the Kuala Lumpur-Singapore high-speed rail, this will be something for us to explore later.

What about the international market? What kind of growth are you expecting?
Australia has been a good market for us. We have six projects there. This year, we may launch one in the Melbourne suburbs and for the A’Beckett Street parcel, we will look at the market. It will take a few months for buyers and investors to absorb the additional stamp duty imposed by the Australian government. Ultimately, it is about the overall amount, including stamp duty and what kind of returns they can get from the investment. Once they are ready, they will come back.

We are looking at Sydney. Now that the Chinese government is becoming stricter, it is an opportunity for us to bid for land at a more competitive price. A lot of the Chinese developers were just too aggressive. That’s why we took our time to look for good land at a fair price in Sydney.

We are quite happy with our pace in Singapore, and in London, we have started to hand over the first batch of properties in Battersea Power Station. We have built up experience in London over the years and that has given us the confidence, so we may venture out of central London into the suburbs later. Demand from the locals is strong and there is not enough supply, so why should we concentrate on Central London?

It is the same in Australia. When we started there, we went into the central business district. Now we have moved to the suburbs and target more locals. It helps that they now know who we are.

We are also still looking at opportunities in, maybe, another one or two countries. Ultimately, we hope to achieve a revenue contribution of 30% to 40% from overseas projects. Last year, it was about 10% and this year, we expect it to be 20%.

The acquisition of I&P Group will turn S P Setia into one of the largest, if not the largest, property development groups in the country. How will this impact S P Setia in terms of strategy, planning, products and growth?

In terms of strategy, it ties in very nicely. We see a lot of synergy between I&P and us. For example, it has 400 acres of undeveloped land next to our mature Setia Alam. A township has the most value when it is mature because by then you would have built all the infrastructure and amenities and value would have appreciated. Then you find that you are out of land to build. This I&P tract gives Setia Alam a new lease of life and enables us to expand our township.

The acquisition will give us economies of scale. The Bangi tract we acquired, combined with I&P Alam Sari next to it, will make us a dominant player there. And because of the size, our cost will go down.

I&P is present in areas like Alam Impian, Shah Alam, and Kinrara in Puchong, where we don’t have land. So, it gives us exposure to new markets, and I&P has its own following. That in itself is a good strategy and fits into our expansion plan very well. People present a challenge. It is a different culture. S P Setia has about 1,800 employees and I&P about 350, and we feel we have a strong culture that they can emulate.

Would you say that blending the two cultures and people is the biggest challenge of the merger? How are you addressing the issue?
Yes, I think that is the biggest challenge. We are talking to them and, of course, initially, there were some concerns and apprehension but we have had quite a number of meetings and town hall meetings. I’m heartened to see that from the questionnaire, 79% said they are ready and looking forward to coming together, 17% are neutral and only 4% are unsure. So it is very positive and we are upbeat about this.

Both companies are township developers, so that makes it easier. It means we don’t have to retrain the staff. We just need to show them our way of doing things. They know us, and some of them really want to know the secret of our success. They want to improve themselves. Of course, we can expect some hiccups along the way but I am confident we can overcome them.

You said you think the worst is over for the domestic market. When do you expect to see a real recovery?
Yes, to us the worst is over but the market is still going sideways. It’s not really picking up. Whether or not it will pick up strongly in the next 6 to 12 months depends on the catalysts.

We do find pockets of real demand like Setia Eco Templer in Rawang, which is an underserved area. There are no such landed lifestyle properties there. So, when we launched, it was fully sold. We are now launching

Phase 2 and, again, the demand is very strong. Then in areas like Setia Alam, landed properties at the right price will still sell.

While I think income in general has increased, disposable income is still an issue. In the past, after you graduated you didn’t have student loans to worry about and you could buy a second-hand car and pay up within two to three years. These days, students are saddled with heavy loans after graduation and car loans can stretch to nine years. So that in itself makes their disposable income smaller, and it is not rising in tandem with inflation. That is the challenge.

With disposable income being an issue, what can be done to improve the situation?
We hope the government can offer more help in ways such as improving accessibility to loans, which will help first-time homebuyers. And state governments, utility providers and stakeholders really have to sit down and look at what they can do to make affordable housing affordable. Right now, we have state governments and such talking about new development charges, which will just add to the cost of the homes. Everyone has good intentions but sometimes good intentions end up adding to the cost for buyers. The Real Estate and Housing Developers Association Malaysia has started talks and there is a lot of engagement. We really need a central body to handle this.

Is S P Setia still looking for land to acquire or is the land bank from I&P sufficient?
I&P will add about 4,265 acres to our 5,452 acres, which is huge. We are looking at replanning some projects as well as adding more value. For the time being, we are not landbanking as aggressively locally but if someone comes to us with a deal we cannot refuse, of course, we will look at it.

Setia Seraya Residences

Tel: +603 8861 6500
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Ovalis, Bandar Setia Alam

Tel: +603 3343 2255
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