Brief Value Investing: Musashino Bank  (8336 JP): Braking Bad and more

In this briefing:

1. Musashino Bank  (8336 JP): Braking Bad
2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris
3. China Rail: Paths to Financial Viability for CRC

1. Musashino Bank  (8336 JP): Braking Bad

Musashino Bank (8336 JP) was one of the last regional banks to announce 3Q FY3/2019 results, and they were a nasty surprise: a consolidated net loss for the nine months to 31 December 2018, caused by heavy reserving in Q3 (October-December 2018) against the bank’s exposure to the troubled Akebono Brake Industry Co (7238 JP) .  While the bank has slashed its full-year net profit guidance from ¥11.1 billion to ¥4.5 billion, this would still require an heroic level of profits in Q4 which the bank has never before achieved.  The share price has fallen over 31% in the last twelve months.  Valuations at current levels are still high (FY3/2019 PER is 17.6x) and we consider the share price to be vulnerable to further weakness.  Caveat emptor (May the buyer beware) !

2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, we look into the first white site at Pasir Ris Central launched by the Housing Development Board (HDB). The white site, which is next to the Pasir Ris MRT station on the East-West Line, is to be developed into a mixed-use commercial and residential development and is likely to be also seamlessly connected to the bus interchange and MRT station.  

On 14 December 2018 at the close of the tender, the Pasir Ris white site saw a weak response from developers with only three bids received. This was below expectations given its prime location next to the MRT station and was likely the result of the July 2018 property cooling measures which made developer turn more cautious. The three bidders for the white site were Far East Organization, Singapore Press Holdings (SPH SP) (SPH) and Kajima Developments in a joint bid, and Phoenix Residential and Phoenix Commercial; both owned by Allgreen Properties and Kerry Properties.

On 25 January 2019, the Land Transport Authority (LTA) announced the alignment and 12 station locations for Phase 1 of the Cross Island Line (CRL), Singapore’s eighth MRT line. The CRL Phase 1, to be completed by 2029, is 29-km long and comprises 12 stations from Aviation Park to Bright Hill. The line will pass through the Pasir Ris MRT station, making it into a MRT interchange station. Spanning about 50-km in length in its entirety, the CRL will serve existing and future developments in the eastern, western, and north-eastern corridors, linking major hubs such as Jurong Lake District, Punggol Digital District and Changi region when fully completed.

Now that the Pasir Ris MRT station is being named as an interchange station with the CRL, the potential of a successful integrated mixed-use property development will be greater. According to the LTA, the projected daily ridership of the entire CRL is more than 600,000 in the initial years, increasing to over 1 million in the longer term.

The prices of private homes in the future Pasir Ris Central mixed-use development will very much depend on the land price paid by the winning bidder and also other macro and micro factors including the interest rate environment, product mix, design, and cost of integration with amenities and etc. However, we attempted to predict a reasonable price point for the private homes at this future mixed-use development by using two other integrated mixed-development projects currently under-construction as references. The two references are The Woodleigh Residences above Woodleigh MRT station in the up-and-coming Bidadari estate and Park Place Residences at PLQ in the new business district at Paya Lebar Central. We also work backwards to estimate the bid price. Market conditions are assumed to remain the same two years from now.

3. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly.