Equity Long-Short Trade #1 // General Electric vs Ho Bee Land

We are starting a new segment from this week called the Equity Long-Short trading strategies by recommending a pair trade from the range of global equities we cover on a weekly basis.

Trade #1 / We call for the following pair trading idea.

Long 5 units of Ho Bee Land (H13 : SGX) @ SGD 2.44

Short 1 unit of General Electric (GE : NYSE) @ USD 8.32

Our one year target as follows.

Ho Bee Land : SGD 2.70 (This excludes a 12 cent expected dividend payout in 2019.)

General Electric : USD 2

Trade Thesis as below with insights from our global equities analyst.

GENERAL ELECTRIC, THE NEW BEAR STERNS! INVESTMENT GRADE CREDIT DOWNGRADE TO LEAD TO CONTAGION!

General Electric (NYSE:GE) is a leading manufacturer in aviation, healthcare, power, renewable energy, digital, additive manufacturing, lighting, transportation, and oil and gas. The Company also has venture capital and finance business segments.

The Company has recently announced their Q3 earnings which fall short of estimates and slashed its quarterly dividend payouts. The Company has also written down the value of the Power Segment and sold multiple key assets including the Middle River Aircraft Systems business to ST Engineering (SGX:S63). The Company has recently announced their FY18 Q3 results with a $2.63 loss per share. In FY17 Q3, the Company recorded in $0.16 earnings.

This is due to lower revenue due to absence of businesses that were previously sold, underperformance of existing segments and a significant asset value write down. Multiple key segments have also recorded lower profits as a result of competitive market conditions.

Insights are as follows:

The Company has announced various cost cutting measures, aligned its focus and accelerated its sales of assets to raise funds including its jewels. This is indicative of a Company that is in peril.

Assets being sold belong to the highly profitable segments. The Company is also thinking of separating GE Healthcare. There are further plans to reorganise, this will lead to further costs which will impact both its bottom line and cashflows. The Company recorded a Q3 and YTD operating cash outflow of $3.3b and $4.1b respectively. This is a serious issue for a business like GE as they typically have the ability to manage their operating cashflow well.

The Company has $15b in borrowings that are due in the next 12 months, approximately $10b due in 2019 and $17b due in 2020. The ability of the Company to refinance is dependent on the macroeconomic conditions and also of the performance of the Company. We think an imminent downgrade of GE credit rating within the next 6 months will lead to a significant increase in cost of funding and possible credit freeze across the IG and HYG credit markets. Rating agencies current rate GE credit at Moody(A-) , S&P ( BBB+). We expect a downgrade to junk status within 6 months from today.

GE 2035 bonds have been sold in the market which will pressure future cost of funding and shake confidence. GE amassed $115 billion of debt on a reputation as one of the U.S.’s safest borrowers. But revelations of losses and questions about its accounting have brought a credit crunch.

Key management changes have been announced with various positions filled externally. This is not GE as they prefer to fill positions from internal succession plans. We think the new CEO is moving the Company in the right direction but it is too little too late for GE.

With a YTD 9 months loss per share of $2.50 and a NAV of $3.63, We are confident that the Company will continue to underperform on its current share price of $8.32

We hereby issue a 1 year target of $2 from today close of $8.32

HO BEE, A GEM AMIDST THE MOUNTING PRESSURES

Ho Bee Land Limited (SGX:H13) - FY18 Q3 review

Ho Bee Land Limited is a leading developer of luxury homes in Singapore, China and Australia and a commercial investment property portfolio in Singapore and United Kingdoms.

The Company has recently announced their FY18 Q3 results with a 23.6% YoY PATMI growth.

This is due to higher rental income arising from a full quarter of rental income from Ropemaker Place, higher contributions from Associates offset by higher net finance cost.

The Company’s 9M FY18 PATMI is 27.8% higher YoY as well due to similar reasons. Insights are as follows:

We are comfortable with the current D/E ratio of approximately 0.82 and understand that management is still looking to acquire. We are of the view that Ho Bee should be able to manage at least one income accreditive acquisition in the next 2 quarters. We are bullish on both London and Singapore commercial properties and will expect resolution of Brexit to substantially provide clarity and allow the Company to take further positions.

Net Rental income (Gross rental income – Direct rental expenses – Net finance cost) has grown by approximately 10% YoY. This is an indication of net positive yield investments even on the onset. Note that the typical initial equity for investment properties is 30% with 70% debt.

Borrowings have a natural asset-liability hedge and this reduces FX impact, however we note that the loans are on a floating interest. Our views are that the interest rate hikes in the countries that the Company is in will be slow and thus will have minimal impact on the Company.

There has not been significant sales of units in Sentosa Cove since the Company first represented that it was in discussions to map out a marketing strategy. This is largely due to the cooling measures announced by the Singapore Government. Do note that the Company has already previously written down the value of the Sentosa Cove properties and hence any sale is an upside.

The units are also being rented out and this will facilitate subsequent sales launches for investors who are keen to purchase ‘with lease’ properties.

We have not seen significant asset recycling from dividends paid out by investments in China and expect this to ramp up in the next few quarters. However Management has sounded a cautious outlook on the demand for China residential properties in line with current macro economic conditions.

With a YTD 9 months earnings per share of 28.34cents and a NAV of $4.85, We are confident that the Company will continue to outperform on its current share price of $2.42. The current share price is also underpinned by share buybacks by the majority stakeholder

The public has speculated on a potential delisting due to suppressed valuations. Our view is the Company is a prime candidate for a LBO by owner/management. Our view is that the funds required for a LBO is insignificant and the LBO will immediately be net income positive for the owner/management.

We hereby issue an upside target of $2.70 from today closing price of $2.44. This excludes a 12 cent expected dividend payout in 2019.

Let us know if any comments.

Good Luck Trading!

The Bad Bear + Global Equity Analyst