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“Let’s sell land to repay our debts”

That’s exactly what this developer is doing. Ho Hup Construction (HHC) is a property developer who has been involved in some notable projects such as the Petronas Twin Towers, National Sports Complex, KLIA, LRT, and other major highways.

On 6 May 2024, HHC is selling its land in Flex Sovo at Bukit Jalil for RM110 million to EXSIM. Before this, they estimated that the development would be worth RM1 billion.

The reason? It wants to pay its debts.

If you are a student of finance, you would be like “What the f —?:”. You don’t sell your key projects and land to pay for debt.

So why is HHC doing this? Is it in trouble? Let’s find out!

I am a big believer in being informed to do your research. The purpose of this content is not to spoon-feed you with what to know about HHC but rather to encourage you to do more research on companies for your investment journey.

The Land is Next to Pavilion Bukit Jalil …

HHC already has plans for the land it is selling. So, it’s weird to see the company doing this.

The land houses the development called Flex @ Bukit Jalil where in its 2023 annual report, HHC highlighted this project to be the main revenue driver for the next 3 to 5 years alongside another development called The Crown Project in Kota Kinabalu.

What’s even weirder is that the project had a gross developmental value of RM1.0 billion and is right next to Pavilion Bukit Jalil. HHC had already launched its SOVO offerings with a 30% take-up rate.

So, now, it’s refunding all the money that they have gotten from buyers.

HHC is Selling the Land at a Loss

It must be desperate.

HHC valued the land at RM119 million and it will incur an impairment loss of RM9 million. Let’s not forget that it also spent about RM57.4 million in development costs for the land.

So, the way I look at it is that HHC had intentions to develop the land, came up with a masterplan, spent almost RM60 million, and then decided to sell it for a loss of RM9 million to EXSIM.

What on earth could have led HHC to such madness?

It Has Been Making Losses in the Past 3 Years

Let’s cut straight to the chase.

HHC has been loss-making since the pandemic. It went from a profit of RM73 million in 2020 to a steep loss of RM80.6 million in 2023. And losses have increasingly widened from RM18 million in 2021 and RM32 million in 2022 respectively.

Things are not looking good. Its retained profits (meaning how much profits it has made in its whole history) have declined to only RM76 million now.

Guess what? If it makes another RM80 million again, it will effectively be in the red.

It’s kind of interesting to see how far Ho Hup has fallen over the years.

But what are the causes?

Ho Hup Is Not Doing Too Well

It made RM371 million and RM316 million in 2019 and 2020 respectively, And its revenue has crashed to only RM188 million in 2023.

What’s even worse is that its 4Q 2023 revenue was only RM16 million. And it made RM60 million in losses.

Something is wrong with HHC now. Its construction contracts have declined by almost half to RM24 million in 2023.

And while its sales of development properties have increased slightly to RM143 million in 2023 from RM141 million, HHC is going to refund the money it obtained from the Flex project back to its clients (well, now ex-clients). So, it might have to roll back some of its revenue obtained.

But why are they doing so poorly in terms of revenue?

HHC is blaming the pandemic and the ‘soft economy’. The pandemic is acceptable if it’s still 2021 or 2022. But most companies have already recovered in 2023.

‘Soft economy’? It cites that GDP growth has weakened considerably to 3.7% in 2023 from 8.1% in 2022. But it’s base effects. If an economy grows spectacularly in a year, the next year will be hard to replicate. Hence, the growth of course will be lower. BASE EFFECT!

Let’s not forget that the main reason why Malaysia’s economy weakened was because of a crash in its exports. No relations to a construction company.

Here Are the Real Reasons

It tried to borrow its way out.

Total liabilities increased from RM903 million in 2020 to RM1.1 billion in 2022. As a result, its interest repayments also burst through the seams from RM27 million to RM41 million over the same period.

The reasons for the borrowing? It was at the tail end of its construction and property development cycle. Many of its infrastructure projects were already approaching the end in 2021 and 2022. And there wasn’t much refreshment in construction contracts.

Meanwhile, it obtained about RM260 million with its tie-up with Malton for the Pavilion Bukit Jalil project. Malton developed it, while HHC provided the land. In return, HHC gets about 18% of the gross developmental value of Pavilion Bukit Jalil.

If we have been following this development, Pavilion Bukit Jalil was completed in 2021, so HHC didn’t obtain much revenue from this project after that.

Hence, HHC was banking on two projects in particular, 1) FLEX @ Bukit Jalil (RM1 billion) and 2) Crown @ Kota Kinabalu (RM590 million) to support its revenue from 2023 to 2026. It is worth noting that HHC is still working on its Laman Iskandria @ Kulai (RM1.8 billion) project but was launched in 2018. Its contribution won’t be much now.

In a nutshell, HHC wasn’t able to properly refresh its construction contracts and property development projects during the pandemic.

Let’s Not Forget that HHC was a PN17 Company Before

Believe it or not, HHC fell into PN17 status back in 2012 and 2013.

PN17 here means that there are serious doubts about the company’s ability to continue operating because of heavy losses for a prolonged period.

HHC has been making losses in the past 3 years. While it has managed to come back from this before this, we should take a good look at HHC’s ability to regain profitability.

It is a long road ahead for the company if it decides to sell its land to repay borrowings.