Maldives property could add to Keong Hong’s recurring income

By Michelle Teo

/ The Edge Singapore |

October 2, 2017 3:34 PM SGT

Source: Mercure Maldives Kooddoo Resort

(Oct 2) The Mercure Maldives Kooddoo Resort was launched to great fanfare on Sept 25, despite already being in business for a month. In attendance were Maldivian president Abdulla Yameen Abdul Gayoom, the Maldivian ministers for tourism and economic development, and members of parliament. Representing Singapore were non-resident ambassador to the Maldives Chua Thian Poh and Keong Hong Holdings CEO Ronald Leo.

The 68-villa mid-scale resort is attached to an airport, with the hotel’s entrance within walking distance of the planes. Kooddoo airport, which was built by Keong Hong in 2011, is a 50-minute flight from the capital city of Male. Leo expects Mercure Maldives Kooddoo to start turning a profit after a year of operations, or even sooner. He estimates the resort could contribute US$2 million ($2.7 million) a year to Keong Hong’s pre-tax earnings. He says, “We are in a segment that I think is going to do very well.”

Keong Hong is also building a more upscale resort on an island 15 minutes away by speedboat. The 120-villa Pullman Maldives Maamutaa Resort is scheduled to open in early 2019. Meanwhile, the company recently extended the Kooddoo airport runway to accommodate large private jets. Previously, planes landing there were predominantly Dash 8-300 turboprops carrying 50 passengers operated by Maldivian, the national airline.

The two Maldivian properties, which will cost US$120 million to build, are owned by Pristine Islands Investments. The latter is 49%-owned by Keong Hong, with construction steel reinforcement fabrication company BRC Asia holding a 15% share. They are to be managed by one of the world’s largest hotel managers, French group Accor.

Beyond construction

Keong Hong was founded as a construction company in 1983, and it was listed on the Catalist in 2011. Its listing was transferred to the Mainboard in August last year. The company had focused on the construction of private housing until 2008, when it partnered Accor to build the Ibis Bencoolen hotel. Since then, Keong Hong has continued to expand into the hospitality space. Through a joint venture, it has developed and now partially owns a hotel and mixed-use project in Katong that is being managed by Intercontinental Hotels Group.

Having completed earlier construction projects in the Maldives, Keong Hong has now leveraged its experience in navigating the logistical and administrative challenges of the archipelago to launch its first resort there.

The country’s more than 1,100 islands are grouped in a chain of atolls stretching 820km from north to south, and are sufficiently dispersed to provide the numerous resorts along the coast with some semblance of privacy. Most are luxury villas, commanding premium prices.

Mercure Maldives Kooddoo is sited on the Gaafu Alifu Atoll, the penultimate southern atoll facing the expanse of the Indian Ocean. It is positioned as a mid-scale Mercure hotel, but with features that are comparable to a luxury resort. The management believes this will help the property become profitable quickly, even as competition increases in the coming years.

In 1H2017 alone, four new resorts were opened in the Maldives. They have added 1,078 beds to the Maldives’ total accommodation capacity, which is 723 establishments with 39,570 beds. The average occupancy rate for the six-month period was 61.4%, or four percentage points lower than the previous year’s. This was despite a 6.3% y-o-y increase in the number of tourist arrivals, to 657,000.

The biggest source of visitors to the Maldives remains Europe, which accounted for 48.7% of all the tourists in the first six months of this year. Asia-Pacific accounted for 42.8% of visitors. China is the single-largest market for tourists, but its numbers have been declining since 4Q2015. Chinese tourists in 1H2017 were 10.7% fewer than in the same period last year.

Now, efforts are underway to attract more visitors. The international airport at Male is undergoing an US$800 million expansion, undertaken by Chinese construction firm Beijing Urban Construction Group. This includes a new runway that is expected to accommodate aircraft as large as the Airbus A380. The expansion is expected to raise the airport’s annual passenger handling capacity to 7.5 million when completed in 2018, from 1.3 million currently.

More investments ahead

Investors seem to have responded well to Keong Hong’s new developments. The stock gained 1% over the period of Sept 19 to 26, beating the 0.4% decline in the benchmark Straits Times Index. That represents all of the counter’s gain since it was added to our portfolio on July 11. The stock continues to be undervalued. It has a gross dividend yield of 6.7% and trades at four times FY2016 earnings.

We are optimistic that the new Maldivian properties will add to Keong Hong’s recurring income over time. The group is beefing up its property investment businesses, as it aims to even out the lumpy earnings characteristic of construction and development operations. Keong Hong is also expected to complete the acquisition of a property in Osaka, Japan shortly. The company is paying $11.8 million to acquire a nine-storey, fully tenanted office building in the fashionable Minamihorie district. This would be the second property Keong Hong has in Japan — it acquired another nine-storey office building nearby in 2015.

For 9MFY2017 ended June 30, the group’s turnover was 28.6% lower y-o-y at $136.2 million. This was attributed to lower revenue recognition from construction projects, as work was completed the year before. Earnings were down 39.7% at $10.7 million. As at June 30, its construction order book of $433 million included works on Raffles Hospital’s extension, the construction of Parc Life and Seaside Residences condominiums, and works on Pullman Maldives Maamutaa. “We are still a contractor, with some developments and investment,” Leo says.

This article appeared in The Edge Singapore, Issue 799 (Oct 2, 2017). The article first appeared online here.

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