ara_pdf

ARA ASSET MANAGEMENT Analyst Research Report

Rusmin

11 April 2012

Fast Grower

ARA Asset management | Contents

© All Rights Reserved

8 INVESTMENT PTE LTD

Table of Contents Disclaimer ............................................................................................................................................................. 1

Business ................................................................................................................................................................ 1

About the Company ........................................................................................................................................ 1

Core Businesses ............................................................................................................................................... 1

Corporate Structure ........................................................................................................................................ 5

Competitive Advantage .................................................................................................................................. 9

Business Risks ................................................................................................................................................ 11

Key Growth Driver ......................................................................................................................................... 12

Management...................................................................................................................................................... 13

Board of Directors’ Profile ............................................................................................................................ 13

Remuneration ................................................................................................................................................ 14

Shareholding Statistic ................................................................................................................................... 15

Insider Trading ............................................................................................................................................... 16

Numbers ............................................................................................................................................................. 17

Income Statement ......................................................................................................................................... 17

Balance Sheet Statement.............................................................................................................................. 18

Cash Flow Statement .................................................................................................................................... 20

Financial Ratios .............................................................................................................................................. 21

Industry .............................................................................................................................................................. 25

Value Chain of REITs ...................................................................................................................................... 25

Competitors ................................................................................................................................................... 26

Valuation ............................................................................................................................................................ 28

Historical Growth Rate (CAGR) ..................................................................................................................... 28

Historical Share Price .................................................................................................................................... 28

Discounted Earnings Model .......................................................................................................................... 29

PE / PEG / PTB ................................................................................................................................................ 29

Analytical Summary ........................................................................................................................................... 30

ARA ASSET MANAGEMENT | Disclaimer


8 INVESTMENT PTE LTD 1

Disclaimer

This report and its contents contain the opinions and ideas of the authors. It is not a

recommendation to purchase or sell the securities of any of the companies or investments

herein discussed. The report is distributed with the understanding that the trainers,

analysts and their associates are not engaged in rendering legal, accounting, investment or

other professional services. If the participant requires expert financial or other assistance

or legal advice, a competent professional should be consulted. Neither the trainers, analysts

nor the associates can guarantee the accuracy of the information contained herein the

report and its contents.

The trainers, analysts and associates specifically disclaim any responsibility for any liability,

loss, or risk, professional or otherwise, which is incurred as a consequence, directly or

indirectly, of the use and application of any of the contents of the report.

This report is meant solely for use by the recipient and is not for circulation.

All rights reserved.

ARA ASSET MANAGEMENT | Business



Business

About the Company

ARA ASSET MANAGEMENT

Incorporated in 1 July 2002

IPO Date 2 November 2007

Exchange Singapore Stock Exchange

Market Cap S$1180 million (as at 10 Apr 2012)

No. of Employees 800 Employees

Website www.ara-asia.com

Source: Annual Report, Company Website & Third Party Research

ARA Asset Management Limited is an Asian real estate fund management company focused on the

management of public-listed real estate investment trusts (REITs) in Singapore, Hong Kong and

Malaysia; private real estate funds investing in Asia and other service providers such as property

management, convention & exhibition and corporate finance advisory. It has asset under its

management which totaling to S$20.2 billion as of 31 Dec 2011.

Core Businesses

• REITs management of public-listed REITs companiesREITs

• Fund management investing in propertiesPrivate Real Estate

Funds

• Property management services provider• Convention & Exhibition service provider

Real Estate Management Services

• Advisory on setting up REITs• Asset acquisition by REITs & Financing

Corporate Finance Advisory Service




Core Business #1: REITs Management

ARA is currently managing six public-listed REITs, namely, Fortune REIT (SGX-ST & SEHK listed with retail assets in Hong Kong), Suntec REIT (SGX-ST-listed with office and retail assets in Singapore), Prosperity REIT (SEHK listed with office and industrial assets in Hong Kong), CACHE Logistics Trust (SGX-ST listed with industrial assets in Singapore), AmFIRST REIT (Bursa Malaysia-listed with office assets in Malaysia) and Hui Xian (SEHK listed with office asset in China). As of 31 Dec 2011, real estate assets under management were S$14.9 billion. The Table 1 below summarised the Asset Under Management (AUM) by ARA Asset Management.

REITs Fortune Suntec Prosperity CACHE Logs AmFIRST Hui Xian Exchange Singapore Singapore Hong Kong Singapore Malaysia Hong Kong Type

Retail Retail & Office Industrial & Office

Industrial Office Office

Property Valuation as of Dec 2011

HK$16.4 billion

S$7.7 billion HK$6.99 billion

S$843 million RM1.16 billion

RMB31.4 billion

Property Locations

Hong Kong Singapore Hong Kong Asia Pacific Malaysia China

Table 1 Asset Under Management by ARA

From the Table 1, prior to the listing of ARA in 2007, it is only managing 4 REITs. Over the span of 3 years, ARA has new REITs under its umbrella - Cache REITs (2010) and Hui Xian (2011).

Figure 1 REITs - Year of IPO

REIT management fees, comprising base and performance fees, are derived from the management of REITs and are determined based on the value of the real estate assets or total gross assets under management and net property income of the REITs managed, respectively. These fees are recognised on an accrual basis. Source of Revenue is from Annual Report and it can be summarised in Table 2 below.

Revenue Recognition #1 Fees Rate Remarks

Base fees (Gross Property Value) 0.3% to 0.4% p.a. of property values Recurring

Performance / variable fees (Net Property Income)

3% to 4.5% p.a. of Net Property Income Recurring

Acquisition / divestment fees (Gross Property Value)

Acquisition fees (1% of property value) Divestment fees (0.5% of property value)

One-off

Table 2 Summary of Revenue Recognition from REITs management

2003Fortune

2004Suntec

2005Prosperity

2006AmFIRST

2010CACHE

2011Hui Xian




Core Business #2: Private Real Estate Funds

ARA is also managing real estate funds investing in Asia. These funds are unlisted and privately

managed by ARA with AUM of S$4.9 billion as at 31 Dec 2011. There are 3 private real estate fund

divisions under its wings which summarised in the table below. The Group is currently forming a

new fund – ARA Asia Dragon Fund II which targeted to raise fund size of US$1 billion.

ARA Asia Dragon Fund ARA Harmony Fund APN Property Group1

Investment Region Asia Singapore Australia Focus All kind of assets such

as Residential, retail, office and green field (tie up with developer who has lack of capital to develop empty plot) in Real Estate

Retail and Office in Real Estate

Real estate securities funds, private equity real estate funds, a listed REIT and unlisted property funds

Fund Source / Investors

Public Pension Funds Foundations Global Institutional Investors

ARA Asset Management holds 80% in Suntec Convetion & Exhibition. The other 20% is held by Suntec REITs

Strategic shareholder between ARA (14.1%) and APN

Fund Size US$1.1 billion (Committed Capital)

S$400m (Gross Asset Value)

-

Lifespan 7 Years (mature in 2014)

- -

Table 3 Summary of Private Real Estate Funds

Portfolio management fees are derived from the management of private real estate funds and are

determined based on committed capital, portfolio value or invested capital. These fees are

recognised on an accrual basis. Performance fees relate to fees earned in relation to private real

estate funds where the returns of the private real estate funds exceed certain specified hurdles.

Acquisition fees relate to fees earned in relation to the acquisition of properties by REITs and

private real estate funds managed and also include corporate financial advisory fees earned in

relation to the acquisition of properties by REITs. The acquisition fees are determined based on the

value of the properties acquired and are recognised when the services have been rendered. Source

of Revenue is from Annual Report and it can be summarised in the table below.

Revenue Recognition #2 Fees Rate Remarks Portfolio management fees

Arrangement fees: 1% - 2% of committed capital Management fees: 0.25% p.q. or 1% p.a. of property value

One-time Recurring

Performance fees (IRR above hurdle) 15% of the annual IRR in excess of 13.0% 40% of the annual IRR in excess of 17.0%.

One-off

Return on seed capital One-off Table 4 Summary of Revenue Recognition from Funds Management

1 Listed in Australian Securities Exchange




Core Business #3: Real Estate Management Services

The third division is mainly involved in operations, sales and

marketing services provider & consultant for convention,

exhibition, meeting and event facilities. The properties under their

management are Suntec Singapore International Convention and

Exhibition Centre, it is one of the leading MICE venues in the world

who won over 3 awards for consecutives “Best Convention &

Exhibition Centre”. Suntec City Mall and Offices are under the

management of APM Property Management.

Real estate management service fees are derived from the

provision of property management services and convention and

exhibition services rendered. These fees include marketing services fees, advertising fees and

commissions and promotion commissions, and are recognised on an accrual basis.

Source of Revenue is from Annual Report and it can be summarised in the table below.

Revenue Recognition #3 Fees Rate Remarks Property management fees (Property Management Fees) 3% per annum of gross

revenue (excluding commissions)

Recurring

Convention & Exhibition Service fees - Recurring Advisory/Consultation fees - One-off

Table 5 Summary of Revenue Recognition from Management Services

Core Business #4: Corporate Finance Advisory Service

This division currently provides advisory services on asset acquisitions to the REITs managed by

the Group and advises the Group on the establishment of REITs, partnerships and joint venture as

well as mergers and acquisitions. This division comes in whenever there is transaction of

properties.

Corporate finance advisory fees are determined based on contracted terms and are recognised

when the services have been rendered.

Source of Revenue is from Annual Report and it can be summarised in the table below.

Revenue Recognition #4 Remarks

Advisory/Consultation fees One-off Table 6 Summary of Revenue Recognition from Corporate Advisory

Figure 2 Source: Company




REITs

Am ARA REIT Managers is 70% owned

by Am Bank and ARA Asset.

ARA-CWT Trust Management (Cache) is

40% owned by CACHE REIT.

Hui Xian Asset Management is 70%

owned by Hui Xian REIT.

Private Real Estate Funds

ARA Harmony is 20% owned by Suntec

REIT.

APN Property Group is a public listed

company where ARA held 14.1%

interest as of Dec 2010.

Corporate Structure

Figure 3 ARA's Corporate Structure

ARA Asset Management

REITs


(Fortune) Limited100%

ARA Trust Management

(Suntec) Limited100%


(Prosperity) Limited

100%

Am ARA REIT Managers Sdn Bhd

30%

ARA-CWT Trust Management (Cache)

Limited60%

Hui Xian Asset Management Limited

30%


ARA Asia Dragon Fund 1

100%

ARA Asia Dragon Fund 2100%

ARA Harmony Fund80%

APN Property Group14.1%

Real Estate Management

Services

APM Property Management

100%

Suntec Singapore Int. & Exhibition Services

Pte Ltd 100%

Corporate Finance Advisory

ARA Financial Pte Ltd100%




From the Table above, in China, the breakdown of the properties under management are

scattered across Beijing, Dalian, Tianjin, Nanjing, Shanghai and Guangzhou. As for Malaysia, the

properties are in Kuala Lumpur and Malacca.

P.S. No data can be found on FY2011. Therefore, FY2010 is used instead

Under the REITs segment, Figure 3, the group has an structure in such; Each REIT has its own

manager, which is also a wholly owned subsidiary of ARA. For instance, Suntec REIT is managed by

ARA Trust Management (Suntect) Limited, Prosperity REIT is managed by ARA Asset Management

(Prosperity) Limited (Prosperity), etc.

Figure 4 Asset Under Management by Region in 2010

53%

25%

18%

4%

Real Estate Assets Under Management by Region 2010 of S$16.2 billion

Singapore

Hong Kong

China

Malaysia




Financial Highlights in 2010

Figure 5 Financial Highlights

53%

29%

11%

7%

Sales by Segment 2010

REIT




56%31%

9%

4%

EBIT by Segment

REIT




65.6% 65.3%

50.9%

40.5%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%

EBIT margin by Segment

From the Figure 5, nearly half of the revenue and profit in 2010 is mainly from REITs

management division. On top of that, the margin earns are very high, not only on one

division, but across the other three divisions. Corporate Finance Advisory contributed the

least to the group’s revenue and profit. Nevertheless, all the divisions are very profitable at

Earnings Before Income Tax margin around 40% to 65%.

P.S. No data can be found on FY2011. Therefore, FY2010 is used instead




Financial Highlights in 2006 - 2010

Figure 6 Historical Sales by Segment

Figure 7 Percentage Sales by Segment 2006 - 2010

2006 2007 2008 2009 2010

Corporate Finance Advisory 0.2 2.1 3.3 4.7 5.8

Real Estate Management 0 0 0 0.8 10

Private Funds 0.7 10.2 19.2 23.9 25.2

REIT 17.7 28.9 30.3 33.8 46.6

0102030405060708090

100

US$

mil

Historical Segment by Sales

2006 2007 2008 2009 2010

Corporate Finance Advisory 1.0% 5.1% 6.2% 7.5% 6.7%

Real Estate Management 0.0% 0.0% 0.0% 1.3% 11.4%

Private Funds 3.9% 25% 36% 38% 29%

REIT 95.1% 70.1% 57.5% 53.5% 53.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Pe

rcen

tage

Segment by Sales (%)

Referring to the Figure 6, REITs management and real estate funds are the two biggest

contributors when it was listed in 2007. Whereas, with the intention to move into different

REITs’ value chain, the management start to venture into property management for Suntec

Convention & Exchibition Centre in 2009.

In the Figure 7, one can see that the percentage of each individual segment growth with

respect to their revenue in that year. Property management only starts to grow in 2009.

Whereas, Corporate Finance is the smallest contributor to the group revenue as it is the front

end for them to become the REITs manager if it is successfully start up a REIT by third party.




Competitive Advantage

Niche #1: Strong management track record in managing real estates

Since the inception of the ARA Asset Management, the group has strong growth in Asset Under

Management from 2003 – 2011 of all the divisions. It successfully establishes and managing REITs

and brought them to listing. The growth has been significant from S$600 million to S$20.2 billion

assets or growing at compounded growth rate of 55% (CAGR). Of all these assets, it is very

profitable under their stewardship. Therefore, raising more private real estate funds or managing

more new REITs, it should not be a problem to them. As a result, the base fees, performances fees

and acquisitions fees are likely to increase as well. This translates to more profit to the

shareholders.

Figure 8 Total Asset Under Management from 2003 to 2011 (Source: Company)

Niche #2: Good working relationship with Cheung Kong

It has strong business relationship with the Cheung Kong Group as Cheung Kong is one of their

founding shareholders and one of the largest property developers of residential, commercial and

industrial properties in Hong Kong. Tapping on Cheung Kong’s strong network, the group has

access to their portfolio of real estates properties in Asia. A lot of business opportunities will be

available in the future such as any REITs being established by Cheung Kong are likely to be

managed by ARA since it is also the shareholder of the ARA Asset Management.

Comments on Competitive Advantage

Other than good working relationship with Li Ka Shing, the group has also strong relationship

with institutional investors as such the group has access to sovereign funds and funds from the

bank. This will allow us them to raise funds more easily in the future.




Niche #3: High Percentage of Recurring Income from its core businesses

Figure 9 Percentage of Recurring Income (Source: Company)

From Figure 9, ARA has a high percentage of around 71% that its income is recurring. Through the

REITs management business, it has base fees and performance fees. As fund manager managing

private real estate equity, they are also entitled to the management fees. On top of that, Convention &

Exhibition Service fees from managing Suntec Singapore International Convention and Exhibition

Centre. It allows them to have feasibility earnings which makes the prediction of future cash flow

much more accurate (as compared to the project based company).




Business Risks

Risk #1: Real Estate Risks

As real estate industry is affected by factors such as economic downturn, inability to renew leases,

inability to collect rental and any defects of the buildings managed by them or changes in real estate

cycles, it will affect value of the assets under their management and net property income. Moreover,

other factors such as global market and economic climate may deteriorate from terrorism, political

uncertainty and rising inflation rate. Therefore, it will affect their revenue and profitability.

Risk #2: Ties with Cheung Kong

Having the honour to work together with Cheung Kong is a blessing, but it is a double-edged sword.

Once the relationship with Cheung Kong were to worsen, ARA is likely to be greatly affected since

Fortune REIT and Prosperity REIT are sponsored by Cheung Kong. They might withdraw these

REITs and change the manager. The success of ARA today is mainly contributed by this company

with strong network through Li Ka Shing who is the owner of the Cheung Kong. Nevertheless,

Cheung Kong has 15.6% stake in ARA. So, the chances are very slim. Early 2011, ARA announced

that it has a new REIT, Hui Xian REIT, under its management. This is one of the REIT that is injected

by Li Ka Shing.

Risk #3: Strong Upcoming Competition

With increase competition in the REITs management industry, the group is constantly facing

pressure to reduce the fees. It happened in 2005 where the group waived the acquisition fees of a

REITs managed by them. However, the group ceased the waiver system in 2007 and charging the

fees according the new assets being acquired.

One great advantage about ARA is that, all the REITs’ assets managed by them, the risks are

bourned by unit holders. Technically, they do not need to gear up that much when acquiring

new assets to its clients. In lay man term, unit holders provide the resource such as money,

And ARA managers provide the skill, in return, they get higher fees when the AUM increases.

Since the services provided to different countries on the REIT management and private real

equity in countries like Malaysia, Hong Kong and Malaysia, the group is subjected to foreign

exchange risks. There are other risks such country risks, regulations, political instability,

etc. which are uncontrollable events.

On regulation - With the recent K-REIT’s case on the acquisition of Ocean Financial Centre

from its parent company – Keppel Corp, critics say the acquisition price was too high with

only 99 years old leasehold. To worsen the case, during the EGM, there was misalignment

between units holders and REIT managers when the poll voting system was carried out

(instead of show-hands system). It prompts the authority (MAS) to look at the REITs

industry to further safeguard the interests of minority unitholders. The culprit, critics

pointed out, was the incentive system for REITs. Should MAS revised the incentive system,

ARA will be greatly affected where their main source of revenue is derived.




Key Growth Driver

Growth Plan #1: Acquisition and Enhancing Assets through existing REITs

REITs under their management will continue to seek acquisition, therefore, it will increase their

asset under management which will directly increase their management fees. On every transaction,

they are also entitled to acquisition fees.

Growth Plan #2: Established of new private real estate funds

Through its strong track record in managing private real estate funds, tt has potential for upside

such as establishment of new private real estate funds in the future. When the fund performed, they

are entitled to the base and performance fees in the form of profit participation. Recently, the group

has set up a new fund called Asian Dragon Fund 2 securing US$400 million of capital commitment

which they intend to increase the fund size to US$1 billion by 2012.

Growth Plan #3: Establishment of new REITs

Through this division, Corporate Advisory Finance Group, if ARA successfully established a new

REIT to their clients, the chances for them to manage the new REIT are higher as compared to those

REIT set up by other companies or by itself. Therefore, it will contribute to the revenue significantly

as REITs set up are usually with assets of at least a billion dollar.

ARA Asset management | Management



Management

Board of Directors’ Profile

Justin Chiu Kwok Hung (Founder)

Job Title : Chairman and Non-Executive Director Age : 61

Elected Since : July 2002

Experiences : More than 30 years of international experience in real estate industry, joined Cheung Kong Limited in 1997 and Executive Director since 2000. From 1979 to 1997, he is with Sino Land Company Limited and Hang Lung Group Limited and responsible for the leasing and property management in both companies (listed in Hong Kong) Qualifications : Bachelor degrees in Sociology and Economics from Trent University in Ontario, Canada

John Lim Hwee Chiang (Founder)

Job Title : CEO and Executive Director

Age : 55

Elected Since : July 2002

Experiences : 30 years experience in real estate.

Independent Director of Techwah Industrial (Audit Committee).

Qualifications : Bachelor of Engineering (First Class Honours) in Mechanical Engineering, a Master of Science in Industrial Engineering, as well as a Diploma in Business Administration, each from the National University of Singapore

One interesting facts about ARA Asset management is, the entire board of directors remain unchanged since its listing in 2007. It seems like the culture instills in the company is vibrant which motivates the member of the boards to stay with them and grow the company.

Source: Company

Source: Company




Audit Committee Member Lee Yock Suan (Chairman) Non-Executive Director Lim How Teck Non-Executive Director Colin Stevens Russel Non-Executive Director Cheng Mo Chi Moses Non-Executive Director

Table 7 Audit Committee Member

Auditor is KPMG since its listing in 2007.

Remuneration

Boards of Directors in the Remuneration Bands

Name of Director Salary (%)

Bonus (%)

Fees (%)

Allowances and other Benefits (%)

Total (%)

S$500,000 and above

John Lim 100 - - - 100

$250,000 to below $500,000

Justin Chiu - - 100 - 100

Below $500,000

Lee Yock Suan - - 100 - 100

Lim How Teck - - 100 - 100

Cheng Mo Chi Mose - - 100 - 100

Colin Stevens Russel - - 100 - 100

Table 8 Remuneration Bands in 2010

Comments on the Management, Audit Committee and Auditor

The success of ARA today is mainly driven by John Lim (group CEO) where he paired up

with Li Ka Shing to form the company in 2002. He was in the Singapore’s Riches Forbes list

ranked #38 in 2010 with $200 million of net worth.

You can rest assure that the financial numbers you are looking at are real results generated

from its core businesses. This can be supported by the Audit committee member where all

the members are outsiders (non-executive). Therefore, the chances are very minimal to

fraud the data. In addition, it’s auditor remains unchanged since its listing.

The attendance of all the board meetings is 100%!

Referring the Table 8, the total compensation to the board of directors are estimated at $3

million. With respect to the profit generated by the boards is $63.8 million (4.7% of profit).

It seems like boards are not overpaying themselves for making so much money as

compared to a lot of companies out there. It is telltale sign that the boards are aligned with

shareholders’ interest. One of the key reasons could he John Lim, CEO, has a 36.45 % stake

in this company as of Dec 2010.




Top Key Executives’ remuneration

Total Compensation Bands in FY2010

Number of Employees

S$500,000 to below S$750,000 5

S$250,000 to below S$500,000 10

Below S$250,000 5

Total 20

Table 9 Remuneration Band of Key Executives in 2010

Shareholding Statistic

No. Name of Shareholder No. of Shares % 1 JL Investment Group 254,570,400 36.45 2 Cheung Kong Investment Limited 109,101,600 15.62 3 Citibank Nominees Singapore Pte Ltd 76,113,674 10.90 4 DBS Nominees Pte Ltd 74,162,212 10.62 5 HSBC (Singapore) Nominees Pte Ltd 36,690,200 5.25 6 United Overseas Bank Nominees 22,307,920 3.19 7 Raffl es Nominees (Pte) Ltd 17,241,000 2.47 8 DBSN Services Pte Ltd 16,280,837 2.33 9 Morgan Stanley Asia (Singapore) Securities Pte Ltd 14,796,600 2.12 10 DBS Vickers Securities (S) Pte Ltd 8,859,200 1.27

Table 10 Shareholding Statistic 2010

From the table above, John Lim (under JL Investment Group) has the highest stake of

36.45% in ARA Asset Management. This is one of the key reasons why he did not need to

get high salaries. In addition, John Lim has a deem interest of 1 million shares which he

held through his trust account, Citibank Nominees.

Second runner up is Cheung Kong which Li Ka Shing also holds the stake in that

company.

In the Table 9, the losses of key executive managing the funds are severe. Therefore,

executives name are confidential due to competitive conditions in the fund management

industry.

The best part is there is no share options issued as of Dec 2010.




Insider Trading

Table 11 Insider Trading from Jan 2010 to Jan 2011 (Source: ShareInvestor.com)

Comments on Insider Trading

During the Europe debt crisis, John Lim has been buying back the shares through his

personal funds. In the Table 11, he increased his stake from 36.99% to 37.27% which is

equivalent to around $4 million in the month of Aug and Sept 2011! As the share price goes

lower, he buys more.

On 13 Jan 2012, John had a married deal with Ng Beng Tiong, Chief Executive Officer of ARA

Private Funds, at a market price of S$1.25 per share.

Another signs that shown John has confident in his own company in the future to come. (Take

note: management buying back shares does not mean the company is undervalued, you will still

need to calculate your own intrinsic value to determine the real value of a stock)

ARA Asset management | Number



Numbers

Income Statement

62.1 70.086.3

112.5 122.8

0.0

50.0

100.0

150.0

2007 2008 2009 2010 2011

Revenue ($ mil)

Revenue

16.2 19.2 21.930.8 33.8

0.0

20.0

40.0

2007 2008 2009 2010 2011

COGS ($ mil)

Cost of Goods Sold

45.9 50.964.4

81.7 89.0

0.0

50.0

100.0

2007 2008 2009 2010 2011

Gross Profit ($ mil)

Gross Profit

6.610.5 9.9

7.8 6.7

0.0

5.0

10.0

15.0

2007 2008 2009 2010 2011

SGA Expenses

Selling, General and Admin Expenses

Selling, General and Admin expenses (SGA) are mainly their operating lease expenses

and other expenses which can be seen from the chart above is decreasing as compared to

their increasing profit growth of 18% YoY (in tandem is revenue growth).

Since they are a service firm, the Cost of Goods Sold (COGS) is mainly the manpower

costs. Administrative expenses is taken instead, otherwise, COGS would be equal to zero.

Revenue YoY increases by 18.85%, from S$62.1 million to $122.8 million which also sees

the YoY COGS increases by 20.19% from S$16.2 million to S$33.8 million. Both of the

figures grow in tandem except that COGS grow slightly faster by 2%.




Balance Sheet Statement

34.0 36.748.2

63.8 74.3

0.0

50.0

100.0

2007 2008 2009 2010 2011

Net Profit ($ mil)

Net Profit Net Profit

0.058 0.0630.083 0.091 0.097

0.000

0.050

0.100

0.150

2007 2008 2009 2010 2011

EPS (cents)

EPS (cents)

74.5

41.9 42.3 46.257.3

0.0

50.0

100.0

2007 2008 2009 2010 2011

Cash ($ mil)

Cash ($ mil)

19.7 19.3 18.6 19.4

0.4

0.0

10.0

20.0

30.0

2007 2008 2009 2010 2011

Total Debts ($ mil)

Total Debt ($ mil)

The group managed to raise S$75.6 million when it went IPO. It then moved on to

deployed the cash to start up private real estate funds such as ARA Asia Dragon Fund

which causes the cash to decline from $74.5 million in 2007 to 41.9 million in 2009.

Nevertheless, the cash maintains at level above S$40 million for the past four years.

Total Debts is around S$19 million since its listing. This loans secured is provided to

Jadeline Capital Sdn. Bhd. to partly finance its acquisition of the units in AmFIRST REIT.

Without that, ARA would have been debt-free given its strong cash flow generation in

the past. The interests charged by bank are at 1% per annum which is relative low. As at

Dec 2011, the loans drops to $0.4 million.

Net Profit is growing proportionately at 21.58% YoY. In addition, EPS growth is at 1.72%

YoY due to bonus shares issued 5-for-1. Excluding the bonus shares, EPS YoY would have

been 21.58%. The growth is still in tandem with the group’s revenue. ARA has quality

earnings since its listing in 2007 till present.




24.816.1

22.5 26.430.6

0.0

20.0

40.0

2007 2008 2009 2010 2011

Receivables ($ mil)

Receivables ($ mil)

16.111.1

17.8 20.2 17.3

0.0

10.0

20.0

30.0

2007 2008 2009 2010 2011

Payables($ mil)

Payables($ mil)

99.974.7

126.9171.5 187.4

0.0

100.0

200.0

2007 2008 2009 2010 2011

Retained Profit ($ mil)

Retained Profit ($ mil)

101.175.9

128.0172.9 188.9

0.0

100.0

200.0

2007 2008 2009 2010 2011

Total Equity ($ mil)

Total Equity ($ mil)

141.5108.4

169.1221.6 214.6

0.0

100.0

200.0

300.0

2007 2008 2009 2010 2011

Total Assets ($ mil)

Total Assets ($ mil)

40.532.8

41.448.1

25.0

0.0

20.0

40.0

60.0

2007 2008 2009 2010 2011

Total Liabilities ($ mil)

Total Liabilities ($ mil)

Receivables are rising at 5.39% YoY from 2007 to 2011 with comparison to revenue

which growing at 18.85%. In other words, ARA has been efficient in collecting the

money from their clients as soon revenue is recognised.

Total Equity and Retained Profit increased by approximately 16.9% YoY. The network

of the company has been growing pretty soundly in the past as part of the earnings are

retained back to finance the growth.

With the total assets increased by as much as 10.97% YoY, ARA is reducing their

liability from $40.5 million to $25 million.




Cash Flow Statement

2007 2008 2009 2010 2011

CF 9.87 52.23 47.96 56.07 49.4

CAPEX 0.32 0.32 0.65 1.02 0.44

FCF 9.55 51.91 47.31 55.05 48.96

0

10

20

30

40

50

60

$ m

illio

n

Cash Flow Generation

22.1225.67 27.94

33.5338.42

34.01 36.73

48.2

63.81

74.30

0.00

20.00

40.00

60.00

80.00

2007 2008 2009 2010 2011

$ m

illio

n

Dividend to Net Profit ($ mil)

Total Dividend Net Profit to Shareholders

The group also has been paying high dividend of S$74.3 million in 2011 against its profit

attributable to shareholders of S$38.4 million. It’s a growing trend. As such, ARA also

retained nearly 40% - 50% of its profit to grow the business as part of their seed capital

in any new investment.

One of the greatest strength of ARA is lower capex is required to maintain and grow the

business. This makes the group a CASHCOW generator to the shareholders.




Financial Ratios

22.12 25.67 27.94 33.53 38.42

0.00

20.00

40.00

60.00

2007 2008 2009 2010 2011

Dividend ($)

Dividend ($)

0.038 0.044 0.048 0.048 0.050

0.000

0.020

0.040

0.060

2007 2008 2009 2010 2011

Dividend per Share (c)

Dividend per Share (cents)

73.86% 72.60% 74.66% 72.61% 72.47%

54.78% 52.44%55.86% 56.71%

60.52%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2007 2008 2009 2010 2011

Pro

fita

blit

y R

atio

Gross Profit & Net Profit Margin

Gross Margin Net Margin

Gross profit and net profit margin is maintained 72% and 55%, respectively. ARA is

well-managed in term of its profitability margin. It is very consistent!

The dividend per share (including bonus issues) also grows steadily at 14.8% YoY in the

past five years. In other words, $1000 dividends received per year will grow into

approximately $1500 within 4 years!




0.200.25

0.150.11

0.00

0.00

0.10

0.20

0.30

2007 2008 2009 2010 2011

Debt to Equity (x)

Debt to Equity (x)

3.573.01

1.850.97

2.33

0.00

2.00

4.00

2007 2008 2009 2010 2011

Cash Ratio (x)

Cash Ratio (x)

5.284.16 3.68

1.53

4.58

0.00

2.00

4.00

6.00

2007 2008 2009 2010 2011

Current Ratio (x)

Current Ratio (x)

33.7%48.4%

37.6% 36.9% 39.3%

0.0%

20.0%

40.0%

60.0%

2007 2008 2009 2010 2011

Return on Equity (%)

Return on Equity (%)

24.0%33.9%

28.5% 28.8%34.6%

0.0%

20.0%

40.0%

2007 2008 2009 2010 2011

Return on Asset (%)

Return on Asset (%)

1613.0%1106.0%

1776.0%2020.0%1734.0%

0.0%

1000.0%

2000.0%

3000.0%

2007 2008 2009 2010 2011

CAPEX to Profit (%)

CAPEX to Profit (%)

In 2010, Current Ratio decreases which also due to the RM44.9 million debts (fully paid).

Return on Equity has been consistently high at 33.7% and 39.3% in 2007 and 2011,

respectively. A stable business which generated consistent return back to shareholders.

Decreased in cash ratio, in 2011, is mainly due to a loans repayable in full of RM44.9

million at maturity in May 2011. This is the loan that used to finance acquisition of units

in AmFIRST REIT and fully paid as at 30 June 2011. In the latest result, the cash ratio has

bounced back to 2.3x.

With high ROE, ARA also has high Return on Assets above 24% for the past five years.

Moreover, CAPEX to Profit ratio has been relatively low or fluctuates around 20%.




0.58 0.530.39 0.30

0.01

0.00

0.50

1.00

2007 2008 2009 2010 2011

Debt to Net Profit (x)

Debt to Net Profit (x)

2.00

0.37 0.39 0.350.01

0.00

1.00

2.00

3.00

2007 2008 2009 2010 2011

Debt to Cash Flow (x)

Debt to Cash Flow (x)

245.13 258.58 240.61 224.78 202.69

0.00

100.00

200.00

300.00

2007 2008 2009 2010 2011

Payable Days

Payable Days

95.34 106.3981.48 79.19 84.72

0.00

50.00

100.00

150.00

2007 2008 2009 2010 2011

Receivable Days

Receivable Days

0.00 0.00 0.00 0.00

0.00

0.50

1.00

2007 2008 2009 2010

Inventory Days

Inventory Days

0.0% 0.0% 0.0% 0.0%

0.0%

50.0%

100.0%

2007 2008 2009 2010

Inventory to Sales (x)

Inventory to Sales (x)

Inventory is zero as there is no inventory needed.

Debt to Net Profit and Cash Flow is very safe which requires them not more than 5

months to fully paid the total debts using its cash flow and profit.

Payables days, mainly due to the accrual of staff-related expenses and strategic advisors’

fee, are as high as 224 days. And Receivables are at 80 days. The mains reason could be

due to lower COGS (service company) which resulting the number of payables and

receivables to be very high.




65.03% 69.89%

57.96%

52.54%

51.70%7.60%

11.03%

3.20%3.81%

3.31%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2007 2008 2009 2010 2011

Div

ide

nd

Yie

ld

Div

ide

nd

Pay

ou

t R

ati

o

Dividend Ratio

Dividend Payout Ratio Dividend Yield

There is no dividend policy in this company. However, historically, the group has been

paying out more than 50% of the profit back to the shareholders as dividends.

ARA Asset management | Industry



Industry

Value Chain of REITs

Figure 10 Structure of REITs (Source: Value Investing in REITs book by Attlee Hue)

Unitholders are the real owner of the REITs except that they tapped on the REIT managers’

expertise to manage the REITs for them. Referring to the Figure 10, Structure of REITs, ARA Asset

Management is the REIT Manager. What the group does is to provide the management services to

the related REITs assets for the REITs under their management and charge them management fees

such as acquiring and divesting of assets or asset enhancements to optimise the full value of the

assets and increase the accretive yield which in turn higher profit generated to shareholders.

For those who do not under REITs, or not your circle of competence, I strongly suggest you to

attend REITs conducted by Attlee before looking at this company. Currently, REITs are

undervalued which one could easily get an attractive yield of 7% to 10%!




Competitors

Most of the REITs management companies are privately held which most of the REITs do. Hence,

there are no listed-peers to do direct comparison of their financial health in Singapore. One way to

ascertain whether ARA, as REIT manager, performance is up to market standard is to compare them

with its peers.

In the Table 12 below, management fees paid to ARA of the 6REITs are highlighted in grey color.

REITs Type Currency Net Property Income (NPI)

Management Fees (Base + Performance)

Property Valuation

Management Fees (Base + Performance) / Property Valuation

Property Yield

CapitaComm Office S$ million 298.98 18.94 5475.4 0.35% 5.46%

Frasers Comm Office S$ million 93.03 12.47 1906.35 0.65% 4.88%

K-REIT Office S$ million 67.31 15.07 1025.63 1.47% 6.56%

AmFIRST Office RM million 56.53 4.93 1024 0.48% 5.52%

Hui Xian2 Office RMB million - - - - -

MapletreeCom Retail & Office S$ million 119.57 11.98 2826.36 0.42% 4.23%

SuntecReit Retail & Office S$ million 193.09 27.93 6490 0.43% 2.98%

Starhill Gbl Retail & Office S$ million 130.36 12.97 2654.46 0.49% 4.91%

LippoMalls Retail S$ million 85.27 6.42 1082.04 0.59% 7.88%

CapitaMall Retail S$ million 399.15 36.03 7271.5 0.50% 5.49%

FrasersCT Retail S$ million 80.05 6.47 1439 0.45% 5.56%

Fortune Reit Retail HK$ million 319.53 21.57 15688 0.14% 2.04%

CapitaRChina Retail S$ million 77.22 4.9 1215.09 0.40% 6.36%

First REIT Healthcare S$ million 29.87 3.03 612.8 0.49% 4.87%

PLife REIT Healthcare S$ million 73.63 7.14 1302.56 0.55% 5.65%

CDL Htrust Hospitality S$ million 115.07 10.16 1787.1 0.57% 6.44%

AscottREIT Hospitality S$ million 101.35 8.92 2577.62 0.35% 3.93%

CACHE Industrial S$ million 41.36 3.35 744 0.45% 5.56%

Prosperity Industrial & Office

HK$ million 212.53 28.63 5934 0.48% 3.75%

Table 12 Management Fees and Property Yield (%) as of Dec 2010

2 Insufficient data to calculate as it is only listed in Early 2011.




Aside real estate private funds, they are few public listed companies in Singapore as stated below.

Global Investments Limited

Managed by ST Asset Management Ltd (STAM), wholly owned by Temasek Limited

Investment in Operating Lease Assets, Loan Portfolio and Securitisation Assets and

Alternative Assets

Macarthurcook prop Sec Fund

Diversified, listed property fund that invests in a range of listed property trusts, unlisted

property trusts and listed property-related companies registered in Australia.

Investments in over 1,200 underlying properties under management across office, retail

and industrial sectors as well as “non-traditional” sectors like healthcare and childcare.

The properties are located in Australia, the United States, Europe and New Zealand.

Year 2010 Exchange Consistent

(5 Years) Market Cap(S$)

PTB Debt/Equity Ratio

ARA Asset Mgmt SGX Yes 768 m 5.38 x 0.11x Macarthurcook SGX No 26.5m 0.36x 0.57x Global Investments SGX No 76.4m 0.63 x 0.15x

Table 13 Peers Comparison (Real Estate Funds only)

Comparison in the Table 13, is not an apple-to-apple comparison but it serves as a guide on how

fund Management Company is performing in the market. Macarthurcook is the closest peers in

their private real estate fund investing in Australia.

The financial ratios being compared are not applicable as most of them are the fund

management companies. There, the ranking system is also removed.

ARA Asset management | Summary



Valuation

Historical Growth Rate (CAGR)

Historical Share Price

Figure 11 Historical CAGR (2006 - 2011)

Figure 12 Historical Share Price from Nov 2007 – Apr 2012 '(Source: Yahoo!Finance)

From the historical CAGR, ARA has shown a strong growth momentum since its listing

with the compounded growth rate at nearly 20% for the past three years in revenue,

profit and cash flow. Even in 08/09 crisis, they are not affected by economic downturn.




Discounted Earnings Model IPO Price: S$1.15

IPO Market Cap: S$585 million

Year 20103 2011 Historical EPS $0.132 $0.097 Net Cash per Share $0.038 $0.052 Book Value per Share $0.246 $0.234

Table 14 Datas used to compute the Intrinsic Value

PE / PEG / PTB

Figure 14 Other Valuation Ratios

3 Based on 698.472 million of shares as of Dec 2010

Figure 13 Discounted Earning Model

In the Figure 13, as of Apr 2012, the Intrinsic Value is around $1.20 which calculated based

on 8% growth rate. With that, using the share price of $1.38, the margin of safety is negative

or overvalued by 26%. For investors who like to include cash per share in the calculation, the

Intrinsic Value is S$1.27or slightly overvalued by 18%.

Referring to the Figure 14, ARA is trading at 14 times against its FY11’s earnings. In addition,

PTB and PEG ratio is 5.6x and 1.78x, respectively. It seems like the market has slightly higher

expectation on ARA with P/FCF of 21x.

Even though, ARA is trading at around of their IPO price, one must understand that there are

few bonus issues (stock-split) given to the shareholders without raising additional capital in

the past.




Analytical Summary

Business

If I can summarise this company into a word, it will be ‘stable’. A very stable business where the

management collects the fees from managing properties, be it publicly or privately. Aside to that,

the investments are allocated across the Southeast Asia region which poses a very stable portfolio

under their stewardship. Personally, I feel that this company can be treated as a blue chip company

with nearly 70% of their revenue is recurring! In an article interviewed with Straits times, John

mentioned that, internally, ARA planned to double its AUM in the next five years.

Management

It is obvious that the management put shareholders’ interest first. First, CEO has stake of 36% as of

Dec 2010. Through his big stake in ARA, he is not going for fanciful pays as shown in the

remuneration band, but rather he rewarded himself through dividends. As a shareholder, you will

benefit from it as well. Secondly, the management has strong track record in real estate industry

since its start up in 2002. It’s a success story and went through the economic cycles. In addition, it is

also backed by Cheung Kong which billionaire investor, Li Ka Shing. Interestingly, all the

management in the boards stays the same since its IPO in 2007. The culture of the company is likely

to be strong that motivates them to stay and grow together with the company.

Number

It is so strong that, during its growing state, it doesn’t need any additional capital from shareholders

(except bonus shares issued) as compared to other growth companies need to raise additional

capital to fund the massive growth. However, the group can fund internally through its cashflow

generation, cash cow! On top of that, almost all the financial ratios such as ROE, ROA, CAPEX ratio,

Net Profit Margin speak by itself, SUPERB result!

Industry

As most of the REITs manager is privately held, it is difficult to do the comparison. There is less

competitors in the industry except those are held privately. They are one of the largest REIT

managers in Asia (excluding Japan) who operating in the niche market.

Valuation

In the similar interview with ST, John said “The minimum we should be able to do though is to grow

AUM by an average of S$2billion a year for the next five years.” That translates into 8% YoY growth.

Therefore, my own intrinsic value is around $1.20 to around $1.30 inclusive of net cash per share at

estimated growth rate of 8%. This is the stock which exactly fits the criteria of Warren Buffett’s

quote- "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful

price." Though the PE suggests 14x, I believe the future earnings of ARA is much more predictable

than project-basis companies where one can see the amount of free cash flow being generated since

IPO. It’s unbelievable! In my opinion, a wonderful stock would hardly sell at undervalued price.

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