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Should HDBs be Sold at Cost Price?

Should HDBs be sold at cost price?

I felt that this would be an appropriate time to write about the issue of HDB prices, as housing affordability is a huge concern of the general population, given that around 80% of us live in public housing. This is a rather radical idea, and I wanted to provide a balanced view on the practicality of this idea.

Firstly, there may have been a long-standing misconception that “HDB prices would keep appreciating”, perhaps due to the words of certain prominent figures in the past. But now, it is clear that we would be foolish to think HDB prices would appreciate forever, as ultimately, they are sold on 99-year leasehold titles, which means that they would be returned to the state with zero compensation once the land lease expires.

In fact, earlier this year, 191 units in Geylang were returned to the state with zero compensation when their 60 year leasehold titles expired. Thus, with housing affordability a key concern, can new BTO flats be priced at more affordable levels for Singaporeans?

What percentage of the cost of building HDBs comes from the cost of the land?

I think the first issue to clarify would be – when we buy a HDB flat, how much of the total price is attributed to the cost of the land? In this answer by the Ministry of National Development, it was stated that “the land cost was about 60% of total development cost, and this percentage was about the same across 3-, 4-, and 5-room flat types”. Additionally, it was also mentioned that “HDB’s total development cost cannot be fully covered from the sale price of flats”.

What happens if HDBs are sold at cost?

During my teenage years, I was already keenly aware of the implications of our housing policies, and long held the view that HDBs should be sold at cost price. However, as I grew to understand the intricate links between real estate prices, the financial system, and our economy, I realised that selling HDBs at cost price may not be a practical solution after all.  

For the sake of simplicity, let us just assume that if a 5 room HDB flat is sold at $500,000, 60% ($300,000) of the price is due to the land cost. Thus, if the HDB flat were to be sold at only the development costs of the flat, then logically, the new 5 room flat can be sold for as low as $200,000.

What would be the impact of this? Firstly, which is clear, the government would lose revenue from the sale of land, although there would be no direct impact on budget expenditure, given that proceeds from land sales are not included in the budget statement. This would be discussed further in the later paragraphs.

But more importantly, it is about the impact on the existing housing market. Selling new HDB flats at cost would probably be detrimental to existing homeowners. A relatively new resale 5 room HDB flat may transact at around $700,000 to $800,000 currently, but imagine if new 5 room HDB flats entered the market at $200,000, would people still be willing to pay $700,000 or more for a resale flat? Surely, selling new flats without including the land cost would cause the resale market to correct downwards. While selling new flats at $200,000 would be popular with first time homeowners, the negative impact on existing home owners would be far worse. This would also have a domino effect on the mortgage market, our banks and the financial system – the HDB prices backing these mortgages would fall significantly, potentially leading to margin calls; if homeowners are not able to top up their equity, there may be foreclosures and fire sales.

Hence, from the moment HDB started its practice of purchasing land at market prices in 1985, there was no turning back, as any attempt to significantly lower prices by excluding land costs would adversely impact the existing housing market – a policy that no rational existing homeowner would support.

Potential solution?

Given that we now understand the negative implications of selling HDB flats at cost price, what would be an appropriate solution? Interestingly, data from MOF showed that the median household income in 1980 was around $12,000 annually, while a new 4 room HDB flat in the early 1980s costs $55,000, implying a price to income ratio of around 4.6x. Recent prices of new BTO flats today also gives us a similar price to income ratio of around 4 times. Do note that CNA’s article used figures from Punggol BTO launches when comparing prices, not more central estates.

If the price to median income ratios have remained relatively stable, why do we Singaporeans often complain about unaffordable housing prices?

The key here would be to dig deeper into the statistics. Note that the calculations for price to median income uses household income, which takes into account the wages of the entire household. In the 1980s, the labour force participation rate of women was around 40% in 1980, while in 2019, the female labour force participation rate was around 61%. Hence, by using household income as a benchmark, this figure has in part been driven by the increased number of women working, which increased household income.

While a sole breadwinner in the 1980s may find public housing affordable, an increasing number of families today are dual income families, which may somewhat explain why the price to median household income remains relatively unchanged. Hence, is it still right to say that housing affordability has not changed?

Therefore, I believe that public housing can still be made to be even more affordable. My main solution would be to set a cap on HDB prices for the foreseeable future – perhaps for the next 5 to 10 years, to allow wages increase, lowering the price to median income ratio further below 4x. During this period, new HDB prices should only be held steady or reduced. This would mitigate the negative impact on the resale market as well.

Impact on government’s budget

Covid-19 has allowed us to see the importance of running a budget with fiscal prudence in mind, and diligently saving away any budget surpluses to deploy them in a rainy day. Thus, any policy decision should account for the impact on government revenue and spending. 

Interestingly, land sales revenue does not form part of the budget statement, the reason being to avoid “a situation where the Government of the day sells land just so that they can meet their expenditure needs”. However, Singaporeans still benefit from land sales revenue, as these proceeds go into the reserves, which then provides the net investment returns which are included in the Budget.

As per data from the government’s revenue and expenditure estimates, proceeds from land sales were around the $14 billion range in the past two years. It would be good to note that this amount consists of sale proceeds from residential (public and private), commercial, and industrial land. Hence, capping the prices of new HDB flats may not significantly impact the proceeds from land sales. Additionally, as mentioned in the Yahoo article, HDB pays approximately $2,000 psm to acquire land from the government in mature estates, while private developers pay around $7,000 psm. Hence, private developers still pay a huge premium for land as compared to HDB, the overall impact of capping new HDB prices would not be as significant.


In conclusion, I believe that owning a HDB flat should be seen as a right for all Singaporeans. And the issue of affordability has to be addressed as well – no one should be subjected to take out a 20 or 30 year mortgage just to purchase a roof over their heads. 

Thus, while measures should be taken to increase the affordability of HDB flats, these measures cannot be too drastic that the current housing market adversely affected. Hence, in my view, setting a ceiling on HDB prices for the foreseeable future may be the most appropriate policy.

Is There Value in Valuetronics? (SGX: BN2)

The last time I wrote about Valuetronics was in late 2019, when I published this article (Valuetronics Research). I had done some research on the company as part of my internship application to an asset management firm. Subsequently, Valuetronics’ share price climbed to a high of $0.86, before falling to a low of $0.435 during the selloff in March.

After a strong recovery, Valuetronics’ share price tumbled again this week, as the management guided for a poor outlook in the near future, due to the renewed US-China trade tensions, which causes Valuetronics’ exports to the US to be subjected to tariffs ranging from 7.5% to 25%. Consequently, management indicated that some customers in the auto and consumer electronics segment were considering a switch of suppliers, and warned of “significantly lower financial results in FY2021”.

Company Overview

Source: Valuetronics FY20 Presentation

Valuetronics is an electronics manufacturer headquartered in Hong Kong. The company provides integrated manufacturing, design, and development services. It operates in two segments, the Consumer Electronics segment, and the Industrial & Commercial Electronics segment. The CE segment accounts for 39% of revenue, and 61% of revenue is derived from the ICE segment. The company’s products include smart lighting, printers, automotive and communications products.

FY2020 Earnings Review

Trade tensions have adversely impacted Valuetronics’ FY2020 results, as revenue declined by 16.8% from 2.83 bil HKD to 2.35 bil HKD, while gross profit margin expanded slightly from 15.2% to 15.4%. Net profit fell from 199.5 mil to 178.9 mil HKD, a decline of 10.3%, while net profit margin increased from 7.1% to 7.6%.

The positives

Source: Valuetronics FY20 Presentation

Continued diversification out of China, with further expansion in Vietnam ongoing. US-China trade tensions had an adverse impact on Valuetronics, given that c.41% of the company’s revenue is derived from US shipments.

Valuetronics has been working to mitigate the adverse impact of tariffs by building up its production facilities in Vietnam. Mass production at its Hanoi plant began in June 2019, while trial production at a second facility started in May 2020. The company also acquired a plot of land in an industrial park in Vietnam to build a manufacturing campus, which is projected to commence mass production by 31 March 2022. This would further boost production capacity, and diversification of its production base beyond China.

Robust balance sheet with a net cash position, reducing downside risks. Valuetronics’ net cash per share stands at 44 cents, with a NAV of 50 cents. This compares with the closing price of 59.5 cents on Friday. With its net cash position making up c.66% of its market capitalisation, downside risks would be mitigated. However, it would be good to note that 200 mil HKD is earmarked for the capex for their new facility in Vietnam.

The negatives

Escalation of US-China Trade War – Currently, c.41% of Valuetronics’ revenue is derived from shipments to the US, which are subjected to tariffs ranging from 7.5% to 25%. Further escalation in trade tensions may pressure more customers to seek alternative suppliers.

Potential Upside?

Positive developments from the US-China trade negotiations – Perhaps if Trump fails to get re-elected, this may be a positive for Valuetronics if trade tensions are resolved?

Valuation – Discounted Cash Flow

I didn’t want to go into the details of how the FCFF figures were projected, because that would involve many detailed assumptions of revenue drivers, expenses, margins etc. Thus, a high level view of estimating the future FCFF would suffice instead.

The following assumptions were used for the Discounted Cash Flow valuation of the company.

1. Drop in FCFF for FY21 and FY22 due to falling revenue as more North American customers switch suppliers, followed by a recovery in FY23 due to the opening of the Vietnam campus in end FY22.

2. Discount rate of 10% to reflect the small cap premium as well as uncertainty around longer term earnings. 0% terminal growth rate was used as a conservative estimate.

3. FCFF of c.10 – 85m for the projected years, which is significantly lower than the average of c.180m for the past 6 years. FCFF for the past 6 years were fluctuating mainly due to the changes in working capital. If we looked at cash flows before changes in working capital instead, we get a relatively consistent number of 200 – 250 mil, with income tax paid of 10 to 20m annually.

4. Annual capex of 120m HKD for the terminal value, with FY21 and FY22 at 150m to reflect the higher capex commitments of c.200m HKD for the new Vietnam facility.

5. Cash of 800 mil HKD was used in the calculation of equity value, to account for the 200 mil HKD earmarked for the capex in Vietnam.

With the above assumptions, a DCF derived price of $0.66 was obtained.

Why P/E may not be meaningful

I think that while a P/E ratio is easy for investors to understand, it may not be an appropriate metric to evaluate a contract manufacturer like Valuetronics. Bear in mind that the following thoughts are coming from a business student with zero knowledge of the manufacturing industry, so please take them with a huge pinch of salt. For those with more in-depth knowledge on the relationships between suppliers and customers in the manufacturing industry, please let me know in the comments.

While I mentioned P/E as a valuation metric in my previous article, I am currently of the view that P/E would not be a good valuation metric, mainly because of the nature of the manufacturing industry. A P/E valuation would be more reliable for companies with stable and predictable earnings – for example, consumer stocks like Sheng Siong. However, while Valuetronics’ earnings have been relatively stable over the past few years, the certainty of earnings is questionable, because once a manufacturing contract expires, the customer may switch over to another supplier if the costs are lower. As we are witnessing currently, the certain customers have indicated that they may switch suppliers due to the tariffs imposed on the shipments from China. For Valuetronics, if earnings were to drop in a given year, using a P/E multiple on that year’s earnings would give a significantly lower valuation.

Hence, to compare Valuetronics’ P/E ratio to a bunch of peers like Venture Corp, AEM or UMS may not provide the best estimate of its valuation, because of the each of these companies are vastly different. Venture’s market cap is significantly larger than Valuetronics, thus Venture may have greater bargaining power or economies of scale for production. For a smaller manufacturing company, I believe that the firm would more likely be a price taker, with less bargaining power when negotiating with larger customers. Whereas AEM and UMS have extremely concentrated customers, which itself brings about an entirely different set of benefits and risks.  


Source: Valuetronics FY20 Presentation

I like the company as it has been operating very conservatively by building up a huge cash buffer over the years. Before the Covid-19 crisis, I have questioned the need for the company to build up such a huge cash reserve, but I think the Covid-19 crisis has shown us the importance of companies having a strong balance sheet. Valuetronics business has also been incredible at generating positive free cash flows, which is what I look out for in any business. As shown above, Valuetronics has managed to increase its cash holdings from 689 mil to 1 bil HKD over the past 5 years through its strong cash flows. This gives them the ability to fund expansion plans without taking on any debt.

While earnings would be impacted in the short term, I believe that any downside would be well supported by its net cash per share of c.44 cents, while a successful diversification of its production facilities to Vietnam would be beneficial to investors in the longer term.

Note: As of writing, I don't not hold a position on Valuetronics. 

Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.

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