Last month, I read this article on The Edge, "NCT Alliance gives itself 10 years to reach top 10 spot" and 2 things in the article caught my attention:
1. The company's target to become top 10 property developer in Malaysia
2. White knight developer specialize in reviving abandoned property project in Malaysia.
Then, I started to look into NCT Alliance because I have never heard of this name before.
NCT Alliance is formerly known as Grandflo Berhad, which is involved in 3 sectors, namely IT, construction and property development. In 2019, the current CEO, Datuk Seri Yap Ngan Choy buyout the former management and took over the company in 2019. Over the past 2 years, Datuk Yap and his team have disposed of the IT and construction business to focus solely on the property development sector. In July 2021, the company name was changed to NCT Alliance which completed the full takeover exercise.
From an interview, Datuk Yap said that NCT has actually fit the requirement to go public listed through the conventional IPO way, but they saw the opportunity to takeover Grandflo Berhad and decided to go for it. Currently, there are 2 business entities under Datuk Yap, which are NCT Alliance (Public Listed) and NCT Group (Private Sector).
Now, let's dig deeper into why NCT Alliance pique my interest.
1. Target to Become Top 10 Property Developer in Malaysia
The Malaysia property market has been stagnant for many many years. It is often heard that property developers face difficulty selling their units, causing an overhang problem. Besides, the Malaysian property market is already full of well known developer with strong presence. Below are the current Top 10 property developer in Malaysia by market cap (8 Aug 2021):
With so many powerhouse in the market, Datuk Yap and his team is still confident that they can achieve their goal to enter Top 10. To me, this is very ambitious. I am excited to know more about his strategy to achieve the target.
2. Reviving Abandoned Project in Malaysia
Most people/investors are not familiar with the abandoned property projects in Malaysia, and so am I. The modus operandi of property developer in Malaysia is to acquire land banks and develop property projects on them. What makes NCT Alliance interesting is that they focus on the niche market of abandoned projects in Malaysia.
Abandoned projects happens when property developers need to stop their property development halfway because of weak planning, financing issues, bankruptcy etc. Normally, after a property developer abandoned their project, all the buyers will be stuck with half built houses/shops with no way out. Imagine you invested your life savings to buy a house, and your property developer declared bankrupt. You can neither take back your investment nor stay in the half built house. What a nightmare.
So this is what pique my interest in the company, where the company operations creates real value for their customers and society. When we look at the stakeholders involved in abandoned projects, the buyers, financier, government are all in the interest for abandoned projects to be successfully revived:
1. Financiers of the abandoned projects (usually banks) want to retrieve back their bad debts / non-performing loans. They are willing to sell the abandoned land at a hugely discount price to NCT Alliance.2. Home buyers desperately want to stay/sell their invested properties, so they will support the revival scheme offered by NCT Alliance as long as it is reasonable.3. Government want a development project to be successful so the community around the land will thrive. Hence, various incentives, red tape relaxation and some cost exemptions will be given to ensure the success of the revival project.
With all parties having the same interest, NCT Alliance enjoys much higher profit margin than conventional property developer in Malaysia. This is because they have extremely cheap land acquisition cost complemented with various incentives from the government.
The Best Part in Reviving Abandoned Projects
Reviving abandoned project is no easy task, but the rewards are huge if done correctly. This is because revival developers make 2 times profit if they successfully revive an abandoned project. The first time profit will be made when the revival developers sell their successfully revived properties the conventional way. If the property sales are successful, it will bring up the land value of the surrounding areas too.
In every abandoned projects, investors give no value to the abandoned land and the land surrounding the project. This makes sense because who will invest in a ghost town? Hence, if the project is successfully revived, investors will then revalue the land and give it a much higher valuation. The revival developers will then make their second time profit by selling the remaining undeveloped land to other property developers.
Now we know that reviving abandoned projects can bring great fortunes if done successfully, how do we know if NCT Alliance is a good deal?
RM300 million Gross Profit over the Next 3 Years
In June 2021, NCT Alliance (Public Listed) purchased 2 property assets in Genting Highlands from NCT Group (Private Sector). These 2 projects are expected to generate gross profit of RM300 million for the next 3 years. The market cap currently (8 Aug 2021) is just around RM350 million. So, are we looking at a company with future PE of 1.2? Let's look further.
The 2 assets purchases in Genting Highlands are Grand Ion Majestic (GIM) and Grand Ion Delemen (GID). GIM and GID were previously an abandoned project in Genting Highland known as Billion Court. NCT Group successfully revived the project by building GIM and GID.
1. Grand Ion Majestic
GIM is currently still in construction and the 5-star luxury boutique serviced apartment is expected to fully complete in March 2023. I have compiled quick details of GIM project in the following table:
Since the consolidation of the asset acquisition will only happen in the next quarterly report to be released in a few weeks, we can see a steep increase in revenue and profit. The following are my projection of revenue and profit in Q2 of FYE 2021:
Since the construction progress is only 31% currently, most units sold are still not fully recognized. Hence, the full effect of GIM project contribution will be in FYE 2022. Below is my estimation of the revenue and profit contribution until 2023.
After the acquisition, the 100 units of serviced apartments will be sold to property investors; the 15 commercial lots will be rented out to Galeri Tropika Sdn Bhd at RM 8.4 million per annum (equivalent to 7% rental yield). Since the construction of GID is fully completed, all units sold will be fully recognized. Below is my estimation of the revenue and profit contribution:
The 2 Genting projects will provide earnings visibility of RM 300 million for the next 3 years, but is the future bright for NCT Alliance looking ahead?
Digging into media coverage and interview, I have compiled the upcoming projects of NCT Alliance (Public Listed) & NCT Group (Private Sector). The total GDV of these projects are around RM4 billion:
1. Ion Vivace Residence (Penang): 2 blocks of 40-storey serviced apartment.2. Ion Forte Green City (Ayer Keroh Country Club, Melaka): Branded residence & commercial complex in 24 hole golf course home.3. Ion Lake Garden (Batang Kali, Genting Valley): 5 precincts comprising double-storey terrace houses, semi-detached homes, and shop offices.4. Kuala Langat Industrial Hub project (Kuala Langat, Selangor): 500-acre tract in Kuala Langat (currently applying to rezone the land use to develop industrial park)5. N-City (Sungai Petani, Kedah): 22 acres land, comprising 2 and 3-storey shop offices, an international school, a hotel and a convention hall.
What are the downside?
Sadly, this is not a perfect company. There are 2 downside to this investment:
1. Dilution of RCULS
A total of 617,786,712 units of RCULS, amounting RM 197.7 million were issued to the management team to raise capital to acquire GID. These RCULS are dilutive in nature since they can be converted to ordinary shares anytime. After the full conversion of the RCULS, the share capital base will expand to 1.4 billion units, which is almost 2 times the current share capital.
2. Many of the projects are still not injected into NCT Alliance (Public Listed)
As I mentioned earlier, NCT Group is an established company even before public listed in Bursa Malaysia. Since they went public by taking over Grandflo Berhad, many of their projects are still under NCT Group (Private Sector). The management has said that they will be slowly injecting their project in hand into NCT Alliance (Public Listed) if they find the injection can create shareholder value. However, we still need to continue monitoring the integrity of the management moving forward.
NCT Alliance's moat is in reviving abandoned projects, giving them an edge over other property developers. Their business creates values to all the stakeholders and their future seems bright. I am excited to see if they can actually achieve their Top 10 Property Developer target in 10 years time. If they did achieve their goal, NCT Alliance can easily be a 5-baggers stock.