Building group survives slump by diversifying

Published May 1, 2007

SME SPOTLIGHT

Straits Construction happy to stay small

ARTHUR SIM finds out how the family business survives the competition


THINKING small in an age of global expansion may sound contrarian but it has helped Straits Construction remain a lean and fit operation through the tough times.

Until only recently, construction companies, Straits included, were languishing.

'Staying focused on residential construction actually helped during the (construction) downturn because we did not diversify into other areas of construction like infrastructure,' explains director Wong Chee Herng.

As such, Straits is not too bullish about construction contracts coming up at either of the integrated resorts (IR). 'But the spin-off effect will be relevant to us because we believe the IRs will soak up the supply of construction companies and leave us with less competition for other jobs,' he added.

The construction industry is especially competitive, not least because Singapore has welcomed many foreign firms. 'First it was the Japanese, then the Koreans, then the Chinese,' says Mr Wong. So it is no small feat to have survived the decades.

'Staying focused on residential construction actually helped during the downturn because we did not diversify into other areas...like infrastructure'
- Mr Wong

In 1969, Wong Swee Chun, 69, also Chee Herng's father, started Straits Construction after working as an apprentice and a sub-contractor.

After building up the company, Straits clinched its first Housing and Development Board (HDB) contract in 1982 and went on to build more than 10,000 units for the board.

Perhaps more remarkable is that between now and 2009, Straits will build another 3,000 units for HDB and also hopes to be awarded another 2,000 units to build over the next two years.

And this is a significant number as Straits estimates that HDB built around 8,000 new units in 2006.

Wong Chee Herng's contribution to the company probably has something to do with its share of HDB contracts.

Mr Wong, 37, joined his father's business in 1994 at his father's request. He had just graduated from the National University of Singapore with a degree in business administration. 'I thought I would try it for one or two years,' he added, and was immediately deployed as a site foreman.

He stayed on and was tasked with getting the company ISO certified.

Any company that has gone through certification process will know that it can be a painful experience. But in 1994 HDB had made it a requirement that only ISO certified companies could tender for jobs of a certain size. 'Back in those days, getting ISO certified was considered a big hassle,' he remembers.

Getting the certification simply means getting the work processes down pat but for many of the 'old timers', it meant duplicating their work - doing it the ISO way and their own. 'At the supervisory level (on site), staff weren't affected. It was the middle management that had to accept the most changes,' he said. There was attrition but Mr Wong says: 'Those that stayed back embraced the changes.' Straits has since become a champion of sorts for such work processes, especially when it comes to safety and health, perhaps even to the point of obsession. 'We started our own penalty system in 2000 to fine staff who breach safety codes on site,' he reveals. Most recently, it won the HDB Quality Award and the HDB Construction Safety Award in 2006. Validation came last year when Straits was awarded two HDB contracts despite not having put in the lowest tenders. Mr Wong believes its quality and safety track record had something to do with it.

Reliance on public sector jobs alone may be a bit risky though. Mr Wong does concede that the number of flats HDB has been building has dropped from the heyday when it would roll out 30,000-40,000 units a year.

Straits, however, hopes to benefit from the 'value-add' that has gone into HDB flats since. By his reckoning, if construction levels can be brought up to about 12,000 units a year, the total value of construction contracts could match those in previous years because the cost per unit has doubled. 'Before, the construction cost per unit might have been $50,000-$60,000. Today, it costs about $100,000-$150,000 per unit to build,' he says. Mr Wong said he also expects profit margins to increase from almost nothing to about 8-9 per cent this year.

Through its property development arm Hoi Hup - headed by his sister, Wong Sjew Hung, a quantity surveyor - property development actually contributed 90 per cent of the group's profits last year. Hoi Hup has developed about 900 private residential units since the mid- 1990s and currently has about 500 units at different stages of development. Mr Wong reveals that Hoi Hup plans to develop at least two to three residential projects each year with a total of 200-300 units.

But as he notes: 'The businesses are very different. Construction is basically a cash-flow business while development is more capital intensive.'

One of Straits' survival strategies was to wise up to the availability of various financial instruments offered by banks to help SMEs.

Working with OCBC, for example, it obtained project financing which was tied to a specific contract, unlike previously when customers could only draw on overdrafts. OCBC would evaluate the contract and provide a customised solution for each contract depending on the cashflow projection and financing needs for the contract. By doing so, the customer is able to manage the financing needs of the project more closely.

The customised solution will include performance bonds, trade facilities and receivable financing. The receivable financing allows SMEs to convert their receivables immediately into cash. While receivable financing requires documentary evidence (versus overdraft), it serves the same purpose of giving contractors the steady cashflow to proceed with their project, something very important to construction players.

With this support, Mr Wong says the company has no immediate plans to go the IPO route to finance any expansion. 'We are well-supported by the banks,' he added.

Even with its property development arm, projects are likely to stay small. 'To play a significant part in the market, you need capital,' says Mr Wong. 'We are a family business - quite conservative actually.'

When foreign funds came knocking on their doors a year ago - the same funds that have been making the rounds - the company felt the time was not right. 'We have no reservations. It's just a matter of time and conditions. It's a matter of commercial terms. We are not averse to it,' Mr Wong says.

Could the next big joint venture with the Lehman Brothers of this world be with Straits Construction? It is hard to say. What seems clear is that this efficient outfit is quite happy the way it is already.

May 2, 2007

Building group survives slump by diversifying

Expanding property arm helps Straits Construction weather downturn and keep all its staff

By Fiona Chan


WHEN the Singapore construction industry went into a slump several years ago, more than 50 companies were forced to close down.

However, some others, such as Straits Construction, managed to ride out the downturn without so much as letting a single employee go.

Its secret: diversifying into other businesses.

The top-rated contractor, with an annual group turnover of about $200 million, survived by branching out from its contract-based business of building homes for property developers.

It expanded into the whole development process itself, which required the firm to buy the actual land plots and market the finished units as well.

There was a steep learning curve, but the gamble paid off when the property market took off before the construction sector.

Now, the company's property arm, Hoi Hup, accounts for 90 per cent of group profits. Its portfolio spans mass-market and high-end projects, and Hoi Hup has consistently sold out the projects it has developed.

Its success in property development was capped last month when its newest project, Suites@Cairnhill, was almost wholly bought by a fund.

Straits Construction's decision to focus more on property was the key to its survival, said the firm's director, Mr Wong Chee Herng.

'Construction is a very cyclical business,' he told The Straits Times in an interview at his office in Panasonic Building in Bukit Merah.

'It's lucky that we got into property because without that, we would have been forced to leave the business. Property saved our business.'

It also enabled the firm to keep all its staff, which now number 120, on board, said Mr Wong. 'We did not retrench a single staff or implement any pay cut during the crisis,' he said.

He added with a laugh: 'At worst, it was just no bonus.'

Pulling through bad times

BEFORE the Asian financial crisis hit in 1997 and took the property market down with it, Straits Construction was handling three or four projects a year, said Mr Wong.

These were mainly contracts awarded by the Housing Board (HDB), and Straits Construction even landed the first 40-storey HDB development.

However, when the market went south, the project flow dried up to one every two years.

Companies started to slash margins in 1998 to win contracts. By 1999, margins were at rock-bottom and some firms were taking on projects at break-even levels just to keep themselves going, said Mr Wong.

That was when Straits Construction decided to devote more resources to its fledgling property arm, which had dabbled in small projects such as a pair of semi-detached houses.

Property development was a 'natural vertical integration' move for the firm, said

Mr Wong. Not only did each new project bring in new business for the construction arm, it also made it easier for the company to control the overall cost of the development projects by handling the construction itself.

Indeed, Straits Construction was one of several contractors, including Chip Eng Seng and Koh Brothers, that survived the slump by developing property.

The firm started by tendering for state-owned land on which to build low-cost condominiums, eventually going into collective sale projects in 2001.

Without much experience in development, the group's first major venture was less than smooth sailing, recalled Mr Wong.

It bought a land plot at Fort Road in 1996, almost at the peak of the property cycle. By the time it launched the Emerald East condominium on the site, the market was already coming down, forcing the group to take a loss.

But it learnt quickly and more than made up for that with its next project, Woodgrove Condominium, in 1999. It was the first private developer to bring the selling price of condominiums below $500 per sq ft, Mr Wong remembers proudly.

Since then, the group has developed landed properties as well as several condominiums, including The Ford@Holland last year, which sold out in a few hours.

Backing from bankers

ANOTHER factor that helped Straits Construction keep its head above water was the support of OCBC Bank, with which it has a decade-long relationship.

'Continuous dialogue' enabled the bank to understand the difficulties that the firm was going through, said Mr David Tang, OCBC's business head of enterprise banking.

He added that keeping in touch was important because 'if losses were anticipated for one project, we might be in a position to help them manage the problem if they talked to us about it and shared with us their solutions'.

The bank also restructured the whole way it looked at the industry in 2004, during the downturn. Rather than just providing general facilities, OCBC focused on specific project financing.

This allowed the bank to provide a customised solution based on the cash-flow projection and financing needs for each contract.

It said it is the only bank to employ a civil engineer to help evaluate construction projects, looking at aspects such as engineering technicality and project costings.

Now, with the property and construction sectors booming, Straits Construction is well poised to ride both waves with the help of OCBC.

'There has been a shift in direction from being a pure construction firm to being a property and construction firm,' Mr Wong said. The goal is to get both these units to 'have equal shares in the top line and bottom line', he added.

Despite this, he still sees construction as the main growth area for the company, which went back to doing three HDB projects last year.

In addition, Straits Construction is now exploring expansion opportunities overseas. This will mitigate its exposure to Singapore's construction cycles.

'We have to look beyond Singapore for the next level of growth,' said Mr Wong.

'We may go somewhere that building is booming, such as the Middle East, Vietnam or Malaysia.'

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