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Expand Construction still sees home-ground potential

Founder Von Lee says the company adopts an "aircraft carrier" approach when venturing into new markets to minimise risks.

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"We must always ensure we are in good shape. In between, we can send out small little battleships. If one or two sink, it will not affect my aircraft carrier. But the mothership cannot sink," says Mr Lee.

THE founder and managing director of Expand Construction likes to use an interesting analogy when he discusses his company's growth strategy. Imagine an aircraft carrier. That's Expand, Von Lee says.

"We must always ensure we are in good shape. In between, we can send out small little battleships. If one or two sink, it will not affect my aircraft carrier. But the mothership cannot sink."

For the moment, the home-grown construction company is still very focused on securing more construction orders in Singapore.

At the start of this year, the government had projected the total value of construction contracts to be awarded in 2016 at between S$27 billion and S$34 billion, mostly driven by civil infrastructure projects.

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At the moment, Expand is generating a revenue of about S$230 million a year - a mere one per cent of the total contracts available. Mr Lee believes there is room to increase that proportion.

That said, the company has grown its topline significantly in the last six years, up from just S$70 million in 2010.

Mr Lee credits this to the A1 grading, which expanded the scope of projects it could tender for, including the Housing and Development Board's build-to-order (BTO) flat projects that are worth upward of S$100 million each.

It also helped that Expand was involved in high-profile projects such as the Marina Bay Waterfront Promenade connected to the Integrated Resorts in 2010 and the Supertrees at Gardens by the Bay in 2011.

But the times they are a-changin', and it is no secret now that the construction industry is going through a rough patch. Asked about this, Mr Lee replies that Expand's asset-light strategy and unlisted status will help it to survive in this tepid environment. There is almost a "been-there-done-that" air about him when he says this.

In recent years, foreign developers parachuting into Singapore's development scene have intensified competition for tenders, a repeat scenario of what had happened before in 2000.

"If you ask me, there is no right or wrong. I went through that period and I survived. Obviously now we are very cost-conscious and quite efficient, and we are able to compete with the Chinese. The Chinese are already entrenched here, and over the years, we've learned to compete and be on par," Mr Lee says.

POOR BUYING SENTIMENT

The other headwind in the sector is poor property buying sentiment and fewer building project tenders available as cautious developers scale back on new property launches.

"This causes a lot of cut-throat competition among building contractors because the capacity went from high (from 2011-2014) to low. Now the developers realise they don't have as many projects to tender, so in order to compete, they have to keep lowering their tender prices."

The result: ultra-lean margins and developers taking on projects below costs. Companies would still execute projects because the revenue would still help to justify some of their fixed costs which are sunken even if they do not undertake any project.

But Mr Lee believes Expand is in a good place to weather the downturn because it had made the prudent choice to remain asset-light, investing mostly in its human resource, and choosing to rent its tower cranes, machinery and office space instead of buying.

"I believe that assets are good in good times but a burden in bad times," he explains.

Because of this, he does not feel burdened by requirements to take on projects just to justify the company's expenses.

Expand also tries to create additional recurring income streams through proper management of cash and investments in financial instruments such as bonds, equities and even real estate.

It currently owns Hotel ibis Styles in Macpherson, the former Windsor Hotel. All the shop space at the mixed development has been sold, and the hotel, which opened in April this year, is currently generating recurring income.

Expand estimates its outstanding current order book at around S$300 million, which should last it until end-2017. Its main projects include BTO projects in Sembawang and Hougang, as well as two other electrical substations on Jurong Island and at Mediapolis respectively. It has a workforce of about 120 management personnel and some 200 to 300 general workers.

Most small and medium-sized enterprises, when they reach a certain scale, start to mull an initial public offering. But Mr Lee is quite clear that listing is not on his cards for now.

"As a construction company, we are not seen differently whether we are listed or not; we are judged by our track record and construction registry," he notes.

He adds that there are also downsides to listing, which he believes contributed to the delisting of some of its peers such as Sim Lian, and the financial trouble that others such as Swee Hong are facing.

ONEROUS REQUIREMENTS

Listing brings with it onerous compliance requirements and the need to deliver a good performance every quarter. The result is that in a bearish market, some companies may take on projects not traditionally their forte, drawing more resources than they should from the group and dragging down the overall group performance.

In comparison, a private company has much more flexibility, he points out.

"There are many other big companies that are privately owned and they can go without projects for one to two years. When times are better, they take on projects and continue. But as a listed company, you can't," he says.

Although Expand's current overseas exposures are limited to opportunistic one-offs, it is open to growing its footprint into overseas markets.

At the moment, it is building a hotel development in Houston, Texas, with a local developer called Midway Hospitality LP in a 50:50 joint venture.

When completed in the middle of next year, Hotel Alessandra will be the second five-star hotel in downtown Houston.

Expand is treading lightly with its other growth plans. Mr Lee reveals: "The focus is always very clear when we take on projects overseas or expand into anything. We take small steps and hopefully grow from there, so that we cut down the risks of over-engagement. If you do that and get into trouble, your mothership may sink."

For now, that mothership remains very much entrenched in Singapore's construction scene.

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