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When the going gets tough, Expand rises to the challenge
THE year 2017 hasn't been a rosy one for the construction sector but local company Expand could just be proof that while tough times don't last, tough businesses do.
This year, homegrown construction firms - Expand included - took a hit as contract prices plunged to new low levels, competition from foreign firms intensified, and tender prices and profitability fell.
Von Lee, founder and chairman of the Expand Group of Companies, says that a particular challenge facing Expand was bagging major infrastructure projects in Singapore, such as the construction of MRT stations and deep tunnel sewerage systems.
He tells The Business Times: "As most of the major infrastructure projects require experience and technical track record, they are dominated by foreign companies. Expand, being a local company, has found it difficult to penetrate the market. At the same time, it is very difficult to form joint ventures with foreign companies."
But Mr Lee is hopeful that Expand can find a breakthrough, and eventually win a major infrastructure project in Singapore that will extend its project diversity and capabilities.
Already, the company has secured S$216 million in revenue for its 2017 financial year until Oct 17. This is just shy of the S$230 million in revenue recorded for its 2016 financial year.
Mr Lee attributes last year's topline to a significant contribution from a new HDB project which received the Temporary Occupation Permit in February.
He adds that in December, Expand was awarded another HDB project that will soon enter the structural construction phase and contribute to the company's turnover in the next six months.
Despite the lower turnover, the company's gross margin on profits reportedly increased from 7 per cent in 2016 to 16 per cent in 2017.
Expand's order book, or value of ongoing contracts, currently stands at S$957 million. Mr Lee says: "There is sufficient work order on hand to keep us busy for the next two years with good profit margins."
Expand is now looking into investing in secured fixed income instruments, using the financial reserves that it has built over the last few years. Mr Lee says: "This provides the company with interest income to pay for fixed overheads, so that we would not be pressured to tender for projects at cutthroat prices."
Since its 2000 founding, Expand has prided itself on a few strategies that has helped the company ride headwinds in the ever competitive construction sector.
First, it has adopted an asset-light approach from Day 1. Its fixed asset turnover is 130.68 times in 2017, versus 127.68 times in 2016. This ratio is said to measure the company's ability to make productive use of its fixed assets to generate sales, and therefore reflects the efficiency of the management in utilising company resources.
Mr Lee says: "By being asset light, Expand is not bound by our investments in fixed assets to tender for projects to utilise our resources."
For example, in the construction of high-rise buildings, Expand will rent tower cranes from suppliers instead of purchasing them.
Notably, in 2012, the monthly rental of a tower crane was reportedly S$15,500 due to a shortage of tower cranes in the market as well as increased demand from a higher volume of HDB construction projects.
Mr Lee says: "Some companies might have chosen to invest and bought a tower crane to reduce rental costs. But today, the monthly rental of a tower crane is only S$7,500. If we had purchased cranes in 2012, the storage and maintenance cost of a tower crane would have cost us more than S$7,000 per month."
Secondly, Expand has formed win-win partnerships with its clients, consultants and suppliers. Mr Lee says that amid the competitive landscape, Expand competes not just on price but its good reputation to deliver the project on a timely basis with quality and safety.
"Expand has benefited from the Price Quality Method (PQM) evaluation as we have performed consistently, and we are able to win projects based on PQM even though our bid was not the lowest in terms of tender price," he says.
Among suppliers, Expand has over the years earned a reputation as a good paymaster. Mr Lee explains that if its suppliers are assured a quotation of S$1, they will receive a dollar and not 95 cents. This has rendered the company credible with suppliers, he said.
Thirdly, Expand has developed a lean and efficient workforce. As a niche builder with experience in special and technically challenging projects, Expand focuses on innovative solutions such as implementing Building Information Modelling, or using precast structures instead of cast-in-situ methods of construction.
Says Mr Lee: "This improves productivity and allows us to complete projects on a timely basis in a safe and environmentally friendly manner."
At present, Expand's target market is still very much domestic. Its current foreign ventures are in property investment rather than construction, says Mr Lee.
The group's latest overseas project is a joint venture with a US company to develop and operate a five-star hotel in downtown Houston. This development commenced operations in October.
Following that, the homegrown firm is now not entirely opposed to construction opportunities abroad.
Mr Lee says: "Expand's focus will remain on Singapore. We have to take calculated risks when expanding overseas. However, if the right opportunity presents itself, we will venture into it."