Loh Chin Hua
Chief Executive Officer
2018 marks Keppel Corporation’s 50th anniversary and also your fifth year as CEO. What were some of the most significant highlights of the past few years?
When I assumed the role of CEO at the start of 2014, my focus was to make Keppel an even better and more successful company, one that would last for generations to come. That focus remains unchanged.
At the onset, my leadership team and I sought to rally our diverse business units around a common purpose and direction for the Group. This set us on a transformational roadmap, which converged on harnessing the Group’s synergies as OneKeppel, and building new muscles to become an agile, better‑rounded, and more sustainable organisation in a fast‑changing landscape.
Following the sharp fall in oil price from mid‑2014, we found ourselves in a perfect storm in the Offshore & Marine (O&M) business, which was at that time the main contributor to our bottom line. We worked hard over the next few years rightsizing Keppel Offshore & Marine (Keppel O&M) and reducing costs, while re‑positioning it to capture new opportunities in the gas and non‑drilling sectors.
Through these efforts, Keppel O&M is now more efficient and compact. With its business units working as an integrated body to offer better value propositions to our customers and partners, Keppel O&M is also in a stronger position, ready to capture opportunities when the O&M industry finally recovers.
With the privatisation of Keppel Land in 2015, our corporate structure was simplified, giving Keppel Corporation better control of the Group’s key business verticals. There is now tighter alignment across units, allowing us to strengthen collaboration and allocate capital towards investments that would yield the best risk‑adjusted returns. Keppel Land has contributed noticeably, particularly in recent years. It has provided a strong pillar of earnings, which has kept the Group on an even keel, amidst turmoil in the O&M space.
Bolstering our strength in capital management, we integrated the Group’s asset management businesses under Keppel Capital in 2016. Through the managed portfolio of listed trusts and private funds, Keppel Capital enables the Group to grow its asset management business, recycle capital and expand its capital base with funding from co‑investors.
More recently, in 2017, we launched Keppel Urban Solutions, our latest strategic platform aimed at melding the diverse experience and competencies of the Keppel Group to develop smart cities of the future, leveraging the latest technologies.
Today, Keppel is not just a group of diverse entities that share a common name, but an eco‑system of companies working closely together, with a common purpose to provide compelling solutions for sustainable urbanisation.
Our vision to be a global company at the forefront of our chosen industries has been made clear to all Keppelites. The market has also grown to appreciate the merits of our multi‑business strategy and Keppel’s model for creating and capturing value across its verticals.
The world is a very different place today. How does the future look to Keppel?
The global economy is enjoying broad‑based growth, with improved business sentiments in both advanced economies and emerging markets. We are excited about the many opportunities presented by strong urbanisation trends across our businesses.
At the same time, we are also seeing rapid change, with new disruptive technology and business models shaking up long‑standing businesses, and threatening to derail others. Growing digitalisation, advances in artificial intelligence (AI) and robotics, will redefine the way we live and work, and can also give us the very stage to make quantum leaps.
Making Keppel future‑ready, in this fast‑changing world with plentiful disruptions, requires us to be agile and bold in seizing opportunities. Business models are changing, including those of our customers. We must be nimble, prepared to take calculated risks, and constantly evolve to ensure that Keppel remains relevant to our customers and the market place.
We must dare to experiment, to be the disruptor rather than the disrupted. Keppel must continue to retain the growth initiative even in the face of uncertainty. Our success lies in building resilience, staying relevant and maintaining a growth mindset.
We are creating and capturing value in our chosen industries in a way that only Keppel can – by defining our own playing fields and collaborating across units to unleash the synergies of our business model. Be they data centres, urban logistics, the gas business or urban solutions, the new growth engines to propel our future are being built today, even as we continue to ramp up our existing engines.
How has the global resolution changed the way you look at Keppel’s businesses and operations, particularly in emerging countries where governance issues and corruption risks are more prevalent?
Our license to operate requires us to act within clear legal and ethical boundaries, and to contribute positively to the community, wherever we operate. As we grow our businesses in this increasingly complex global landscape, we need to conduct ourselves according to the highest ethical standards, and always do what is right, even when no one is watching.
The global resolution reached by Keppel O&M brings closure to a painful chapter. We have put in place effective compliance controls to ensure that this does not happen again. Above all, Keppel’s core values of accountability and integrity must continue to serve as the true north to guide our people.
Some people have asked if the global resolution would result in Keppel taking less risks in the future, especially in emerging countries. This is not the case. Keppel has grown to what it is today led by generations of leaders who had exercised a spirit of enterprise and taken appropriate business risks. I encourage all Keppelites to continue taking legitimate business risks for which we expect to be rewarded with appropriate returns. But there are bright lines that we must never cross.
Keppel will win business legally and ethically, based on our collective strengths, customer‑centric solutions and good track record in execution. We look forward to continue on our growth trajectory and build a more disciplined and sustainable business – a Keppel that will remain trusted and admired by all our stakeholders.
How will you ensure that the Group maintains a high standard of compliance?
The tone for regulatory compliance is driven from the top.
Keppel Corporation’s Board exercises oversight of regulatory compliance and governance with the support of our Group Risk and Compliance team. As CEO, I chair the Group’s Regulatory Compliance Management Committee, whose members include the heads of all business units. Each business unit in turn has its own risk and compliance team to drive and administer the compliance function, ensuring that policies, measures and best practices are cascaded down to our operations.
Our core value of integrity prohibits Keppel and its employees from engaging in any unethical practices or behaviour. This is absolutely clear to me. Since my appointment in 2014, the Chairman of the Board and I have sent letters to all employees regularly, underscoring Keppel’s anti‑bribery stance and the need to embrace the Group’s Code of Conduct and apply it in all aspects of their daily work.
Compliance, like safety, is a continuous journey. Since 2015, we have strengthened our regulatory compliance measures and rolled out an improved programme across the Group. We enhanced the Employees’ Code of Conduct, which sets out key principles to guide Keppelites in carrying out their duties and responsibilities to the highest standards of personal and corporate integrity. We also revised and improved our compliance policies governing gifts and hospitality, suppliers’ code of conduct, whistle‑blowing, as well as the processes for conducting due diligence on appointing and making payments to third parties who represent Keppel in business dealings.
As part of the global resolution with the criminal authorities in the three jurisdictions, Keppel O&M has committed to strengthen its compliance processes, obtain certification by accredited international bodies, and report on its corporate compliance measures annually. I am confident that Keppel O&M will emerge from this process a more disciplined company and a benchmark for the industry.
To further entrench the compliance culture, we ramped up training programmes for staff, keeping them abreast of rules and regulations, as well as the expectations of them as employees and officers of the Company. This includes comprehensive annual compliance‑related e‑learning and attestation exercises, which have to be completed by all Keppelites.
Optimism seems to have returned to the O&M sector with the improvements in oil price. How does 2018 look from Keppel’s perspective? Is the long and harsh winter ending?
The more positive market sentiments appear to be underpinned by rising oil prices, and in general, a more favourable global economic environment. However, the hard times may not be over yet for many in the industry.
As I have cautioned on several occasions, the offshore rig market continues to be plagued by a supply overhang, which has put a ceiling to utilisation and day rates. It could take some more time for demand and supply to rebalance, before we see a return in new rig orders. On the brighter side, the market has seen increased secondary market activity involving companies such as Borr Drilling.
Meanwhile, we will advance our pursuit of new markets and top lines in the non‑drilling sector. Despite the current challenges, Keppel O&M more than doubled its new contract wins in 2017 to $1.2 billion, from about $500 million in 2016, securing a majority of the FPSO conversion jobs in the market, on top of the contracts for newbuild dredgers and LNG dual‑fuel vessels won.
We expect 2018 to be a more fruitful year. The team is working hard to convert a pipeline of potential jobs, many in the production and non‑drilling sectors, into new contracts.
Will Keppel O&M continue to feature prominently in the Group’s business mix moving forward? What is being done to prepare it to capture future opportunities?
I do not see a future Keppel without an O&M division. The immediate focus for Keppel O&M in 2018 is to break even and position itself for growth. Beyond the current challenges, we have big plans for the Division and I am very excited about where things are heading.
Whilst shale or unconventional oil will continue to impact the energy sector, offshore oil is making a comeback. Offshore oil producers have to up their game to become more competitive against shale players. As an industry leader, Keppel O&M will play an important role to help the offshore oil sector become more efficient.
In response to our customers’ drive to improve operational efficiency and lower costs across the project life cycle, Keppel O&M is developing rigs of the future. Our initiatives include building 'digital twins' of physical structures, processes and systems; designing smarter rigs using sensing technology, and providing mission critical aftermarket services.
To execute these innovations, Keppel O&M is developing yards of the future, by incorporating robotics and AI into our manufacturing process. We are also collaborating with equipment providers to see how we can extract timely, actionable insights from the vast amount of data generated from running a rig.
Our end‑to‑end gas strategy will unveil new opportunities for the Group in the way forward, taking us beyond a shipyard’s regular turnkey business model to become a developer, owner and operator of floating energy infrastructure. Our experience working with various industry stakeholders such as governments, energy companies, operators and financiers over the past few years, has made apparent the gap that needs to be filled by a competent and resourceful industry partner and enabler.
With proven cryogenic expertise and the ability to stitch‑up the entire gas value chain, Keppel O&M is well placed to address this growing market segment. Keppel O&M can collaborate with Keppel Infrastructure, which is already an experienced owner, developer and operator of onshore infrastructure projects, as well as with Keppel Capital to secure co‑investors to fund projects.
In building the future Keppel O&M, we will need to cast our sights beyond the current playing fields. As rapid electrification continues, electricity’s share of total energy demand is expected to increase from 18% in 2015 to around 40% in 2050, with most of the production coming from renewable sources.
As it is, we have seen oil and gas majors gradually shift their business focus to renewables. They are also linking up the value chain, from upstream to downstream, to convert gas molecules into electrons. Keppel O&M likewise needs to position itself for this new reality. We are actively considering expansion into renewables, and how we can play a part in the electrification of island states using our proprietary floating solutions.
The Property Division has been the largest contributor to the Group’s earnings for the past three years. What opportunities are you seeing in Keppel Land’s key property markets?
As a provider of quality homes, offices and mixed‑use developments, the Property Division is a core pillar in our mission to provide solutions for sustainable urbanisation. Keppel Land is in an enviable position, given its sizeable pipeline of about 63,000 homes in Asia. Of these units, 31,000 are located in China; 20,000 in Vietnam; 8,200 in Indonesia and some 1,200 in Singapore.
Despite the cooling measures, we believe that the demand for good quality homes in China remains healthy. Keppel Land will continue to deepen its presence in the five focus cities of Beijing, Chengdu, Shanghai, Tianjin and Wuxi, where it enjoys strong competitive advantage and branding.
In Vietnam, long‑term prospects are supported by continued urbanisation and a growing middle class. As a pioneer foreign developer with a prime landbank mostly located in Ho Chi Minh City, Keppel Land is well positioned to tap Vietnam’s vibrant property market.
Keppel Land maintains a quality portfolio in Singapore, including the Keppel Bay precinct and the Serangoon North development. Amidst rising land prices, we will remain disciplined in bidding for sites. The returns must commensurate with the risks. Meanwhile, we are also studying the redevelopment of Keppel Towers and Nassim Woods, which can potentially add another 500 homes in prime locations to our Singapore portfolio.
On the commercial front, rising demand for high‑quality office space in Asia is supporting rental growth in the region. Today, Keppel Land has a total commercial portfolio of 1.5 million square metres of gross floor area, either completed or under development, which can generate an annual net operating income of about $300 million when fully stabilised. This puts the company in prime position to ride the favourable market conditions, and earn more recurring rental income. When stabilised, the investment properties could be potentially monetised, either through a sale or injection into a REIT.
Investors are starting to recognise the inherent value of the Group’s real estate business. What is Keppel’s strategy to realise the full potential of its Property Division?
We are transforming Keppel Land into a multidimensional real estate player with one of the highest returns on equity (ROE) in Asia. Our target is a through‑the‑cycle ROE of about 12% for the property business. Although returns have hovered at high single‑digit levels in the recent three years, we are reasonably comfortable with a longer‑term target of 12% considering that Keppel Land had achieved an average ROE of 14.6% over the past decade.
In today’s context where land is expensive, we are fortunate to have entered some markets early and acquired land at relatively lower cost, particularly in China and Vietnam. With about 10 years of supply in its landbank, Keppel Land can afford to be more selective in its land acquisition – purchasing new sites only when the pricing makes sense.
In addition to selling homes, Keppel Land will also continue reviewing its sizeable residential landbank for opportunities to unlock capital that will give good returns. A case in point is the divestment of three residential projects in 2017, equivalent to about 4,330 units sold en bloc, which contributed immediately to the year’s profit. The value that we unlock can then be recycled into higher growth opportunities.
Apart from purchasing land for development, we can also selectively acquire newly‑completed assets in prime locations. The cost of buying land in some of these prime cities is so high today that standing investments can be bought below their replacement costs if we factored in the current land prices. After acquisition, we can add value through asset enhancements and improving the tenant mix just as we are doing in K‑Plaza and Trinity Tower (formerly known as SOHO Hongkou) in Shanghai, China.
An advantage of buying completed assets is that most of them are already cash flow generating. Unlike development projects, the time‑to‑market for these is also much quicker, making the investment holding period shorter. Returns for such investments can be attractive and there is no need to take development risks.
I am confident that Keppel Land will be an effective, multi‑faceted property solutions provider, as we work towards maintaining one of the highest ROEs in the region for a real estate company.
The Infrastructure Division has seen a pickup in activity in 2017. Could you discuss the key milestones achieved and the business prospects in this Division?
2017 was a busy year for the Infrastructure Division. The Division has not only delivered significantly higher net profits year‑on‑year but was also active in securing new projects and building new businesses.
As an infrastructure developer, owner and operator, Keppel Infrastructure has contributed steadily to the Group’s recurring income. In 2017, Keppel Infrastructure inked two major projects, namely the Keppel Marina East Desalination Plant (KMEDP), as well as the Hong Kong Integrated Waste Management Facility (IWMF). The company also signed an agreement with the Singapore Economic Development Board to develop, own and operate a state‑of‑the‑art gasification facility in the petrochemical hub on Jurong Island. This agreement is a pivotal first step towards achieving the final investment decision.
In 2017, Keppel Infrastructure earned about $160 million in operations & maintenance revenues from power, waste‑to‑energy, district heating and cooling as well as water and wastewater facilities. When the KMEDP and Hong Kong IWMF are completed, they will further extend income visibility from infrastructure services into 2045.
Meanwhile, Keppel Telecommunications & Transportation (Keppel T&T) is positioning itself to ride the digitalisation wave and meet the fast‑changing needs of its data centre and logistics customers.
Keppel T&T will continue pursuing new development and acquisition opportunities for data centres in Asia Pacific and Europe. The company will leverage its partnerships with the Alpha Data Centre Fund (Alpha DC Fund) and Keppel DC REIT, and focus on green data centre designs and technologies to sharpen its value proposition. In 2017, Keppel Data Centres invested US$10 million in Nautilus Data Technologies, a Californian startup currently developing a commercial water‑cooled data centre for deployment in 2018.
Rapid urbanisation and the proliferation of connected mobile devices have fuelled e‑commerce in Asia at high double‑digit growth rates, unearthing new opportunities for omnichannel logistics, multi‑modal transportation, cold chain logistics and intelligent transportation systems. Last year, we launched UrbanFox, Keppel Logistics’ new omnichannel logistics and channel management solutions arm, to tap opportunities in e‑commerce by offering value‑added services and solutions seamlessly from businesses to consumers.
The Investments Division performed well in 2017 with a net profit of $235 million. At a broader level, what has changed and how does the Division fit in with the Group’s growth plans?
Prior to 2016, the Investments Division had consisted mainly of the Group’s holdings in key associates such as M1, KrisEnergy and the Sino‑Singapore Tianjin Eco‑City (Tianjin Eco‑City). In the past two years, we have added to it new operating subsidiaries – Keppel Capital and Keppel Urban Solutions (KUS) – with the aim of growing stable income contributions from the Division. Today, the Investments Division also serves as an incubator of future growth engines for the Group, as well as a driver of synergy across our key business verticals.
Through Keppel Capital, we will be looking to create more private funds and co‑investment vehicles with like‑minded investors. This will expand our capital base and allow us to seize more opportunities without putting a strain on our balance sheet. By enlarging our investment capacity with co‑funding from like‑minded investors, we can give the Group even greater financial capacity to grow.
Not all of the funds managed by Keppel Capital will be invested in assets built by the Group. But there will be considerable pull through for the various business units that are engaged in developing infrastructure and other real assets – all of which are solutions that meet the needs of urbanisation sustainably.
As the assets under management (AUM) grow, the requirement for operations & maintenance services will also increase, thereby enhancing our recurring service fees. If we add that to the recurring income from our co‑investments in the funds and trusts managed by Keppel Capital, as well as the asset management fees we receive, the overall quality of our earnings would improve over time with a larger proportion of income from recurring sources.
To further operationalise collaboration and the tapping of synergies, we created KUS at the end of 2017. KUS will integrate the latest urban solutions, bringing together the Group’s capabilities and track record in energy, property, infrastructure and connectivity, to create sustainable, highly‑liveable and digitally‑connected communities. Moreover, KUS’s open platform allows us to partner best‑in‑class technology providers, such as Microsoft, and tap the power of sensing technology and the Internet of Things for residents as well as operators of infrastructure and community services.
The possibilities are boundless. For a start, KUS is collaborating with Keppel Land to develop the 64‑hectare Saigon Sports City, located in the prime District 2 of Ho Chi Minh City. Through KUS, the Group can enhance and capture the value of land and real estate that we own or acquire. We will be able to enjoy multiple earnings streams across the Group, as we develop, manage and maintain properties and horizontal infrastructure, and provide a host of high‑quality urban services. We can also bring in co‑investors through Keppel Capital to participate in this long‑term value creation process.
Keppel Capital targets to grow its AUM to $50 billion by 2022, how will it get there?
Keppel Capital leverages the Group’s core competencies to create innovative investment solutions, connecting investors with high‑grade real assets in fast‑growing sectors fuelled by sustainable urbanisation trends. Data centres, power and desalination plants and offshore vessels are examples of cash‑generating real assets that the Group is capable of developing and operating, which are also attractive to many investors.
In 2017, Keppel Capital’s AUM grew to $29 billion on a fully‑leveraged and invested basis, compared to $25 billion in 2016. This was on the back of having raised US$1 billion for the Alpha DC Fund and US$560 million for the Alpha Asia Macro Trends Fund III, as well as the successful listing of the Keppel‑KBS US REIT on the Singapore Stock Exchange with about US$553 million raised.
Keppel Capital aims to achieve its AUM target of $50 billion by 2022 through pursuing both organic and inorganic growth opportunities, as well as explore new markets and asset classes in line with the Group’s core competencies.
The target has been set high. Keppel Capital can also tap strategic partnerships to help it reach its goals. Keppel Capital’s joint venture with KBS exemplifies this, and has enabled us to enter the US commercial real estate sector with a best‑in‑class partner.
The Tianjin Eco‑City contributed $120 million to the Group’s net profit for FY 2017. What are your plans for the Eco‑City moving forward?
Our long‑term investment and involvement in the master development of the 30‑square‑kilometre Tianjin Eco‑City is bearing fruit. As the project matures, we are seeing increasing demand for homes and land in the Eco‑City.
After a long gestation period, in 2016, the project reversed cumulative losses from previous years, largely due to the sale of two plots of residential land. In 2017, the Eco‑City continued to perform well, contributing $120 million to the Group’s net profit, mainly through the sale of another three land plots. Presently, slightly more than 45% of the net land in the Eco‑City has been sold or developed, and the price of land sold by our joint venture, the Sino‑Singapore Tianjin Eco‑City Investment and Development Co., Ltd, has been rising steadily.
In 2018, Tianjin Eco‑City will be celebrating 10 years of development. The Eco‑City is a long‑term undertaking and we are committed to making sure that the objectives set by both the Singaporean and Chinese governments at the inception of the project are achieved. Some degree of lumpiness is to be expected, as we do not sell land every quarter. Nevertheless, we expect the Eco‑City to be a significant contributor to Keppel’s bottom line in the years ahead.
How will the Group stay agile and innovative to ensure that it continues to succeed in this fast‑changing environment?
To thrive in this fast‑changing world, we need to be entrepreneurial and innovative. Keppel has a long history of innovating for solutions, but we need to do so at a higher speed and scale. This does not mean that we should disregard risk management and compliance, nor our operating principle of being financially disciplined. Rather, we should be prepared to experiment, and expand the bandwidth for innovation and enterprise in the Group.
We established Keppel Technology and Innovation (KTI) with this purpose in mind. As a change agent and innovation catalyst for the Group, KTI aims to transform how Keppel deploys technology and innovation to create value for our stakeholders, imbuing an insurgent mindset that constantly challenges the status quo.
Whether it is to develop new products and services, improve existing ones or to innovate and enhance business models and ways of working, KTI is a platform for all our business units and teams to co‑create and incubate ideas towards tangible outcomes.
To support our ambitious growth plans, we are grooming a new generation of Keppelites who are committed to our core values and operating principles, and at the same time, are innovative, collaborative and nimble. We are harmonising our corporate and human resources systems, which will allow us to reap efficiencies and improve controls.
We seek to create a conducive workplace where Keppelites can explore, develop and fulfil their professional aspirations, and at the same time help Keppel achieve its mission to provide solutions for sustainable urbanisation. Our goal is to have great people working hand‑in‑glove at Keppel to shape the future, improve lives and create enduring value for our stakeholders.
As we write the next chapter of the Keppel story, our response to the challenges and opportunities ahead of us will define the character of our present and future leaders. Guided by our operating principles and core values, we will deliver solutions for sustainable urbanisation profitably, safely and responsibly. With this common mission, we can stride forward in confidence and take Keppel into the future.