KEVIN CHEN | RIO HODGES | JENNY RYOO | JULIA SHI | TAMMY TAN | WEILIN TU YE
Infilling in Chile Mass urbanization is transforming the typical residence
Steady relocation to cities in 5 years
7.8% Increase in average apartment price
More demand for city center living
200k
6x
Pain Points of Modern Living How can Socovesa address the growing issues associated with urban living?
Shrinking Spaces
RisingPrices
Limited Functions
Identical Apartments
Compression of Choices
Choke point in housing
Central Access
Limited Choices
+
Urbanization limits the choices home owners can make today
The ultimate living spaces empower through flexibility and personalization.
⏣
Typically, we forego what we want, to be where we are
⏣
City density is innevitable, but do we have to sacrifice?
Pick two COST
LOCATIONPersonalization
A progressive firm in a traditional industry, Socovesa is well positioned to lead the trend
SOCOVESA’S TRANSITION TO A CONSUMER AND DESIGN ORIENTED Company
Backward integration to increase architectural skillset
Forward-facing managers seeking better customer insights
History of leveraging huge cash pile to invest in strategic acquisitions
An innovative, sustainable construction delivery method that balances affordability, durability, and flexibility
THE ASSEMBLY LINE
MODULES MANUFACTUREDOFF-SITE
TO BEASSEMBLEDON-SITE
UNDERSTANDING PREFABRICATEDmodular HOUSING
+ -
Skeletal Panelized
Combined
Versatile external structures+
Flexible internal panels
Movable panels : compartmentalization + Customization
Prefabricated modular construction creates cost, time, and waste savings, whilst integrating flexibility and customization.
Prefabricated modular: A compelling alternative
Prefabricated Modular Site-built
Construction Types
0
1Construction Timeline
Resource Efficiency
Functionality and AestheticsAdaptability to Chilean Environment
Environmental Impact
Streamlined and predictable construction timeline, leading to cost savings
Less site damage, material exposure, and waste
Earthquake resistant; durable
Built with factory precision; less labor and fewer materials used
Incremental improvements at lower cost and shorter time period
Compared to traditional site-built construction, prefabricated modular saves time, optimizes construction productivity, and results in faster returns
UNDERSTANDING PREFABRICATED modular HOUSING
Time saved, quicker occupancy,
faster returns
Design Eng. Permits and Approval
Site Development & Foundation
Install & Site Restoration Time Savings
Building Construction at Plant
Design Eng. Permits and Approval
Site Development & Foundation Building Construction Site Restoration
Modular Construction Schedule
Site Built Construction Schedule
Source: Modular Building Institute, 2014
INFINISKI: Combing design principles with prefabricated modular construction techniques
Modular | Sustainable | Affordable
Limited scalability: housing distribution limited by market access
Infiniski: Product Portfolio
Main focus on residential housing market, with a few commercial estates
Tailored according to individual specifications; caters to high income bracket (ABC1)
Problems of accessing the market and distributing its modular design
Aligning stakeholder interests
Innovative designs
Great reputation in the industry
Expertise in sustainable, modular housing
InfiniskiInternational status
Large capital
Scalable access to the market
Socovesa
Current market share and brand name in Chilean market
Large capital on hand
Familiarity with the locals and Chilean systems
No experience in modular housing
No existing prefab construction sites or factories
Strengths Weakness
Socovesa and Infiniski’s strengths and weaknesses are complementary
Able to distribute to a larger market
Design collaboration
Possible foreign investment inflow
Government subsidies
Progressive brand image
Acquisition Synergies
Leveraging assets to aid efforts to scale up
Access to European investor base (specific to prefab)
Marrying complementary skillsets to deliver a better product
Cement its position as a progressive market leader in the real estate market
Capitalizing on the government’s 2050 energy efficiency plan for the housing and construction sector
Synergies lead to new competitive advantages
Pursuing Synergies in StagesSocovesa is experienced in acquiring companies and successfully helping them develop
Short-term partnership phase
Promoting the “creative brain” and establish culture
Establishing a fully autonomous prefab branch:
Infiniski
Integrating Infiniski into Socovesa’s structureHow can Socovesa manage the transition seamlessly?
Establish a new culture within Infiniski post-
acquisition by using teams from both companies to
collaborate on the initial project
Short-term partnership phase
As Infiniski pursues more projects, its identity needs to
be preserved so that it can assert its creative
advantages—especially in prefab
Promote “creative brain” and establish culture
Ultimately transition Infiniskiinto the architectural and prefab arm of Socovesa.
Commissioning customized houses and spearheading
larger projects.
Establishing a separate branch: Infiniski
Acquisition Financials - key financial statisticsThe enterprise value for Infiniski is USD$ 23.2 million, which is estimated based on comparable public companies & a sensitivity analysis
Housing type Revenue
Residential $ 3.645 m
Commercial $ 18.225 m
Total $ 21.870 m
EBIT margin 7.97%
Multiple 13.3x
EBIT $ 1.742 mEnterprise Value $ 23.231 m
Key Financial Statistics (million)
Terminal Value (UF) 2.399
NPV (UF) 0.201
Value of Investment (UF) 2.601
Gross Profit (UF) 0.578
Terminal Value (USD) 94.045
NPV (USD) 7.907
Value of Investment (USD) 101.951
Gross Profit (USD) 22.665
Gross Profit Margin 37.8%
Unleveraged IRR 16.1%
Leveraged IRR 28.3%
Payback Period (years) 6.80
Currency Conversions1 UF 25,889.57 CLP1 UF 39.2 USD1 USD 660.45 CLP
Estacion Central: A prime location
Close to the City Center
⏣
Size of apartments not heavily regulated
⏣
On the rise but not overpriced (west side)
Modular housing saves time and resources while yielding more sustainable projects
Location: North of Estación Central
Population: 144,982
Nearest Subway Stop: Line 1 – San Alberto Hurtado
Time to City Center: 15 minutes
Construction Site
Downtown Santiago
Sky Garden1400 feet2
24’ x 58’Communal gardenIndividual plots for residents
Lounge & Courtyard345 feet2
20’ x 17’Bioclimatic Architecture
Basement1700 feet2
30’ x 57’Thermal Storage ConditionedStorage and laundry roomCreative working spaces
FoyerMail roomStorage/bike accessLounge seating arrangement
Project protoype: los bloques
Kitchen36 feet2
6’ x 6’Efficient factory built space folding counter and full fridge
Storage Loft72 cubic feet12’ x 2’ x 3’
Juliette Balcony63 feet2
7’ x 9’EnergyStar® rated sliding glass panels
Bathroom60 feet2
10’ x 6’Fully outfitted with bathroom with separate closet compartment
Living/Bedroom140 feet2
14’ x 10’Multipurpose convertible living space
Project Prototype: Los Bloques
50 apartments in the building, each around 300ft2
45.2UF/m2
1259UF for a 300ft2 apartment
Outfitted with some of the latest sustainable technology
Eco-friendly, cheap and modern
Foldable bed to save space
Foldable table and counter
Storage compartments and shelves
10 f
eet
30 feet
Ultra-efficient insulated walls and windows
EnergyStar® appliances
Project Prototype: Los Bloques
Santiago Communes Price per m2 (UF)
Apartment Prices (UF)
Estación Central 45.20 1,259.76
Santiago 50.60 1,410.27
Nuñoa 65.60 1,828.33
Providencia 75.80 2,112.61
PROTOTYPE Financials - key financial statistics
Key Financial Statistics
Interest Rate 3.50%
Discount Rate 7.42%
Gross Margin 36.53%
Net Profit Margin 17.61%
EBITDA $0.902 m
Unleveraged NPV $0.215 m
Leveraged NPV $0.942 m
Unleveraged IRR 16.23%
Leveraged IRR 46.02%
Payback period (Years) 2.54
Net Profits $0.435 m
LONG TERM implications: an open road
Revitalize spaces in the city: convert unused industrial spaces into new low cost housing in the city/on the periphery
Expand to other segments: commercial;/office buildings
Reach scale economy and efficiency to satisfy unmet demand
Explore opportunities to integrate renewable energy generation systems into development projects
1
2
3
4
Strategy
Introducing new technology in Chile
Infiniski acquisition plan
Competition against international companies and new market entrants
Prototype
Potential migration of city center in the future
Risks and Considerations
3 m
11 m
6 m
8 m
1m10 m
Complete acquisition of Infiniski
Legal / restructuring
Acquire project site, capital, and permit
Acquire buyers / potential residents
Assemble modules on project site
Manufacture modules for project 2
LongTerm
Revitalized unused spaceOffice/commercial projects
Government “city planning” opportunitiesPartnership with renewable energy
companies
10 m8 mAcquire project site, capital, permit, buyers/residents for
project 2
3 m Design
6 m Site development / foundation
Manufacture modules for project 1
’16 ’17 ’18 ’19 ‘20 à
Proposed timelineFocus on prefabricated modular construction leads to higher project turnover and faster returns
Q&A
Num
ber o
f Peo
ple
0
75000
150000
225000
300000
Inside Vespucio Outside Vespucio Suburban1992-2002 2002-2011
Santiago City Center Demand Rising
Source: Atisba, INE
Metric Number as of 2015
Population 17,508,260
Median Age 33.7 years
Population Growth Rate
0.82%
Urban Population 89.5% of total
Urbanization rate 1.09% annual
Source: CIA Factbook, 2015
Appendix a1: infilling phenomenon - Shifting Demographics
Appendix A2: infilling phenomenon - Housing Prices in Santiago
Region of Santiago % Price Increase
Central 10.8%
Western 7.9%
Eastern 10.7%
Southern 11.7%
Santiago Apartment Price 2011-2012
Source: COCC
Housing Prices in Santiago 2013-Present
Source: Central Bank of Chile
Source: http://www.cchc.cl//centro-de-informacion/indicadores
(Thousands of units)
(Sales of Large homes in Santiago)
(Houses) (Apartments)
Appendix a3: infilling phenomenon - Shifting DemographicsDwelling density at the census district level (2011)
Apar
tmen
ts Almagro
ABC1 C2 C3 D E
Pilares
Hou
ses Socovesa Santiago
Socovesa South
Socio-economic Status
Appendix B: socovesa Product diversification strategy
ABC1:Upper class (2.5%) to upper-middle class (7.5%) (10% of the population, collectively)Monthly income: $3.5 million pesos (about USD$7,000)
C2: Middle Class (<20% of the population) Monthly Income:$1 million pesos a month (~US$2,000)
C3: Lower Middle classMonthly Income: $600 thousand pesos (about US$1,200)
D:Lower Income Class$300 thousand pesos (about US$600)
E: Lowest Income Class (10% of population) $90 thousand pesos (about US$180)
APPENDIX C1: Acquisition - Quick comparables Analysis The enterprise value for Infiniski is $ 23.2 million, which is estimated based on comparable public companies
Company Name LTM Revenues TEV/EBIT LTM - Latest EBIT Margin %
Cavco Industries, Inc. (NasdaqGS:CVCO)
619.7 18.5x 6.00%
Deer Valley Corporation (OTCPK:DVLY)
35.66 1.2x 5.80%
Nobility Homes Inc. (OTCPK:NOBH)
29.63 12.4x 10.60%
Thor Industries Inc. (NYSE:THO)
4,237.83 9.1x 7.30%
Liberty Homes, Inc. (OTCPK:LIBH.A)
87.21 -
Cavalier Homes, Inc. 108.09
Champion Home Builders, Inc.
Champion Enterprises Holdings, LLC
APPENDIX C2: Acquisition - Sensitivity Analysis for Acquisition
Multiple
11.3 12.3 13.3 14.3 15.3
EBIT Margin
5.97% 19.72 21.46 23.2 24.94 26.68
6.97% 23.02 25.05 27.09 29.12 31.15
7.97% 26.33 28.65 30.97 33.3 35.62
8.97% 29.63 32.25 34.86 37.48 40.09
9.97% 32.94 35.84 38.75 41.66 44.56
The enterprise value for Infiniski is $ 31 million, which is estimated based on comparable public companies
Appendix C3: Acquisition FinancialsThe enterprise value for Infiniski is USD 23.2 million, which is estimated based on comparable public companies & a sensitivity analysis
Acquisition Discounted Cash Flows (in UF)
Year 0 1 2 3 4 5 6 7 8 9 10Year Over Year Revenue Growth - - 50% 33% 25% 25% 20% 17% 14% 13% 11%
Total Revenues - $25,195.29 $37,792.94 $50,390.59 $62,988.23 $78,735.29 $94,482.35 $110,229.41 $125,976.47 $141,723.53 $157,470.59
Total Interest - (349.79) (743.32) (1,136.86) (1,530.40) (11,917.86) (11,568.07) (11,174.54) (10,781.00) (10,387.46) (9,233.30)
Total Cost (435,046.26) (40,675.26) (41,462.34) (42,249.41) (43,036.49) (50,209.24) (57,381.98) (64,554.73) (71,727.48) (78,900.23) (86,072.98)Current INFINISKI Operating Income 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47
Cashflows from Operations (376,417.79) 43,148.50 54,959.07 66,769.64 78,580.22 87,154.53 95,728.84 104,303.15 112,877.46 121,451.77 130,026.08 Discounted Unleveraged Cashflows (376,417.79) 40,168.03 47,628.74 53,867.10 59,016.39 60,934.63 62,306.29 63,197.71 63,668.71 63,773.10 63,559.28
Discounted Leveraged Cashflows (267,656.23) 49,878.66 57,094.92 63,076.27 67,958.89 75,960.00 77,290.15 78,054.24 78,343.99 78,221.29 77,462.88
Key FinancialsTerminal Value (UF) 2,399,005.14 NPV (UF) 201,702.20 Value of Investment (UF) 2,600,707.33 Gross Profit (UF) 578,163.74
Terminal Value (USD) $94,044,776.44 NPV (USD) $7,906,947.61 Value of Investment (USD) $101,950,581.65Gross Profit (USD) $22,664,928.34
Gross Profit Margin 37.8%Unleveraged IRR 16.1%Leveraged IRR 28.3%Payback Period (years) 6.80
Currency Conversions1 UF 25889.57 CLP1 UF 39.2 USD1 USD 660.45 CLP
Assumptions
• Model assumes no fluctuations in the US and Chilean Currency
• Current Infiniski operations will continue to ensure optimal usage of their factory and expertise
• Chile will eventually develop into a stable economy (like the US)
• New product technology will create barriers to entry that will slowly erode over the period of the investment
• Total costs include land, labor, capital, and other operating expenses
Appendix C4: Sample Acquisition Timeline
Source: Baker & McKensey (2011)
Appendix C5: Acquisition - Integration Flow Chart
Appendix C6: Acquisition – impact on socovesa
Market analysis and
business decisions
ProjectDevelopment Construction Commercial Stage After Sales
Service
Land Bank Strategy
Market Analysis Land
Identification
Preliminary Project Development
Land Purchase
Product Definition
Architectural Design
City Planning Design
Engineering Development
Project Approval by planning authorities
Socovesa Construction under sum-jump scheme
Pilot houses to be sold in shell form
Quality Control
Launch Strategy
Marketing
Dedicated Sales Force
Coordinator of customer’s financing
Post sales service
Warranties
More time unlocked for the commercial stage
Appendix C7: Acquisition – split of responsibilities
Design Eng. Permits and Approval
Site Development & Foundation
Install & Site Restoration Time Savings
Building Construction at Plant
Post-acquisition: Modular Construction Schedule
Socovesa
Time Savings
Infiniski
Design Eng. Permits and Approval
Site Development & Foundation Building Construction Site Restoration
Pre-acquisition: Site Built Construction Schedule
Source: Modular Building Institute, 2014
Outsourcing Joint venture Acquisition
Investment Cost
Lowest, BUT extremely high transportation costs
Shared Costs Highest, BUT low transportation costs
Operating Control
Relinquishment of Control of Asset(s)
Shared Control Control over the acquiree
Risk/Reliance on the other party
Reliance on supplier increases supplier power; Also increases transportation costs
Shared Risk; Lack of control over technology
Least risk to technology leakage, and able to reduce exposure to risk
Primary Driver Cost reduction, least risk Co-dependence Quickly acquire new capabilities; protect technology and realize location and experience economies
Long Term Potential
Hard to make significant changes or innovation
A temporary contract Growth in new markets
Appendix C8: Heat Map – Outsourcing vs JV vs acquisition
Key:
Most Ideal
Average
Not Ideal
Appendix C9: Heat Map – M&A Options
Merger Stock Purchase Asset Purchase
Restructuring Efforts
High Medium Medium
Typical Target Companies of the same size
Private companies/wholly-owned subsidiaries
Specific divisions of companies
Asset + Liability Changes
All automatically transferred
All automatically transferred
Assets retitled and liabilities assumed
Strengthening the Target Company
Restructure and strengthen the involved companies
Increase in funds for target company
Limited to the assets acquired
Shareholder Negotiations
High High Disposition of >50% of corporation’s assets needs shareholder approval
Key: Most Ideal
Average
Not Ideal
Discount Rate calculationChilean interest rate 0.035Corporate Tax Rate 0.24Assumed Cap Rate 9%Debt to Value Ratio 0.25Equity to Value Ratio 0.75WACC 7.42%
Permit Cost Estimates (Pesos)Assessment from regional sanitary authority 16000Request/obtain building permit 2200000Certificate of Urbanization 4200Certificate of Compliance for roads 8468Receive Connection to water services 315671Total 2544339Converted Total (UF) 98.28
Costs Projections (monetary units in UF)
UF/m2 Cost of terrain 30
Terrain Area (meters) 162.58
Terrain Area (sqft) 1750
Project terrain cost (UF/m2) 4877.4
Apartment size (sqft) 300
Apartment size (meters) 28.7
Number of apartments 50
Estimated Construction costs 700
Construction Costs 35000
Permit Cost 98.29
Total Costs 39975.69
Debt 9993.92
Key FinancialsNPV (UF) 5,482.45 EBITDA (UF) 23,012.54 Net Profit (UF) 11,094.68 EBITDA (USD) 902,116.82 NPV (USD) 214,918.06 Net Profit (USD) 434,923.63 Leveraged IRR 46.02%Unleveraged IRR 16.23%Gross Margin 36.53%Net Profit Margin 17.61%Payback Period (years) 2.54
Discounted Cash Flows (in UF)
Occupancy Increase 0 0.4 0.2 0.2 0.2 0
Year 0 1 2 3 4 5
Revenue - 25,195.29 12,597.65 12,597.65 12,597.65 -
Cost (39,975.69) - - - -
Interest Expense - (349.79) (393.54) (393.54) (393.54) (10,387.46)
Cashflows from Operations (39,975.69) 24,845.51 12,204.11 12,204.11 12,204.11 (10,387.46)
Discounted Unleveraged Cashflows (39,975.69) 23,130.39 10,577.33 9,847.17 9,167.40 (7,264.15)
Discounted Leveraged Cashflows (29,981.77) 23,456.03 10,918.41 10,164.70 9,463.02 -
Appendix D1: Prototype Financials
Indicator Chile OECD High Income Country Avg.
Procedures (number)
13 12.4
Time (days) 152.0 152.1
Cost (% of value) 0.6 1.7
Building Quality Control (0-15)
13.0 11.4
Chile Construction Consideration vs. OECD Averages
Appendix D2: Dealing with Construction Permits
Source: World Bank Group – Doing Business in Chile 2016
Appendix D3: Timeline & Costs of construction permits
Source: World Bank Group – Doing Business in Chile 2016
Location: Ruta 68, kilómetro 48, Curacaví
[Around 50 mins away from the city center]
Volume: Able to manufacture 15-20 small 300ft units at once,
a warehouse that could store 50% of the production
Just-in-time delivery to match module manufacturing
schedule with installation rate
Appendix D4: infiniski factory & Inventory management
Appendix E: Long term impact – office segment to take off In 2017