SINGAPORE (Aug 26): With or without the ongoing US-China trade war and a global economic slowdown, the Middle Kingdom continues to press ahead with its Greater Bay Area plans, which would eventually lead to the area gaining developed-market status. Banks, developers and tech companies are all on board. At least three listed companies — two in Singapore and one in Hong Kong — have articulated a GBA strategy that should reap earnings for shareholders.
In June this year, HSBC Holdings launched a US$880 million ($1.2 billion) fund focused on supporting fast-growing technology companies in the GBA. Guangdong alone is home to more than 45,000 high-tech firms, the banking behemoth says.
“HSBC’s GBA+Technology Fund will provide senior debt financing to high-growth companies in sectors including e-commerce, fintech, robotics, biotech and healthcare technology. These firms will have demonstrated the viability of their business model and will likely have received backing from venture capital or private equity firms, but will still be at an early stage in their development,” HSBC says in an announcement on June 11. The new fund will focus on innovative companies in GBA in particular, as well as being available to firms throughout mainland China.
Two years ago, Oversea-Chinese Banking Corp group CEO Samuel Tsien had already recognised the potential of GBA and articulated a GBA strategy. Last year, he indicated that by 2023, GBA would contribute $1 billion in profit before tax to OCBC. This year, he reiterated the $1 billion target. In FY2018, OCBC reported a profit before tax of $5.55 billion, with $603 million from GBA, and net profit of $4.49 billion.
The GBA comprises Hong Kong, Macau and nine cities in Guangdong province. They are Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing, which the Chinese government defines as the nine Pearl River Delta municipalities.
A blueprint announced by the Chinese government in February outlined five main goals: (1) building a dynamic world-class city group, (2) becoming a global international technology and innovation hub, (3) providing support for the implementation of the Belt and Road Initiative, (4) deepening co-operation between mainland China and Hong Kong and Macau in the Qianhai, Nansha and Hengqin development zones, and, (5) building a quality living environment that is suitable for residents as well as business and tourism.
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The blueprint has both short-term as well as long-term goals. The aim is for GBA to become a world-class bay area and world-class city group by 2022. In the longer term, GBA should meet first world standards for innovation, international competitiveness, commerce and liveability by 2035.
To achieve this, the Chinese government is looking at facilitating a seamless movement of goods and services. Hong Kong’s tax regime has been mooted as the GBA’s tax code.
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Not all positive
The western press such as The Economist has argued that a closer union with China may not be what Hong Kongers want. Despite the economic opportunities in the region, Hong Kong natives may worry that the special administrative region will end up like any other Chinese city. Furthermore, since June, Hong Kong has been rocked by massive protests over an extradition bill that has been mothballed and unhappiness among its youth over social issues such as housing and the loss of its unique freedoms.
Separately, Fitch Ratings expects a slowdown in China from the trade war. Trade-dependent Asia-Pacific economies are likely to be the most impacted. “The markets likely to be most affected — Hong Kong, Singapore, Taiwan and Korea — are also among those that we generally assess to have the strongest underwriting standards and risk controls in the region. Most banks in these markets are also highly rated, suggesting that they have more headroom to absorb pressure on their viability ratings than would be the case in some markets where bank ratings are lower,” Fitch says in an Aug 20 ratings update.
According to the report, a severe economic slowdown in China would affect Asia-Pacific banks through three main channels — direct losses on mainland exposure, broader stress from a weaker regional economic environment, and market risks from a negative shift in global investor sentiment. “Banks in trade-dependent developed markets would face the most pressure to their credit profiles, but also have the largest buffers against shocks,” Fitch says.
In the event of a prolonged trade war, Fitch estimates that Chinese GDP growth would trough at 3.4% in CY2020, compared with a base case of 5.9%, before recovering to 4.2% in 2021 (base case: 5.8%). Fitch also points out that in this scenario, Singapore would report negative GDP growth in CY2020 of more than 3%.
Connectivity, development offer opportunities
Businesses, on the other hand, continue to see opportunity in GBA. The Chinese government has constructed infrastructure to spur economic growth. As the US opts for protectionism and containment, China is going all out for connectivity, integration and innovation in the area.
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“If I take the high speed rail from Hong Kong, I reach Guangzhou in 45 minutes, Shenzhen in 20 minutes. A lot more bridges are being built, and with inter-city rail, travelling between the GBA cities will be truncated to around 1½ hours,” says Lucas Loh, president, China, of CapitaLand. “The bridges connecting Zhongshan to Shenzhen have cut travelling time. From Shenzhen airport, you’re in Zhongshan in 20 minutes. Without the bridge, it takes an hour.”
Loh, who is studying the Chinese government’s blueprint for GBA seriously, is clearly bullish about the region’s prospects. CapitaLand has some 42% of its assets in China, and he estimates that as much as 10% of its China equity could be in GBA.
“The GBA will power this economic region. Hong Kong is going through some uneasiness, but once the dust settles and everyone comes together, this region will offer a lot of opportunities,” Loh says. With economic growth comes higher GDP per capita, and the need for homes, offices, business parks and tech parks, among others.
“In Guangzhou, with the merger with Ascendas-Singbridge, we’ve taken over Guangzhou Knowledge City, which will -offer big development potential for us,” Loh says. On June 30, CapitaLand completed the merger with Ascendas-Singbridge. “Size-wise in terms of landbank, GBA has the greatest gross floor area.”
Urban renewal: Capital efficient, productive
In 2011, CapitaLand and the Guangzhou Municipal Liwan district government signed a memorandum of understanding for CapitaLand to provide assistance on the urban renewal of Datansha Island. At the same time, Ascendas (before it merged with Singbridge) signed a separate joint-venture agreement with Guangzhou Knowledge City Joint Venture Co to develop a 30ha integrated business park in Knowledge City. The business park is being developed in two phases over 10 years.
At Datansha, CapitaLand has launched its first residential project, which is 50% sold, according to Loh. “We’re preparing the land for project No 2 and 3 and we’re building some facilities such as schools and roads, as promised in the agreement. This [infrastructure] is part of our cost and is calculated as part of the land price,” he explains. All in — for the land, roads and schools — the cost works out at around RMB13,000 ($2,545) to RMB14,000 psm. Meanwhile, residential units are selling at RMB47,000 to RMB50,000 psm.
Before analysts rush to work out Capita-Land’s fat margins from Datansha, they should be aware that only the first few projects provide good margins. “This is a whole island and the margin will get thinner and thinner, but we will continue to receive [cash flow] from the projects when they complete,” Loh says.
For overseas residential developments, Singapore companies can only book earnings when the projects are completed, and units are handed over to their buyers.
For urban renewal projects in China, developers can pay progressively for the land. “As we take possession of the land, we pay, which is good for capital management. Secondly, we already lock up one big part of land (through the agreement), which is good landbanking,” Loh says. “Urban renewal projects are considered infrastructure projects because they consist of compensation for resettlement; hence, we can borrow money from the bank for the acquisition of this land.”
Developers have to use their own equity to finance purchases under the government land sales programme in China, as they are not allowed to use debt, according to Chinese regulations. “This project is capital efficient. Although Datansha has a long gestation period, I can use bank borrowings, which plays a part in capital productivity as I pay only when I take possession of the land. And the margin is not bad,” Loh elaborates.
The government has built three subway stations on the island, which is just a 20-minute journey away from Guangzhou’s current CBD. Think of Datansha as Bukit Timah or Bishan rather than Woodlands, Loh suggests. Datansha was part of old Canton, where goods were loaded and unloaded from junks, much like Clarke Quay in the late 19th and early 20th centuries.
“There are a lot of other areas where the local governments are talking to us about urban renewal. So, we are identifying a few other opportunities. The urban renewal model will be a very capital-efficient model to continue with, giving us good margins and a landbank and yet not [making us] overly committed in terms of capital,” Loh says.
CapitaLand’s China unit is cash generating. In 2QFY2019, China earnings before interest and tax rose 10.6% y-o-y to $640.8 million, or 50.9% of total Ebit. In 1HFY2019, China Ebit rose a marginal 2% y-o-y to $8792.7 million. CapitaLand’s Ebit in 1HFY2019 of $2.06 billion was 5.8% less, owing to lower contributions from asset recycling, but was partially mitigated by higher contributions from the US and Europe. CapitaLand’s profit after tax and minority interests for 1HFY2019 fell 5.3% y-o-y to $875.4 million. It fell 4.2% y-o-y to $579.8 million in 2QFY2019, due mainly to a one-off transaction cost of $36 million incurred for Ascendas-Singbridge in 2QFY2019. Ascendas-Singbridge will only be consolidated in the profit and loss statement from 3QFY2019.
“We generate cash,” Loh confirms of the developer’s China business. “I would say we use the cash more efficiently than before, and are putting the cash to more productive use.”
From 3QFY2019, RMB18.3 billion worth of residential properties comprising 7,300 units will be progressively handed to their new owners. About half of this amount, or RMB9 billion, will be recognised in 2HFY2019.
CapitaLand has said that a 1% depreciation in the renminbi is expected to impact its profit and loss by 0.3% and balance sheet by 0.6%. Since the start of the year, the currency has weakened by just 0.222% against the Singapore dollar, and both currencies have weakened in tandem against the US dollar.
Playing the long game
In a KPMG survey before the current unrest in Hong Kong, 80% of respondents were supportive of the GBA initiative, and 90% believed it would be positive for China. Respondents believed sectors that would benefit most were trade and logistics, followed by financial services, R&D and professional services.
For all the positives, Fitch warns that in a worst-case scenario, Singapore banks will be affected, although their exposure is to lending to top-tier corporations, for short-term trade loans and for liquidity placements with major Chinese banks, which are typically lower risk, but would still be tested by a severe China slowdown. “We recently revised the operating environment score for Singapore’s three major banks to ‘aa-’/negative to factor in their growing exposure to China and other Asian emerging markets, many of which are likely to be affected by a China slowdown,” Fitch says.
China plays the long game, and by the time GBA reaches developed market status in 2035, the trade war could turn out to be just a skirmish or a momentary setback in GBA’s long march to the first world.
