SINGAPORE (May 20): On May 15, City Developments announced it had entered into agreements to invest in a 24% equity stake in Sincere Property Group, a stressed mainland Chinese developer, for RMB5.5 billion ($1.1 billion). The transaction is subject to approvals and other conditions, and expected to be fully completed in 4QFY2019. This investment will make CDL the largest investor after Sincere’s founder and chairman, Wu Xu. CDL will have board representation and the right to key decision-making.
The investment amount of RMB5.5 billion will comprise a share subscription and a four-year interest-bearing loan, the allocation of which is subject to adjustments. The debt-and-equity split is not disclosed. As at March 31, CDL had extended RMB526 million in loans to Sincere. These loans boosted CDL’s interest income by 60.9% y-o-y to $21.89 million in 1QFY2019.
Sherman Kwek, group CEO of CDL, says: “This deal is still pending several conditions precedent. One of the major shareholders is Greenland [Hong Kong Holdings], with a 40% stake. Greenland’s stake will be pared down to below 20% because it involves Mr Wu’s buying a stake from Greenland.”
At the same time, CDL has entered into an agreement with Sincere to acquire a 70% stake in Shanghai Hongqiao Sincere Centre (Phase 2), a commercial property in Shanghai’s Hongqiao CBD, for RMB 1.2 billion, or about RMB49,000 psm. The Hongqiao property has a gross floor area (GFA) of 35,739 sq m, comprising 11 blocks — two are serviced apartments and nine are office buildings. The committed occupancy rate of the office buildings is 50%, with another 20% to 25% under negotiation. Kwek says the property should see a committed occupancy rate of 90% in the next six to eight months. The Hongqiao acquisition will be completed in 3QFY2019 and its stabilised net operating income yield is estimated at 4% a year.
The investments in Sincere and Hongqiao Property will be funded through internal cash resources and credit facilities.
Greater exposure to China
Kwek says the transaction is transformational for CDL. The group’s exposure to China by asset size rises from 9% to 15%, and China overtakes the UK as its largest foreign market. “We anticipate China will keep growing because Mr Wu has a sales target of RMB100 billion in the very, very short term,” he says. Sincere’s contracted sales grew at a compound annual growth rate of 47%, from RMB9.9 billion in 2016 to RMB21.3 billion in 2018. As at March 31, it had pre-sold RMB24 billion worth of property. Gross margins for development projects are more than 20% and net margins range from 8% to 9%.
“It has always been my dream to invest and partner with a Chinese developer and we’ve looked at listed and unlisted developers. We came very close [to investing in one] six years ago, but that deal didn’t go through,” he discloses. “When this transaction closes, we will have 24% of Sincere and we look forward to jointly managing the company.”
The investment into Sincere expands CDL’s presence in China from three cities to 20. It also gives CDL access to a pipeline of 70 development projects and a landbank of 12.6 million sq m, with a gross development value of RMB130 billion.
In addition, Sincere owns by itself and through partnerships more than 15 business parks, which are either under develop-ment or in operation, with a total GFA of more than five million sq m. Sincere also owns and operates 14 retail malls with a GFA of 700,000 sq m; two serviced residences with 536 apartments; and five hotels with 1,400 rooms.
To be sure, Sincere is in need of capital. Its gearing ratio is at around 200%, and a condition of the investment is for gearing ratio to remain below 250%.
The initial pro forma impact to CDL (for illustrative purposes) is mildly dilutive as reporting standards align. The company uses historical cost accounting and depreciates its investment properties whereas Sincere uses a fair-value approach to its investment properties. Because of the reversal of revaluation gains and depreciation, earnings per share of 59.9 cents for FY2018 falls to a pro forma 57.3 cents. CDL is investing in Sincere for future growth, however, and as earnings accrete, both EPS and net asset value should rise.
There is no impact on CDL’s FY2018 NAV of $11.07. As at March 31, NAV stood at $11.32 a share, boosted by earnings growth.
Earnings boosted by stronger margins, divestment
For 1QFY2019, CDL announced a 133% surge in profit after tax and minority interest to $199.56 million. Patmi growth was boosted by strong profit margins for development projects recognised in the first quarter and the realisation of a $144.3 million pre-tax gain from the divestment of Manulife Centre, in connection with the second Profit Participation Securities (PPS) structure developed in 2015.
Earnings were also aided by higher rental income from recently acquired properties, including Aldgate House and 125 Old Broad Street in the UK, Central Mall (Office) as well as Le Grove Serviced Residences, which re-opened in July 2018. For residential development, CDL booked revenue and profits from Gramercy Park, New Futura, The Tapestry, Whistler Grand, South Beach Residences as well as overseas projects such as Hong Leong City Center in Suzhou and Hongqiao Royal Lake in Shanghai.
The company’s gearing ratio stood at 36% as at March 31 — without factoring in any revaluation gain as CDL adopts historical cost accounting — and is likely to rise to a pro forma 41% after the Sincere transaction. At close of trading on May 15, CDL shares fell 14 cents to $8.54, and are trading at 0.75 times book value.
