China Puti Becoming a State-owned New Town Developer

Transcription

1 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 China New Town Development 1278.HK China Puti Becoming a State-owned New Town Developer CDBIH subscription CDBIH, a wholly-owned offshore subsidiary of CDB Capital (the only direct equity investment platform of CDB) will strategically subscribe for 5.35 bn CNTD s new share at HKD 0.27 and is expected to become its largest shareholder (54.32%). CDBC intends to establish CNTD to be its sole listed urban land development platform and transform the Company into the PRC s leading, largest integrated new town developer and operator in China. Disposal of non-core assets CNTD will dispose non-land assets to its major shareholder SREI, at a total consideration of RMB 2.07 bn, of which RMB 1 bn is the consideration for the Disposal Assets and RMB 1.07 bn is the amount of Loans repayable. And it will be paid in cash in 5 installments within 24 months after the CDBIH subscription. Such set of assets are loss making historically Reborn in the subscription Become focused in primary land development as non-core assets will be disposed. New financing tools from CDBC. More advantageous position in negotiating land sales timeline, share of interest, as well as new project acquisition with local government. Net-cash position after subscription Net-cash position of over RMB 1.8 bn after subscription from net-debt RMB 2.8 bn 1H13. Mostly due to over RMB 3 bn bank loans on balance will be disposed together with the non-core assets. Subscription and disposal consideration boost cash balance to RMB 1.89 bn, compares to the RMB 0.34 bn cash 1H13, which will fuel the land sales in Wuxi Hongshan Project, and open up opportunity for project acquisition. Accelerated Wuxi project, initiate with BUY We expect CNTD becomes focused in primary land development. Both accelerated sales schedule and higher share of sales are facilitated by the CDBIH s subscription. Land sales in Wuxi Hongshan project will be able to start shortly after subscription. And the sales of remaining land parcels in Shanghai Luodian are expected to conclude in 2 year. Initiate with BUY, target price HK$ 0.93, which translate to 40% discount to NAV after the subscription. RMB million FY11A FY12A FY13E FY14E FY15E Revenue ,355 2,564 3,620 Operating profit Net Profit EPS (RMB cent) P/E (x) N/A Dividend Sources: Bloomberg, CIRL estimates Rating Buy Initiation Target Price Company Report 22 Oct 2013 Shawn Yang xiaoxia.yang@cinda.com.hk (852) Trading data 52-Week Range (HK$) 3 Mth Avg Daily Vol (m) No of Shares (m) Market Cap (HK$m) Major Shareholders (%) Auditors Result Due Company description 0.92/ ,498 3,329 Shi Jian (32.78%) ERNST & YOUNG FY13: Feb 2014 China New town Development is a non state-owned new town developer in the PRC, established as the commencement of their Luodian Project in Shanghai in CNTD focuses on planning, managing and operating new towns in China. It listed in Singapore in 2007 and subsequently in Hong Kong through introduction. Price chart HK$ HK$0.93 Current price HK$0.74 Upside +26% Page 1 of 13

2 The CDBIH subscription In 10 Oct. 2013, the Group has announced that transaction with China Development Bank (CDB). CDBIH, a wholly-owned offshore subsidiary of CDB Capital will strategically subscribe for 5,347,921,071 CNTD s new share at HKD 0.27 and is expected to become its largest shareholder (54.32%). The subscription of CDBIH will not only unleash the full potential of the current CNTD, but also equip it with new gear (financing tool, negotiation power, etc.) and potentially inject it with their projects. Exhibit 1: Prospective shareholding structure after the deal announced on 10 th Oct 2013 Source: CIRL, CNTD presentation China Development Bank and CDB Capital CDB is the fifth largest commercial bank in China and the largest strategic policy bank of China. It is a state-owned strategic financial institution, which provides medium-to-long-term financing facilities and owns the largest portfolio in infrastructure and industrial development, bond issuance business in the country. CDB mainly engages in loans and investment projects by supporting strategically-favored sectors with lending at favorable terms. CDBIH is the core investment platform of CDBC focusing on overseas investment which is the only direct equity investment platform of CDB. CDBC which is wholly owned by CDB, owns the only authorized license in managing RMB-denominated investment in Chinese banks. It actively involves in new town development, industrial development project, overseas investments and fund management. CDBIH s intention for the subscription After the completion of subscription, CDBIH will be the largest shareholder of CNTD (54.32%). CDBC intends to establish CNTD to be its sole listed urban land development platform and transform the Company into the PRC s leading, largest integrated new town developer and operator in China. Page 2 of 13

3 Disposal of non-core assets According to the announcement, a bundle transaction has to be made that CNTD dispose non-land assets to its major shareholder SREI. The total consideration of RMB 2,069,832,594, of which RMB 1,003,106,105 is the consideration for the Disposal Assets and RMB1,066,726,489 is the amount of Loans repayable. And it will be paid in cash in 5 installments within 24 months after the CDBIH subscription. Such set of assets are loss making historically. Exhibit 2: List of Disposal Assets and the consideration/loan repayable involved (RMB) Name Interest Assets Consideration Loan repayable 1 Chengdu Real Estate 100% Chengdu Albany Oasis Garden Project -802, ,562,937 2 Wuxi Hongqing 100% Phase 2 of Jiangnan Richgate -7,674, ,757,197 3 Wuxi Yingshuiting 100% Hotel management 43, Wuxi Xinrui Hospital 60% Wuxi Branch of Shanghai Ruijin Hospital 49,702, Wuxi Hongshan Virescence 90% Meteorite Park 355,770,684-49,424,152 6 Wuxi Hongshan Shop, hotel, except land and cultural street 197,501,014 7 Malaren Sports 95% Golf course 6,735,915-27,118,631 8 Malaren Hospital 100% Malaren Hospital development 189,571,208-75,855,324 9 Luodian Newco 72.63% Centres, hotel, Silicon Valley, golf course 49,479, ,242, Malaren Tourism 90% Tourism consultation and Tourism 2,851,827-1,400, Malaren Hotel Management 100% Hotel management 4,986, , Malaren Investment Management 100% Investment consultation and management -12,831,805 10,153, Hongshan Commerical 100% Commercial property management -2,771,372 3,169, Shenyang Country Club 100% Club operation -8,293,777 10,530, New Town Procurement 100% Wholesale etc. 23,990, ,397, New Town Trading 100% Trading -5, Malaren Art 20% Exhibition 200, Others Right in park and hotel in Lixiang 154,652,555 0 Sum: 1,003,106,103 1,066,726,489 Source: CIRL, CNTD presentation Termination with Zennon and NWSI According to the MOU made on 16 th May 2013, Zennon and NWSI will subscribe CNTD s share and aggregately holding 6.1% of interests after CDBIH s subscription. However, based on the recent announcement, the negotiation on subscription was terminated. Page 3 of 13

4 Reborn in as a state-owned new town developer Clean Assets owned A batch of the group s assets is to be disposed in accordance with the subscription of CDBIH. Such set of assets includes not only the non-core golf course, hospitals, etc. but also the residential properties under development, commercial properties and hotels, which are related to its land/properties development. This shows CDB s intention of forging CNTD into a model new town developer. The remaining assets are as followed: 3 new town projects 1) Luodian (in Shanghai): Started in 2002, Luodian Project matured and became the biggest contributor of the group s revenue. It situated in Baoshan District, Shanghai, and was part of Shanghai Government s one city, nine towns plan. The whole project takes 6.8 sq. km, and is 96% completed. Around a quarter of the land remains available for sale, and the sale is expected to conclude by The total cost planned for Luodian is around RMB 6 bn, among which 70% (RMB 4.2 bn) would be relocation cost. In 2012, 3 parcels of land (125,604 sqm) were sold, amounting RMB 1,047 mn. In Mar 2013, another parcel with the area of 0.11 sqm was sold at RMB 1.35 bn. 2) Hongshan (in Wuxi, Jiangsu): Hongshan located is Wuxi near the High-Tech industrial park, the framework agreement of the project is established in Currently 82% of relocation work has been completed; the sales process is expected to last up to However, the relocation cost remains to be settled with the local government before the land can be list for sale, which is a major part of the development cost. Yingshuiting Hotel has been completed during the year which attracted good public attention. In 2012, a parcel of 62,145 sqm land was sold for RMB 75 mn. 3) Lixiang (in Shenyang, Liaoning): Lixiang located in Da Hun Nan District Shenyang, which is planned to be Shenyang s new administrative, cultural and transportation center. Also, CNTD manage to advertise Lixiang by holding golf events. However, the development of the project is still at its early stage (45% completion), the sale is expected to complete by Page 4 of 13

5 Exhibit 2: Asset portfolio Project: Shanghai Wuxi Shenyang Luodian Hongshan Lixiang CNTD's Interest: 72.63% 90.00% 90.00% Site Area (sq. km): Completion Rate: 96% 67% 45% Planned Population: 50,000 80, ,000 Total Saleable Land (mn sqm): Remaining Land for Sale (mn sqm): Latest selling price (RMB/sqm): 12,270 3, Sales completion Timeline Up to 2015 Up to 2025 Up to 2038 Source: CNTD presentation, CIRL Exhibit 3: Locations of the 3 projects Shanghai Luodian Wuxi Hongshan Shenyang Lixiang Source: CNTD presentation, CIRL Exhibit 4: Assets left from disposal other than the land in the 3 new towns Name: Market value as of 1H13 (RMB mn) Interest Command Center in Luodian % Command Center Hongshan % Command Center in Lixiang 12 90% The proposed development site of Hongshan New Town Hotel % Source: CNTD presentation, CIRL Page 5 of 13

6 Net-cash position after subscription The RMB1.14 bn (HKD 1,443,938,689) subscription price for CDBIH and the one fifth of the total RMB 2.07 bn consideration for disposed assets (assuming 5 installments are evenly paid and the first installment is immediately paid after disposal) will immediately boost the group s cash balance with RMB 1.55 bn, compares to the RMB 0.34 bn cash 1H13. Also as the most of the interest bearing loans are accounted for the disposed assets, the over RMB 3 bn bank loans on balance will also be considered disposed, resulting a net-cash position of over RMB 1.8bn. The proposed use of proceeds from subscription and disposal The total proceeds from CDBIH subscription and assets disposal amounting approximately RMB 2.15 bn. According to CNTD s planning: 17% will be used to invest on the existing Luodian and Hongshan projects, including trade payables owed by Hongshan project. This will enable the immediate rolling of Wuxi Hongshan Project. We believe that the whole development cycle of Hongshan project will be accelerated by 2~3 year from its original completion time in % of the proceeds will be dedicated to seek opportunities for new town project acquisition. The remaining will be allocated to general corporate funding of CNTD Page 6 of 13

7 New financing source from CDBC CDB is dedicated to support urbanization and new town development. Roughly 50% of the loan issued by CDB each year is designated to urbanization. On-shore CDBC will be able to co-invest a stack no less than that of CNTD. Moreover, CNTD can secure both loans with better leverage and at favorable terms. The finance cost of CNTD is 8% on average, incremental financing can reach the cost of more than 12%, while CDB can secured long-term financing at 6~7%. Financing leverage can reach up-to 3 times the invested capital. Exhibit 5: Potential financing leverage of CDB of a RMB 500mn investment by CNTD Source: CNTD presentation, CIRL Page 7 of 13

8 State-owned status after the subscription Better bargaining power with local governments will be granted by the state owned status which will ensure more favorable terms in the sharing of the sales, as well as accelerate the schedule listing for sale of existing land parcels. For example, one of the projects under CDB, CDB enjoys a guaranteed 12% return on investment in the JV from local government or 80% of the land sales whichever is higher, while the sales proceeds sharing ratio is 66% for the latest land sale in Luodian. Also business network of CDBC will facilitate a favorable operating environment for CNTD in securing contractors/suppliers as well as new projects. Potential asset injection Last but not the least, CDBC is running 26 projects at present. Potentially, some of these projects can be injected to CNTD. Exhibit 6: Projects under CDB Capital Source: News, public information, CIRL Page 8 of 13

9 Risks Capital intensive in nature Hugh amount of relocation cost has to be settled early in a primary development project, any delay will very likely further increase this cost. Revenue will come in years after the completion of relocation. This creates a heavy financial burden on initial deposition and interest cost and will also drag out the development project. Uncontrollable land sales Land sales are scheduled by local governments, which are ultimately affected by the national policy. CNTD can only advise but not decide the sales time; therefore the company has no control over the timing, which makes its business lack of necessary visibility. Limited policy head-wind CNTD suffers limited policies tightenings as primary land development is the cornerstone of urbanization, which is set to be the major driver of Chinese economy the planning of the Chinese Government. Expanding the pilot of property tax, Enforcing New National Five Rules will influence the real estate developer s sentiment to bid lands, the rising land price may not sustain. But as the government is pushing more land for sale, primary land development will be encourage as another method to combat ever-rising property price. Initiation - BUY We view the subscription from CDBIH will make CNTD focused in new town development. The State-owned identity and financing tools from CDBC will great offset negative impact from lack of business visibility and capital intensive nature, which offers competitive advantages in this industry of high entry barrier. Solid Luodian project sets a good track record for CNTD. We believe CNTD will be entrusted with more privileged projects as well as gaining more shares from the land sales proceeds. Initiate with BUY, target price HK$ 0.93, which translate to 40% discount to NAV after the subscription. Page 9 of 13

10 Exhibit 7: Income statement Income statement (assuming subscription on 31 Dec 13) Year to Dec (RMB '000) FY11A FY12A FY13E FY13E FY14E FY15E Revenue 640, ,954 1,355,336 1,355,336 2,564,194 3,620,166 Gross profit (reported) 336, , , , ,309 1,127,484 EBITDA (149,110) 219, , , , ,886 Depreciation (58,566) (62,602) (70,849) (70,849) (12,967) (13,657) EBIT (207,676) 157, , , , ,229 Net interest income (31,089) (75,108) (68,691) (68,691) (8,408) (9,248) Associates (891) Exceptionals/others (155,456) 0 0 Profit before tax (239,656) 82, ,131 76, , ,980 Tax expenses 6,476 (36,657) (103,280) (34,114) (251,097) (363,046) Minority interest 32,453 (31,292) (88,164) (19,442) (143,100) (206,900) Net profit (continued operating) (200,727) 14,441 40,687 23, , ,034 Dividends Source: CIRL, CNTD presentation Exhibit 8: Balance Sheet Balance sheet (assuming subscription on 31 Dec 13) Year to Dec (RMB '000) FY11A FY12A FY13E FY13E FY14E FY15E Cash & equiv 537, , ,737 2,180,875 2,340,571 2,580,018 Land development for sale 4,998,936 5,177,168 5,186,184 5,186,184 6,742,039 8,764,651 Properties under development for sale, prepaid land lease 1,791,092 2,388,269 2,107, , , ,000 Trade receivables 65, , ,900 2,037,438 2,110,030 1,810,083 Other current assets 76, , ,355 38,748 55,722 76,717 Fixed assets 1,324,933 1,518,089 1,748, , , ,491 Investment properties, associates 1,062,864 1,146,682 1,140, Intangible assets, etc. 759, , , ,878 47,608 46,767 Total assets 10,616,030 11,761,087 11,719,899 10,207,124 11,816,871 13,839,727 Account payables 2,086,912 2,629,615 2,221,591 2,146,591 2,790,568 3,627,739 Deffered income from land development 594, , , , , ,794 Short-term debt 757,243 1,235, ,696 61,070 83,595 55,730 Other current liabs 1,225,125 1,581,853 1,848,151 1,823,041 1,968,884 2,126,395 Long-term debts 2,383,100 1,948,458 2,507, , , ,460 Deferred tax 21,151 25,816 35,422 35, , ,204 Other long-term liabs 521, , , Total liabilities 7,590,384 8,520,540 8,328,821 4,937,130 6,190,674 7,134,321 Share capital 2,801,180 2,980,809 3,129,395 4,863,318 5,192,034 6,187,961 Reserves (312,609) (310,619) (337,718) (524,840) (560,315) (667,793) Shareholders' equity 2,488,571 2,670,180 2,791,676 4,338,478 4,631,719 5,520,168 Minorities 537, , , , ,478 1,185,237 Total equity 3,025,646 3,240,547 3,391,078 5,269,994 5,626,198 6,705,405 Net cash (debt) -2,602,956-2,749,818-2,486,808 1,869,021 2,089,787 2,412,828 Source: CIRL, CNTD presentation Page 10 of 13

11 Appendix: Quotes form Not-rated report issued on 02 Sep 2013 CNTD, the new town planner Primary land development China New Town Development (CNTD) engages in planning and developing large-scale (at least 6 mn sqm) new town projects in suburbs of major cities in China, which enhance the land value and turn the bare land into valuable land resources. Usually, a new town project is initiated by local government by setting location, size for feasibility study and producing a master plan. CNTD secures the mandate then operates the project under a majority-owned joint venture with the local government. Then its key business cycle starts rolling: Core business cycle From Bare Land Then Land Preparation Planning, obtain financing, relocation and resettlement of residents at CNTD s cost. Formation of infrastructure and public amenities/commercial properties development Developed Land Parcels Ready for sale (the local governments retain the title to the land and manage the selling process). And CNTD receives a portion of the sale (approved by the government authority), these proceeds is the major source of revenue For primary land development, revenue from land sale can come in as fast as a year after the project agreement has been signed. However, for property developers, contract sales from a project can only be booked after it has been delivered (over 2 years). Also, the land of a property project has to start developing within 2 year and the developer suffers heavy LAT. However, a primary land development has no time limit and involves no LAT. Primary land developer like CNTD can steadily enjoy the appreciation of their effort as the project matures. Normally, a new town cycle will take about 15 to 20 years. Page 11 of 13

12 Riding on the rising land price In Luodian project, after 11 years hard work, the land price in the area has grown 500%. In FY12, CNTD recorded 4 pieces of land sold (1 in Hongshan, 3 in Luodian), ultimately resulting RMB 935 mn revenue booked, which is a 46% yoy increase. CNTD achieved a turn from loss to profit with RMB 163 mn operating profit up from a RMB 190 mn loss in FY11 as only 1 parcel of land was sold in 2011 sicne the company has no control over the schedule of land sales. Exhibit 9: Land sale price achieved in Luodian (RMB 000/mu) Source: CNTD presentation, CIRL Other players in primary development Primary land development is not an unchartered land. The majority of the players are local state-own UDICs (Urban Development Investment Corporation). Property developers also took part in the development as they were aiming to obtain the land that developed at low cost. However, due to the capital intensive nature and lower profit margin of the business, their involvements are limited. As local governments currently are lack of funding, more and more private companies like CNTD and property developers taking their own shares. Property developers who involves in primary land development, normally seek property developments in the same piece of land. Although they may obtain the land at a lower cost, it would take them additional several years after the completion of primary land development to gain the first batch of revenue. For example, OCT East of the OCT Group (parent company of 3366.HK): it took the company 5 years after having obtained the land use right to start pre-sell) While the majority of the investment of primary land development is the relocation cost (~70% according the CNTD projects) that has been settled at the very beginning, these type of projects bear an even heavier financial burden, as well as other risks. CNTD usually will not acquire land use rights in their new town projects unless intend to develop properties. Besides only a few residential properties and the commercial properties it manages (hotel, etc.). CNTD also enters into agreement with local government to build, manage and operate public amenities. Page 12 of 13

13 Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Antony Cheng Research Director (852) antony.cheng@cinda.com.hk Hayman Chiu Senior Research Analyst (852) hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) kenneth.li@cinda.com.hk Lewis Pang Research Analyst (852) lewis.pang@cinda.com.hk Susanna Chui Research Analyst (852) susanna.chui@cinda.com.hk Shawn Yang Research Analyst (852) Xiaoxia.yang@cinda.com.hk Analyst Certification I, Shawn Yang hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 13 of 13