High-margin financing business born from a crisis

FIRST Sponsor Group is not only the first Singapore-listed developer that disburses loans instead of borrowing, but it may also be the only developer with net cash post-IPO - "which is unheard of", said its CEO Neo Teck Pheng.

This has been made possible with the stunningly high-margin property financing business in China - one that the group stumbled upon following a crisis in 2008. The crisis stemmed from a fraud involving a Hainan hotel that it was acquiring, Mr Neo told BT.

Back then, First Sponsor was in the midst of acquiring Hotel Sofitel in Hainan with the help of a reputable Beijing law firm. Since it was a strata-titled hotel, the vendor - a developer - proposed selling the hotel in five tranches progressively to First Sponsor. But after First Sponsor completed the acquisition of the first tranche, the second tranche didn't come through.

"The lawyer did a check and got a fright," Mr Neo said. "Earlier on, the titles were all clean. Now the remaining assets all have imperfect titles - either with mortgages or caveats put in by creditors. The developer had bribed the property bureau in Hainan and got the records fudged."

Stuck between a rock and a hard place, Mr Neo said that he pushed through the deal by approaching the creditors of this developer, which included the banks, leasing companies and lending companies, to sell the remaining tranches to him, lift the lien and transfer the titles. For those tranches that he could not acquire directly, he had to go through the public auctions.

It was during this process however that he came across the entrusted loan business in China. "That was how I found my CEO for this business - from one of the leasing companies. This person, who now works for me, was giving me a hard time," he said.

There were initial doubts about this business. "To the independent directors (of Millennium & Copthorne Hotels plc) sitting in London, they couldn't understand why this was such a high-yielding business. And they read so many scary things about China in the press that it didn't help," Mr Neo said.

But this venture has proven to be highly successful. For the past three and a half years in property financing, there has not been a single loan default. "We only lend on properties we don't mind owning," Mr Neo said. "I make it a point that my lady CEO tells all my customers that we hope they pay but if they don't, we won't be upset at all. We will be very happy to own their asset, so some potential borrowers run away because they say 'you don't behave like a lender'."

This highly scalable business, run by a Shanghai-based team of four people, does not have direct costs as the legal fees, property valuation, entrustment fees are all paid by the borrowers, First Sponsor chief financial officer Lee Sau Hun said. The source of the business comes mainly from financial intermediaries and agents who link up the lenders and borrowers and get a commission from the borrowing customer.

Unlike the burgeoning Internet financing in China, First Sponsor's property financing is purely B2B (business-to-business), does not gun for volume but goes for big-ticket loans. The tenure for these entrusted loans is typically six months, with the option to extend by another six months.

Property financing accounted for 35.5 per cent of First Sponsor's profit before tax for fiscal 2014, though it accounted for only 12.7 per cent of its revenue. It was only with the recent acquisitions of Dutch commercial assets that First Sponsor's gearing was created.

"Why we do that is because analysts told us that when they analyse property companies, they apply a discount on net asset value," Mr Neo explained. "But my equity value and asset value is almost the same because I don't have gearing. I told the analysts: 'That is very penalising for me, so you mean to say if I want to be fairer to my public shareholders, I need to gear up my asset base and hence increase my liabilities so that the real discount is smaller?' They say that sounds like a plan."

There is yet another dramatic twist in First Sponsor's history. The group no longer owns the Hainan hotel that seemed to have played a part in prodding it into property financing. In March 2010, First Sponsor's legal representative in Dongguan took the company seal, sold the hotel without authorisation and ran away with the profit.

After nine months of "rescue work" in China, First Sponsor got back the money - and clearly a lesson learnt on the damaging impact of a rogue legal representative. Guess who's the legal representative now for all the group's subsidiaries in China? Mr Neo himself.