No bubble in China's property market, says CWG Int'l CEO

AS far as SGX-listed CWG International executive chairman and CEO Qian Jianrong is concerned, many market observers have got it wrong in believing that there is a property bubble in China.

Since the Chinese government's measures last October to limit home purchases to rein in soaring prices, speculation has been stamped out and what remains is latent demand for owner-occupation, he argues.

In fact, the restrictions on purchases and issuance of pre-sale licences to developers are creating pent-up demand which may trigger the next wave of demand.

Furthermore, price curbs by some local governments on new sales have also been counter-productive, spurring a continued rush of buyers into the market, said Mr Qian.

This is why CWG International's residential projects in China have not been adversely affected by the curbs - for example, its Nanjing Royal Lake Mansion sold 183 out of the 198 units launched within one day.

"Even though prices of first-hand homes are controlled by the government, our selling prices still exceeded the estimates we had when we first bought the land because land prices have shot up so much," Mr Qian told BT.

For these reasons, the Chinese developer is accelerating its expansion domestically and planning to enter new cities such as Chengdu and Changsha while also embarking on new projects in Australia and the US this year.

Plans are also afoot to grow its education business with the addition of two new international schools each year and creating a subsidiary to hold all its educational assets.

CWG International (formerly known as Chiwayland International Limited) currently has development projects in China mainly in Suzhou, Xuzhou, Xuancheng, Wuxi, Wuhan, Shanghai and Nanjing. It has seven projects in Australia, and one mixed-use project in Los Angeles, US. It also builds international schools and leases them to its sister company Chiway Education Group, which is listed on China's New Third Board and runs these schools under different brands.

The group's fund management subsidiary Richmont Capital, set up in April 2015, now manages eight fund products with assets under management in excess of US$100 million. The proceeds from four of these funds are intended for international expansion.

Besides residential sites, the group is talking to local governments about mixed-use projects comprising residential and education elements, Mr Qian said.

The firm is also keen to take strategic stakes of 50 per cent or more in companies with good land banks in Wuhan, Xuancheng and Chengdu. This follows its 197.2 million yuan (S$40 million) acquisition in March of a 60 per cent stake in Suzhou Xinglun Tourism Co Ltd, owner of the iconic Suzhou Ferris Wheel Theme Park.

When considering new cities to enter, Mr Qian said he looks at scalability, economic growth, upside potential in home prices, and the time it takes to clear existing housing inventory to determine if the market is healthy.

An absorption rate - defined as the time to clear inventory - of eight to 10 months is considered healthy for a city, he explained. A rate of 15 months and above would be considered unhealthy, while anything under eight months signals upward price pressures.

This year, the group expects to deliver six projects in China and Sydney with a total saleable gross development value of 5.5 billion yuan. It is also targeting 10 billion yuan in advanced receipts from residential pre-sales this year and 40 billion yuan by 2021 in China, having achieved a 15 per cent increase in pre-sales gross floor area (GFA) to about 435,119 square metres worth 4.3 billion yuan in fiscal 2016.

But earnings lumpiness has persisted as development income forms the bulk of its earnings. It reported deeper net loss of 30.6 million yuan for the first quarter ended March 31, compared to 19.2 million yuan a year ago because of a drop in the number of property units handed over and a surge in selling and distribution expenses; its net debt to equity stood at about 400 per cent as at March 31. This came after a tripling of net profit in fiscal 2016 to 116.7 million yuan driven by higher selling prices of the group's Suzhou projects.

To mitigate such lumpiness, the group hopes to beef up its recurring income from educational assets. Cities where it hopes to land new schools this year include Xiamen, Wuhan and Changsha.

A restructuring of its educational assets to be held under a new subsidiary is also underway, prompted by a controversial law amendment by the Chinese government to tighten oversight of private education operators that offer the first nine years of compulsory schooling. Because implementation details are still unclear, at least until the new rule kicks in from Sept 1, CWG International is adopting a wait-and-see approach and will finalise its restructuring exercise in September.

Despite the many growth plans of the group, investors have not warmed up to the stock. Shares of CWG International still trade at a paltry 4.85 times price-to-earnings compared to a median 24.3 times for real estate peers listed on the Chinese mainland bourses. Mr Qian attributed this perceived undervaluation to investors' unfounded concerns over the Chinese property market.

"I don't see the bubble," he maintained. "The Chinese need to pay 30-50 per cent downpayment when they buy homes. There are no speculators in the market now that many cities do not allow the use of mortgages to buy a third property. Many banking chiefs tell me their best assets are individual borrowings because the defaults are so low."

However, to instill greater confidence among investors, the group has adopted a dividend policy of one Singapore cent per share last year. This is not a common practice among Chinese companies listed here, commonly known as S-chips, and this has been a sticking point among investors who see dividends as proof that the cash on their balance sheets is real.

In addition, CWG International has a direct holding structure for its subsidiaries, with no BVI-incorporated (British Virgin Islands) intermediaries unlike other S-chips.

"We will maintain our dividend policy and this year's dividend won't be lower than this figure," said Mr Qian, who owns about 75 per cent of the group. "This will give us room to issue new shares."

With one cent per share as the base dividend, the company may offer special dividends in good years, he added. There are also plans to raise the free float of the stock by issuing new shares to strategic partners, a move that may pare Mr Qian's controlling stake down to about 60 per cent.