CDL's near-term performance depends on Kweks resolving differences amicably

IT HAS been almost a month since City Developments (CDL) stunned corporate circles with the announcement that its long-standing director Kwek Leng Peck had resigned.

Mr Kwek has, among other things, been against CDL's investment in Sincere Property Group, a privately-held Chinese property group. He does not see eye-to-eye with his cousin, CDL's executive chairman Kwek Leng Beng, on CDL's strategy of continuing to provide financial support to Sincere - perhaps seeing this as throwing good money after bad.

CDL has invested S$1.9 billion in Sincere and now owns 51.01 per cent with an option for another 9 per cent.

But Sincere is facing liquidity challenges, and shareholders would face risks if CDL continues to fund it.

Given what is at stake for the wealth of various members of the Kwek family, it is possible that shareholders have not seen the last of Mr Kwek Leng Peck.

Family tree

The Hong Leong group, of which CDL is a member, was founded by Kwek Hong Png, who left Fujian, China for Singapore in the 1920s at the age of 16. He started his own business around 1940 and soon invited his three brothers - Hong Khai, Hong Lye and Hong Leong - to join him.

The leadership of the group was passed to Mr Kwek Hong Png's elder son, Mr Kwek Leng Beng.

Mr Kwek Leng Beng's son Sherman Kwek is currently the group chief executive of CDL.

But Mr Kwek Leng Beng does not have full control over the Kwek family's stake in CDL.

The company's annual report shows that as at May 15, entities controlled by the Kwek family own 48.55 per cent of CDL.

There are a few other influential Kwek cousins in the picture.

First are the descendants of Mr Kwek Hong Lye, who set up the Malaysian business, which today is helmed by his son, Quek Leng Chan.

Another of Mr Kwek Hong Lye's sons, Quek Leng Chye, is based here and is the managing director of property development and investment company Hong Leong Holdings.

The assistant managing director, Kwek Leng Kee, was given away by Mr Kwek Hong Lye to Mr Kwek Hong Khai.

Mr Kwek Leng Peck and his brother Leng Keow, meanwhile, are the sons of Mr Kwek Hong Leong.

According to the grapevine, most of the key Kwek family members are on Mr Kwek Leng Peck's side concerning Sincere, which means he may have enough support to remove Mr Kwek Leng Beng from the board and management of CDL.

Sincere investment

When CDL first revealed its intention to invest in Sincere in May 2019, the Chinese group's net gearing was already at 200 per cent.

But Mr Sherman Kwek had in April this year argued the deal would "transform the group's scale and firmly establish CDL as a major player in China's property sector", taking CDL's presence in China from three cities to 18.

Sincere has a development land bank of 9.2 million square metres gross floor area with 64 development projects across mostly Tier 1 and 2 cities. It also has 27 investment properties, based on CDL's April release.

There were plans to divest some of Sincere's retail, hospitality, office and business park assets to lighten its debt load and shore up its residential development plans. But Sincere and CDL seem to have missed the window of opportunity for this.

Chinese authorities announced a new measure in August dubbed "Three Red Lines" - referring to metrics that developers have to meet if they want to borrow more.

Given the difficulty in selling assets in the current climate, Sincere has been leaning on CDL.

CDL had first extended a 2.75 billion yuan (S$563 million) loan last year. This was followed by a subscription for US$230 million of bonds.

In April, CDL announced the purchase of 51.01 per cent of Sincere for 4.39 billion yuan. Part of this sum went towards repaying the 2.75 billion yuan loan.

In August, CDL revealed it had granted a 650 million yuan working capital loan to Sincere.

And in October, CDL revealed two further contributions: a 1.5 billion yuan liquidity-support undertaking for Sincere's bonds maturing on Oct 26, 2020; and a 1.5 billion yuan corporate guarantee for a bank loan.

Due diligence

On Nov 4, CDL announced the appointment of Deloitte & Touche Financial Advisory Services as external financial adviser to review the Sincere investment.

The scope of Deloitte's appointment should, perhaps, include examining the due diligence CDL performed and answering some questions about Sincere.

How prime are the locations of Sincere's properties, for instance, and what is the quality of the assets? What is the financial strength of tenants at its investment properties, and how are the leases structured?

Founder Wu Xu and Greenland Holdings Group had cut their respective stakes in Sincere, from 60 per cent and 40 per cent to 29 per cent and 19.99 per cent, respectively, to make way for CDL. But have they since participated, alongside CDL, in financially supporting Sincere?

How much is known about Mr Wu's background and his dealings?

Having served as CDL's executive chairman for almost 26 years, the 79-year-old Mr Kwek Leng Beng has built on the foundation laid by his father. Among other things, he established an international hotel chain.

But CDL has begun to lose its shine - as The Business Times has pointed out recently.

It may be time for someone else - perhaps the 64-year-old Mr Kwek Leng Peck, or even someone outside the family - to make an entry, and some changes.

Mr Sherman Kwek, who is in his mid-40s, is not wrong in wanting to go big in China. The current state of the Sincere investment is unfortunate and may reflect his inexperience.

But Mr Kwek Leng Peck and Mr Sherman Kwek are said to have been on good terms, prior to the investment in Sincere, and the latter could still help unlock value from the Sincere investment and safeguard CDL's interests.

Meanwhile, if it turns out that CDL ended up with a lemon from its Sincere investment, the independent directors have some answering to do.

Just a few months before he passed away in November 1994, Hong Leong group founder Kwek Hong Png had told historian Melanie Chew he hoped his "sons, nephews, and grandchildren who stay on with the group will continue to work harmoniously and collectively".

Shareholders will be hoping for the same.

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