Why CDL shareholders should be heartened by Sincere's recent complaints

CITY Developments' (CDL) executive chairman Kwek Leng Beng said last month it was time for the company to put its ill-timed investment in Sincere Property Group behind it and move on.

"We must now forget about all these old subjects," said Mr Kwek, after CDL reported its financial results for FY2020, which included impairment losses for nearly its entire S$1.8 billion exposure to Sincere. "We must look forward," Mr Kwek added.

Tell that to the folks at Sincere. This past week, the China-based real estate company posted a statement on its website blaming CDL for holding up decision-making and affecting its ability to raise funds, offload assets and improve its cash flow.

Sincere's statement came after it reportedly missed a deadline to repay the principal on a bond that had matured.

CDL responded by saying Sincere's statement contained "incorrect information" that could "mislead readers" into believing CDL is responsible for Sincere's current situation.

The fiery exchange suggests the relationship between CDL and Sincere is far from cordial. This could be bad news for investors still hoping to see CDL turn Sincere into an effective platform to expand in China.

Yet, the statements also suggest CDL has managed to place a degree of control over Sincere that the China-based company finds unfamiliar and frustrating.

For many Singapore investors, especially those whose views of Chinese companies have been shaped by their experience with S-chips, this might seem remarkable as well as heartening.

It also addresses the major unspoken concern hanging over CDL: that Sincere may turn out to be a financial black hole and that, if push ever came to shove, CDL might discover it isn't really in control of Sincere.

Ironically, if CDL had made the same claims Sincere did this past week, many investors would probably have taken them with a huge pinch of salt.

CDL's consent needed?

In fact, CDL has been trying to clarify much of what Sincere said last week.

Sincere had characterised CDL as its controlling shareholder, with an effective 51 per cent stake. Sincere also asserted that CDL had dispatched a group of management personnel to head its core departments.

On top of that, the China group said its corporate governance structure and approval procedures have undergone major changes since CDL took control. Matters that ought to have been decided by its board and management were submitted to CDL's headquarters in Singapore for approval.

CDL clarified in its own statement last week that it holds "a joint controlling equity stake" in Sincere, together with the founder of the Chinese company.

It also pointed out that it has only four seats on Sincere's eight-member board. A company controlled by Sincere's founder has a further two seats. Greenland Holdings Group has the remaining two seats.

CDL went on to say that it seconded fewer than eight employees to Sincere's headquarters in Shanghai, where they work as subordinates of Sincere's senior management. Their role is to "co-share knowledge and best practices".

Sincere has more than 2,000 employees in total, CDL noted.

Yet, CDL did not actually deny Sincere's central assertion that its consent is required on a variety of matters.

"There have been occasions where CDL could not support Sincere management's recommendations as they contravened CDL's corporate governance as a listed company and the recommended use of funds were not in the best interest of all shareholders," CDL said.

CDL did not mention if Sincere had ever attempted to push ahead with initiatives it had shot down.

Slow restructuring

CDL was also at pains to address the insinuation that it had caused Sincere's financial troubles.

"As previously disclosed, the liquidity issue that Sincere faces was inherent even before CDL's investment," CDL said.

It added that Sincere had maintained a "growth-focused" approach and kept its gearing high, even in the face of the Covid-19 fallout and the sharp tightening of lending to China's real estate sector.

One could argue that if Sincere were not facing significant headwinds, it would not have been possible for CDL to acquire it.

CDL noted last week that progress in restructuring Sincere's debt and boosting its capital has been slow. This was partly due to the challenging operating environment in China as well as the complexities of Sincere's debt structure and cross-collaterals of its assets.

Last month, Mr Kwek hinted that Sincere's founder Wu Xu has been reluctant to monetise its assets. "He has a different view from us," Mr Kwek said.

So, was the broadside launched against CDL last week just a face-saving move by Sincere after failing to redeem a maturing bond? Or, is Sincere really being restrained by the heavy hand of CDL? What does it all mean for investors?

Impact on investors

Much as CDL would like to put the matter of Sincere to rest, the evidently strained relationship between the two companies could mean that issue will continue to flare up from time to time.

Yet, CDL appears to have prepared itself for a difficult few years ahead.

After recognising impairment charges in FY2020 for almost its entire exposure to Sincere, CDL has effectively insulated itself from further financial trouble at the Chinese company.

Meanwhile, the bleating from Sincere last week about slow decision-making at CDL speaks to the control CDL has over Sincere, and its determination to ensure transparency and good governance at the Chinese company.

Over time, Sincere may well contribute significantly to CDL's underlying value.

CDL closed at S$7.47 on Friday, which is a more than 20 per cent discount to its net asset value (NAV) as at Dec 31 of S$9.38 per share, and a nearly 56 per cent discount to its revalued net asset value of S$16.88 per share.

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