Worry over defaults in First Sponsor's property financing business may prove unfounded

FOR more than four years, First Sponsor Group - a mixed property developer and owner of commercial properties in China and the Netherlands - has been operating a property financing business out of Shanghai that yields a mouth-watering 100 per cent gross profit margin.

But the property financing business segment faces perennial scepticism from market critics concerned about the risks of entrusted loans in China. On the surface, their worry seems founded when loan defaults involving close to 87 per cent of the group's loan portfolio emerged. This has triggered a slide in the stock price.

But, unknown to many, instead of causing a likely dent in the group's bottom line, a windfall from these loan defaults awaits First Sponsor. And this has something to do with its property financing business model.