Analysts sanguine on CDL's decision to sell Sincere Property for US$1

Singapore

MARKET observers generally view as mildly positive City Developments Limited's (CDL's) move to exit its ill-fated investment in China-based Sincere Property Group for US$1 while increasing its stake in a Shenzhen tech park from about 55 per cent to 65 per cent.

CGS-CIMB analyst Lock Mun Yee said: "Generally, I believe the divestment of the 51.01 per cent effective interest in Sincere Property will remove the overhang on the share price performance of CDL."

In similar vein, Terence Wong, chief executive of fund management firm Azure Capital, said: "On a net basis, CDL's latest announcement is marginally positive for its stock price. The Sincere investment has been hanging over the stock's performance for quite a while now. Hopefully, this move will bring to an end the whole episode."

In a nutshell, says RHB analyst Vijay Natarajan, CDL's latest move removes the group's equity exposure to Sincere and avoids it being involved in long-drawn liquidation and court proceedings for bankruptcy. "Instead, it allows CDL to focus on segments of the credit exposure to Sincere which it thinks are recoverable."

He describes CDL's move to boost its effective stake in the Shenzhen tech park as a sound idea as the asset is in a location that has been growing rapidly. "Moreover, a tech-focused business park is in a real estate asset class where there is strong market demand right now," he added.

That said, Mr Natarajan is not expecting any sharp reaction to CDL's share price when the stock market opens today. "We are at the tail end of negative news flow from CDL pertaining to Sincere."

Shares in CDL closed Friday at S$6.67, before the announcement was made.

For years, CDL had struggled to grow its business in China. Its top management thought it had finally chanced upon a golden opportunity in 2019 to scale up its presence in the world's most populous country by taking a stake in Sincere Property Group, based in Chongqing and headquartered in Shanghai. In April 2020, CDL announced its 51.01 per cent acquisition in the heavily indebted group founded by Wu Xu, whom CDL's chief executive Sherman Kwek had known for a decade.

However, Sincere's liquidity challenges mounted following China's implementation of the "three red lines" policy to cap borrowings for property developers. CDL also discovered a 95 per cent drop in the revalued net asset value of Sincere as at April 30, 2020, when comparing China's accounting standard against the draft Singapore Financial Reporting Standards (International).

This resulted in CDL announcing in February this year that it had booked a S$1.78 billion impairment on its investment in Sincere Property for FY2020, effectively writing down 93 per cent of its S$1.9 billion investment in Sincere.

Like many other market watchers, Mr Natarajan thinks CDL will probably take a pause in China for now. He highlights two more immediate priorities.

The first is to boost its exposure to Singapore. The group has been buying residential development land. In addition, it is going to redevelop Fuji Xerox Towers in the old CBD and has plans for the redevelopment of Central Mall along Magazine Road.

"This is the right move in my view, because Singapore is their bread and butter - because they have so much exposure and a strong brand name here. The market conditions are also favourable for residential and office at this point of time."

CDL also has ambitions to grow its fund management business, with plans under way to list a UK office Reit here.

"If the hospitality sector makes a recovery, that could be a positive share price catalyst for CDL," said Mr Natarajan.

In its late Friday night announcement, the property and hotel group unveiled an agreement to sell its 63.75 per cent interest in HCP Chongqing Property Development (HCP Cayman) to an unrelated third party incorporated in the Republic of Seychelles. HCP Cayman holds an 80.01 per cent equity interest in Sincere.

The consideration was agreed upon after taking into account Sincere's current liquidity issues and its potential bankruptcy, CDL said.

A bankruptcy claim has been filed against Sincere in China. The Chinese developer has also missed payment on a bond.

Concurrently, CDL is increasing its stake in a company that owns 65 per cent of Shenzhen Longgang Tusincere Tech Park (Shenzhen Tech Park). A Shenzhen Longgang District state-owned enterprise holds the remaining 35 per cent.

The transfer represents partial repayment of a loan owed by Sincere to a wholly-owned subsidiary of CDL.

CDL had in February acquired 84.6 per cent of Shenzhen Tusincere Technology Park Development Co (Shenzhen Tusincere) from Sincere for 850 million yuan or S$174 million at the time.

The latest transaction will make Shenzhen Tusincere a wholly owned subsidiary of CDL. The latter will now have direct operational control over the project management of Shenzhen Tech Park and be in a position to ringfence its investment in the property.

The transfer will further reduce CDL's financial exposure to Sincere, which was S$117 million at end-June. CDL said the reduction in exposure would be "by the fair value" of the transfer but did not provide the amount. CDL added that all its nominee directors and officers will resign from Sincere and its related companies once the divestment is completed.

The group does not expect the Sincere divestment or the Shenzhen Tusincere agreement to have a material impact on its earnings per share or its net tangible assets per share for fiscal 2021.

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