reporter2
27-09-21, 15:22
CDL's sale of Sincere an anticlimactic end to a deal that was supposed to be a game changer
As it draws a line under this unfortunate chapter, the company should offer a frank account of mistakes made and lessons learnt
Sep 27, 2021
WHEN City Developments (CDL) announced late on Friday, Sept 10, that it had sold its 51 per cent stake in China-based Sincere Property Group (Sincere) for US$1, my first thought was that shares in CDL would probably take a hit when the market opened after the weekend.
While CDL had impaired its entire equity exposure to Sincere, it had still been working to extract value from this investment. By letting Sincere go for just US$1, CDL seemed to be indicating that it no longer sees any value in the beleaguered Chinese company's equity.
My second thought was that any sell-off in CDL would probably be a good opportunity for investors like me to jump on the stock.
After all, CDL was trading at a steep discount to its net asset value (NAV) as at June 30 of S$9.22 per share and an even steeper discount to its revalued NAV of S$17.00 per share.
There could also be an upswing in CDL's overall profitability in the months ahead - fuelled by sales at its new projects, the redevelopment and enhancement of its investment properties, and a gradual recovery of its hotel business.
More importantly, with the sale of CDL's equity stake in Sincere, there would no longer be any risk of CDL somehow getting drawn into providing Sincere with additional financial support as the China-based company works out its problems.
As it happened, the sell-off I imagined did not materialise. On Monday, Sept 13 shares in CDL galloped out of the gates and ended the day 5.4 per cent higher at S$7.03.
The stock climbed even higher in the days that followed. On Friday, Sept 17 it closed at S$7.25, up 8.7 per cent for the week.
CDL has since pulled back a bit. It closed at S$7.06 on Friday, Sept 24 - but that is still nearly 6 per cent above where it was when it announced the sale of its stake in Sincere.
Even though the market reacted much like I did, I can't say I wasn't surprised.
Good companies sometimes make bad investments. Yet, it seemed strange to me that such a major investment that went sour so quickly had come to such an anticlimactic end.
Non-disclosable transaction
The whole thing seemed even stranger when CDL said this past week that the sale of its stake in Sincere was actually a non-disclosable transaction under SGX rules.
On Sept 23, responding to queries from Singapore Exchange Regulation (SGX RegCo), CDL noted that the relative figures computed on the bases set out in Rule 1006 were less than 5 per cent.
Specifically, CDL showed that the NAV attributable to its stake in the offshore holding vehicle through which it owned Sincere was less than 5 per cent of its own NAV as at June 30 of S$8.36 billion.
In fact, it was zero after the impairments it took last year.
CDL also noted that it had stopped equity accounting for its share of the offshore vehicle's losses from Sept 30, 2020. So, CDL's share of its losses in H1 2021 was zero; and, hence, less than 5 per cent of its own earnings for the six-month period.
CDL further noted that the consideration it received for the divestment of Sincere - that is, US$1 - amounted to zero per cent of its market capitalisation of just over S$6 billion.
SGX RegCo did not leave the matter there though. It asked what the figures would look like if the cost of CDL's investment in Sincere had not been impaired.
In response, CDL said the impairment loss on the cost of its investment was S$806 million. Adding that back to its NAV as at June 30 would put the revised NAV at S$9.16 billion.
So, if CDL had not taken the impairment last year, the NAV attributable to its stake in the offshore vehicle through which it owned Sincere would have been 8.8 per cent of its own NAV - that is, S$806 million divided by S$9.18 billion.
However, CDL said this 8.8 per cent ratio may not be meaningful.
If CDL had not impaired the cost of its investment in Sincere last year, it would have continued to equity account for losses from that investment - which would probably have eroded the value of its investment substantially.
Unfortunately, CDL said it was unable to prepare the consolidated financial information for the offshore vehicle through which it owned Sincere in accordance with Singapore Financial Reporting Standards as it did not have the necessary information.
Game changer gone awry
The fact is that CDL's investment in Sincere was supposed to have been a game changer.
When the group announced the deal in April last year, CDL couched it as an improvement over an earlier proposal to invest 5.5 billion yuan (or some S$1.10 billion), comprising an equity investment and the extension of loans, to acquire an effective stake of 24 per cent in Sincere.
The new and improved deal involved CDL acquiring a 51 per cent stake in Sincere for 4.4 billion yuan, part of which would be used to repay 2.75 billion yuan in loans that CDL had already extended to Sincere.
CDL was also granted a call option under the deal to purchase an additional 9 per cent effective interest in Sincere for 0.77 billion yuan.
Only six months later, CDL announced that Kwek Leng Peck had tendered his resignation from the board because of disagreements over the company's investment in Sincere.
CDL noted at that point that its total financial exposure to Sincere was S$1.9 billion. Besides its equity investment in Sincere, CDL had also subscribed to its bonds and provided it with working capital loans, liquidity support and guarantees for its bank loans.
CDL has blamed the trouble at Sincere primarily on the pandemic and China restricting lending to property companies.
In CDL's most recent annual report, executive chairman Kwek Leng Beng also alluded to the partnership between CDL and Sincere facing "differences in processes and operations".
Provide more information
CDL is not obliged to reveal any more than it already has about the internal missteps and misjudgments that led to it pouring money into Sincere.
And, as I said at the beginning of this column, many investors are probably inclined to look forward anyway.
Yet, it would be a mistake for CDL's top management to assume that they have navigated the debacle with their reputation and prestige entirely unscathed.
While many property players might see the current turmoil in China's property sector as an opportunity, it could be a long while before CDL will be able to attempt another big deal in that market without making investors nervous.
They say confession is good for the soul. As CDL draws a line under one of the most unfortunate chapters in its long history, a frank account of the mistakes that were made and the lessons learnt might be good for its stock price.
As it draws a line under this unfortunate chapter, the company should offer a frank account of mistakes made and lessons learnt
Sep 27, 2021
WHEN City Developments (CDL) announced late on Friday, Sept 10, that it had sold its 51 per cent stake in China-based Sincere Property Group (Sincere) for US$1, my first thought was that shares in CDL would probably take a hit when the market opened after the weekend.
While CDL had impaired its entire equity exposure to Sincere, it had still been working to extract value from this investment. By letting Sincere go for just US$1, CDL seemed to be indicating that it no longer sees any value in the beleaguered Chinese company's equity.
My second thought was that any sell-off in CDL would probably be a good opportunity for investors like me to jump on the stock.
After all, CDL was trading at a steep discount to its net asset value (NAV) as at June 30 of S$9.22 per share and an even steeper discount to its revalued NAV of S$17.00 per share.
There could also be an upswing in CDL's overall profitability in the months ahead - fuelled by sales at its new projects, the redevelopment and enhancement of its investment properties, and a gradual recovery of its hotel business.
More importantly, with the sale of CDL's equity stake in Sincere, there would no longer be any risk of CDL somehow getting drawn into providing Sincere with additional financial support as the China-based company works out its problems.
As it happened, the sell-off I imagined did not materialise. On Monday, Sept 13 shares in CDL galloped out of the gates and ended the day 5.4 per cent higher at S$7.03.
The stock climbed even higher in the days that followed. On Friday, Sept 17 it closed at S$7.25, up 8.7 per cent for the week.
CDL has since pulled back a bit. It closed at S$7.06 on Friday, Sept 24 - but that is still nearly 6 per cent above where it was when it announced the sale of its stake in Sincere.
Even though the market reacted much like I did, I can't say I wasn't surprised.
Good companies sometimes make bad investments. Yet, it seemed strange to me that such a major investment that went sour so quickly had come to such an anticlimactic end.
Non-disclosable transaction
The whole thing seemed even stranger when CDL said this past week that the sale of its stake in Sincere was actually a non-disclosable transaction under SGX rules.
On Sept 23, responding to queries from Singapore Exchange Regulation (SGX RegCo), CDL noted that the relative figures computed on the bases set out in Rule 1006 were less than 5 per cent.
Specifically, CDL showed that the NAV attributable to its stake in the offshore holding vehicle through which it owned Sincere was less than 5 per cent of its own NAV as at June 30 of S$8.36 billion.
In fact, it was zero after the impairments it took last year.
CDL also noted that it had stopped equity accounting for its share of the offshore vehicle's losses from Sept 30, 2020. So, CDL's share of its losses in H1 2021 was zero; and, hence, less than 5 per cent of its own earnings for the six-month period.
CDL further noted that the consideration it received for the divestment of Sincere - that is, US$1 - amounted to zero per cent of its market capitalisation of just over S$6 billion.
SGX RegCo did not leave the matter there though. It asked what the figures would look like if the cost of CDL's investment in Sincere had not been impaired.
In response, CDL said the impairment loss on the cost of its investment was S$806 million. Adding that back to its NAV as at June 30 would put the revised NAV at S$9.16 billion.
So, if CDL had not taken the impairment last year, the NAV attributable to its stake in the offshore vehicle through which it owned Sincere would have been 8.8 per cent of its own NAV - that is, S$806 million divided by S$9.18 billion.
However, CDL said this 8.8 per cent ratio may not be meaningful.
If CDL had not impaired the cost of its investment in Sincere last year, it would have continued to equity account for losses from that investment - which would probably have eroded the value of its investment substantially.
Unfortunately, CDL said it was unable to prepare the consolidated financial information for the offshore vehicle through which it owned Sincere in accordance with Singapore Financial Reporting Standards as it did not have the necessary information.
Game changer gone awry
The fact is that CDL's investment in Sincere was supposed to have been a game changer.
When the group announced the deal in April last year, CDL couched it as an improvement over an earlier proposal to invest 5.5 billion yuan (or some S$1.10 billion), comprising an equity investment and the extension of loans, to acquire an effective stake of 24 per cent in Sincere.
The new and improved deal involved CDL acquiring a 51 per cent stake in Sincere for 4.4 billion yuan, part of which would be used to repay 2.75 billion yuan in loans that CDL had already extended to Sincere.
CDL was also granted a call option under the deal to purchase an additional 9 per cent effective interest in Sincere for 0.77 billion yuan.
Only six months later, CDL announced that Kwek Leng Peck had tendered his resignation from the board because of disagreements over the company's investment in Sincere.
CDL noted at that point that its total financial exposure to Sincere was S$1.9 billion. Besides its equity investment in Sincere, CDL had also subscribed to its bonds and provided it with working capital loans, liquidity support and guarantees for its bank loans.
CDL has blamed the trouble at Sincere primarily on the pandemic and China restricting lending to property companies.
In CDL's most recent annual report, executive chairman Kwek Leng Beng also alluded to the partnership between CDL and Sincere facing "differences in processes and operations".
Provide more information
CDL is not obliged to reveal any more than it already has about the internal missteps and misjudgments that led to it pouring money into Sincere.
And, as I said at the beginning of this column, many investors are probably inclined to look forward anyway.
Yet, it would be a mistake for CDL's top management to assume that they have navigated the debacle with their reputation and prestige entirely unscathed.
While many property players might see the current turmoil in China's property sector as an opportunity, it could be a long while before CDL will be able to attempt another big deal in that market without making investors nervous.
They say confession is good for the soul. As CDL draws a line under one of the most unfortunate chapters in its long history, a frank account of the mistakes that were made and the lessons learnt might be good for its stock price.