Singapore’s CDL Warns of Loss After China Developer Investment Swells to $1.4B

Singapore-based City Developments Ltd on Thursday issued a fresh warning that it is likely to report a loss stemming from the firm’s contentious investment in mainland Chinese developer Sincere Property Group.

In the filing with the Singapore Exchange, CDL cited “ongoing unprecedented challenges” in China’s real estate market and said it expected to make provisions for a material impairment loss on its 51 percent interest in Chongqing-based Sincere.

CDL also disclosed that it had invested a total of S$1.8 billion ($1.36 billion) in Sincere as of 31 December 2020, swelling from an initial investment of RMB 4.39 billion ($621 million) when the company acquired its majority stake in April 2020.

Disagreement over the Sincere investment led three directors to resign from CDL’s board in the last three months. On Friday, CDL shares were down 2.7 percent in price shortly after the market opened before recovering some ground to close at S$7.51, down 2.2 percent.

Audit Drags On

Last November, CDL announced the appointment of Deloitte & Touche Financial Advisory Services to assist in reviewing the Sincere investment. Upon completing the review, Deloitte said the mid-sized builder possessed good assets from which CDL could extract further value.

Even so, CDL said it would weigh Deloitte’s findings and those of auditor KPMG before finalising its own assessment of the fair value of the Sincere assets by the end of 2020. But on Thursday the company confirmed that it was still in the process of finalising the audit of Sincere and that the amount of the impairment remained undetermined.

The review of the Sincere investment followed the shock resignation of Kwek Leng Peck as non-executive, non-independent director in October after over 30 years in the role. Kwek, the cousin of CDL executive chairman Kwek Leng Beng and the uncle of CDL group CEO Sherman Kwek, was followed out the door in short order by two independent non-executive directors, Koh Thiam Hock and Tan Yee Peng.

All three board members cited CDL’s Sincere investment as a reason for their departure.

Earlier this month, CDL told the SGX it would form a special working group to directly oversee and improve Sincere’s liquidity and profitability, including reviewing potential divestments of assets and restructuring existing liabilities.

CDL has “ring-fenced” its current financial exposure to the Sincere investment and will continue to strenuously protect its position, the company said in Thursday’s filing.

Trouble on the Ground

Apart from pandemic-related challenges, CDL identified China’s “three red lines” rule restricting bank borrowing and a deterioration in market conditions as likely obstacles for mainland developers.

Despite CDL’s bleak assessment, property consultancy JLL reported this month that office demand had in fact rebounded during the second half of 2020 in Shanghai, where Sincere owns several properties including Shanghai Qidi Sincere Fengxian Smart Equipment Business Park and Shanghai Hongqiao Sincere Center.

The announcement of CDL’s Sincere investment last April — in the thick of the COVID-19 outbreak — came just under one month after four domestic bonds issued by Sincere were suspended from trading for a day after the developer had failed to make payments on the instruments worth an aggregate RMB 2.6 billion.

“Our strategic partnership with Sincere Property marks a major milestone in CDL’s history and represents a game-changing investment for us,” Sherman Kwek said at the time. “This deal will transform the group’s scale and firmly establish CDL as a major player in China’s property sector.”

The Sincere saga aside, CDL faces difficulty on other fronts. The company’s hospitality division, Millennium & Copthorne Hotels Ltd (M&C), reported a pre-tax loss of S$208.2 million for the first half of 2020. In November it announced plans to sell hotels and narrow its geographic focus to gateway cities like Singapore, New York and London.

M&C chief executive Clarence Tan quit last July after just four months at the helm, and CDL reported in August that the group barely broke even with a S$3 million net profit in the first half.