CDL Strikes Deal to Acquire 51% Stake in Mainland Developer for RMB 4.39B

City Developments Ltd (CDL) has found opportunity in the COVID-19 crisis to expand its real estate holdings in mainland China by acquiring a majority stake in a Chongqing-based developer for an initial investment of RMB 4.39 billion ($621 million).

The Singapore-listed property giant announced that it had agreed today to acquire a 51.01 percent shareholding in Sincere Property Group (协信远创) after renegotiating an earlier loan to the mid-sized builder.

The news comes just under one month after four domestic bonds issued by Sincere Property 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.

CDL’s agreement with Sincere is the second time this month that the developer controlled by billionaire Kwek Leng Beng has found a silver lining in this year’s downturn, after the Singapore firm paid a combined S$26.1 million ($18 million) through series of transactions to buy an 8.4 percent stake in Singapore-listed IREIT Global from mainland billionaire Tong Jinquan, who chairs Shanghai-based Summit Property Group.

Call Option Could Boost Stake to 60%

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

Following completion of the transaction, which is expected to take place this year, CDL would jointly control Sincere Group together with the mainland company’s Chairman Wu Xu.

With Sincere Property having been valued at RMB 16.48 billion at the end of 2019, per unaudited financials cited in the statement, CDL is acquiring its stake at a valuation of RMB 8.6 billion — nearly a 50 percent discount to the developer’s net asset value. In the first half of 2019 Sincere Property had achieved RMB 3.8 billion in operating income and had once ranked among China’s top 50 home builders.

While the mainland developer reported a profit of RMB 181 million for the first half of 2019, it also faced obligations at the time to repay nearly RMB 12.3 billion in credit obligations by 30 June 2020 and its cash on hand as of 30 June 2019 totalled just RMB 4.38 billion.

The transaction provides CDL with access to cashflows from Sincere Property’s portfolio of 27 investment properties while also expanding the Singaporean firm’s mainland presence from its current three cities to 18. Among the investment properties held by the mainland firm are the Chengdu Hilton Hotel and the CHINT-TUS Harbor business park in Shanghai’s Songjiang district, as well as the Starlight [email protected] Centre mall and the Xinhua Sincere Center in Chongqing.

Upon completion of the acquisition, CDL will have what it terms a “joint controlling interest in Sincere Property” via an offshore vehicle, while the mainland firm’s chairman, will see his stake shrink from 60 percent to 29 percent, and Shanghai government-controlled Greenland Holdings Group would see its shareholding fall from 40 percent to just under 20 percent.

The terms of the deal also provide CDL with a call option to purchase an additional 9 percent effective interest in Sincere Property for RMB 770 million at the same valuation as today’s transaction. The Singapore firm will be able to exercise that call option at its discretion during a six month period that will commence either 18 months after the completion of the today’s deal or on 1 July 2022, whichever is later.

Should CDL put its option to use, it would raise its stake in Sincere Group to 60.01 percent and assume sole control of the developer.

Sincerely Yours for Less

Today’s deal comes after an agreement in May last year built around an initial RMB 2.75 billion loan from CDL to Sincere Property had stalled out.

In its statement, the Singapore firm noted that, “Given the adverse impact of the COVID-19 crisis and the global uncertainty, CDL has taken the opportunity to negotiate new terms for its investment into Sincere Property, which are significantly improved over the original investment terms announced last year.”

Sincere Property will use part of the RMB 4.39 billion that it will receive under the new deal to repay last year’s RMB 2.75 billion loan. The 2019 agreement also included a second RMB 2.75 billion tranche in return for equity in Sincere Property.

Combined, last year’s debt and equity deal was to have provided CDL with what the developer termed a 24 percent effective equity stake in Sincere Property to be held indirectly by the Singaporean firm via the mainland company’s offshore investment vehicle, in return for RMB 5.5 billion in compensation. Should CDL elect to exercise its call option included in today’s deal, the Singaporean firm will have acquired more than 60 percent of Sincere for RMB 5.16 billion.

CDL today said that the earlier agreement to purchase equity in Sincere Property had not been completed, “due to a variety of factors.” Also this month, Singapore-listed GuocoLand, which is controlled by the cousin of CDL chairman Kwek Leng Beng, completed its own mainland deal, selling a Shanghai hotel to local developer Dahua Group for RMB 1.44 billion.

Gaining a Pipeline of 64 Projects

CDL made the investment with a view that, while the novel coronavirus disaster has hurt the cashflow of developers like Sincere Property, the ultimate potential of the mainland market remains appealing.

“While there are challenges and uncertainties caused by the COVID-19 pandemic, China remains one of our key overseas markets and we hold a positive view of the long-term growth and market outlook there,” Sherman Kwek said.

Beyond Sincere Property’s investment properties, the CDL CEO, who headed the company’s China operation before stepping up to the top role in 2017, pointed to the Chongqing developer’s pipeline of 64 development projects and sizable land bank as central to the deal.

Sincere’s current supply of land is capable of yielding 9.2 million square metres (99 million square feet) of finished projects, with 96 percent of those properties in first and second tier cities, according to the announcement.

The transaction would boost the China component of CDL’s global portfolio from 13 percent, as of 31 December 2019, to 17 percent upon completion of the transaction. Sincere Property’s mainland portfolio includes residential, commercial and hospitality properties.

Note: This article has been updated to clarify that Sincere Group’s NAV as of 31 December 2019 was RMB 16.48 billion. An earlier version indicated the valuation at RMB 8.6 billion. Mingtiandi regrets the misunderstanding.