COFCO Property has been given a green light by the China Securities Regulatory Commission (CSRC) to buy back a controlling 64.18 percent stake in Hong Kong-listed commercial real estate developer Joy City Property for RMB 14.76 billion ($2.15 billion), re-integrating the commercial real estate holdings of one of the mainland’s largest state-run conglomerates with its residential property operation.
The CSRC’ approval allows the residential property division of Beijing-based COFCO, the largest food processor and manufacturer in China, to move forward on a proposal made in March to transfer ownership of the Hong Kong-listed shares in Joy City held by a wholly owned Hong Kong-registered unit of COFCO Property in return for 2.14 billion shares in the Shenzhen-listed unit.
The CSRC’s “unconditional approval” of COFCO Property’s acquisition, as announced on the CSRC website, came 40 days after the finance regulator first rejected the proposal and brings an end to an eight-month-long acquisition saga. COFCO Property had listed its commercial assets on the Hong Kong exchange in 2013 via a backdoor listing, with the listed unit taking the name of the group’s popular Joy City shopping malls in January 2015.
Profit Guarantees Added
COFCO Property’s newly approved acquisition plan maintained the original purchase price of RMB 14.76 billion proposed in March, although it added new guarantees that the accumulated net profits of Joy City in the coming three years would be no less than RMB 1.89 billion. This number does not pose as an unachievable target given that COFCO Property tallied RMB 1.73 billion in total net profits in 2017. Of that total, RMB 945 million was claimed by its parent COFCO Corp, according to its financial statements.
The fact that COFCO Property applied for approval of the deal two times with the same valuation price and yet achieved two very different results within such a short time frame came as a surprise to many industry observers, local Chinese media reported.
Shenzhen-listed COFCO Property’s merger with Joy City is portrayed as part of the parent company’s restructuring plan, which is said to be aligned with China’s latest state-owned enterprise reform first announced in January. The move brings the equity listing of one of China’s biggest commercial real estate developers back to a mainland exchange at the same time that the government is urging its largest tech players to list in Shanghai or Shenzhen.
As a subsidiary of a major state-owned enterprise, COFCO Property’s acquisition plan was approved by the State-owned Assets Supervision and Administration Commission (SASAC) in June, by the National Development and Reform Commission in September, and later by the Ministry of Commerce. The China Securities Regulatory Commission, however, rejected the developer’s proposal on October 25th on the grounds that the valuation price of the target asset lacked “justification and a logical base.”
Market Capitalization Dips
COFCO Property was prepared to pay the equivalent of RMB 14.76 billion to buy back its controlling 64.18 percent stake in Joy City based on the latter’s RMB 22.5 billion valuation. But starting from July this year, Joy City’s stock price hovered below HK$1. As of Wednesday, its market capitalization stood at around HK$13.23 billion, or RMB 11.63 billion. The developer’s stock, which traded at HK$1.31 per share at the beginning of April, was priced at HK$0.88 per share at the close of trading on Wednesday.
COFCO Property argued that the stock market has been volatile recently and that the valuation took into consideration Joy City’s historical value, net asset value, profitability and brand value as well as the interests of the two companies’ shareholders.
In its revised application to the CSRC on November 21st, COFCO Property maintained that the RMB 14.76 billion offer price was fair and just, although it added the new promises regarding the three-year profit target. And this time around it got its way.
Debt Load Weighs Heavy
Ranked 29th on China’s Top 100 builders list, COFCO Property lags behind other state-backed developers such as Poly Developments and Holdings, China Overseas Property Group and China Resources Land.
The Shenzhen-listed firm has been focusing on residential developments in and around Beijing, Shanghai and Shenzhen. But home sales in the first- and second-tier cities have slowed significantly as the government has imposed tightening measures to rein in an overheated market. COFCO Property recorded total sales revenue of RMB 14 billion in 2017, down 22.1 percent from the previous year’s RMB 18.02 billion, according to its financial statements. As of June 2018, the developer had RMB 73.12 billion in debt, with total assets of RMB 85.4 billion.
“The transaction (for Joy City Property) will inject new commercial real estate elements into the core business of the company and release the synergistic effect of the integration of the residential and commercial sectors,” COFCO Property said in a statement back in April. “After the completion of the transaction, COFCO Property will become COFCO’s sole platform that covers residential and commercial real estate.” COFCO Property and Joy City Property could then allocate resources more effectively, and realize the sharing of both risks and benefits, the company added.