Release date: June 9
Source: Gelonghui
On the evening of June 7, an announcement made by LVGEM China (00095.HK) caught the market’s attention. According to the announcement, Shenquan Real Estate, a subsidiary of Vanke, contributed RMB2.3 billion to Sida Industrial, a subsidiary of LVGEM China. Upon the completion, Shenquan Real Estate will be interested in 8% equity interest of Sida Industrial, and ICDL’s (a subsidiary of LVGEM China) interest in Sida Industrial will be diluted from 100% to 92%. Sida Industrial holds the urban redevelopment project in Baishizhou, Nanshan District, Shenzhen City. The announcement indicated that all the proceeds from the introduction of Vanke would be used for the development of phase III and phase IV of the project.
LVGEM China’s share price soared in opening on the next day, and even skyrocketed by more than 50% at some time, reflecting the market’s bullishness about the Company’s move.
(Source: Futu Quotes)
- Does LVGEM China surrender part of the profits to Vanke?
The Baishizhou project has always carried the expectations of investors who are concerned about LVGEM China. What is the underlying meaning behind this unusual move by LVGEM China to introduce Vanke as a shareholder?
Even though LVGEM China once surged more than 50% during the trading on next day and investors were generally positive about the equity cooperation, I still noticed a small number of skeptical voices in the market, believing that LVGEM China was surrendering part of the profits to repay debts and fill holes.
Judging from the specific circumstances of this transaction, it is estimated that the overall valuation of the urban redevelopment project in Baishizhou is RMB33 billion, while Vanke contributed RMB2.3 billion to the project and obtained 8% of the equity interests (20% dividend rights for phase III and phase IV of the project), with the asset discount rate of 80%.
The Baishizhou project is of obviously high quality, but it was 20% discounted for sale, should it be considered as a fire sale?
First of all, phase III and phase IV of Baishizhou project are still in the signing stage of urban redevelopment. According to the information disclosed by the management of LVGEM China at the end of April, the signing rate of phase II, phase III and phase IV of Baishizhou project has exceeded 90%, and the implementation subject shall be determined if the signing rate required by the policy reaches 95%. According to its progress, it is expected to reach 100% by the end of this year. This also means that there is still a long way to go before final development and sales. As previously mentioned in LVGEM’s annual report, the Baishizhou project will be developed in four phases, with a development cycle of 8 to 10 years. Therefore, Vanke’s entry at this stage is more of a long-term investor. LVGEM China reinforces the security of the project with the “immediate” inflow of funds, and Vanke’s entry significantly boosts the market’s confidence in the smooth development and pre-sale of Baishizhou project. Two parties demonstrate theirs own advantages and obtains benefits. In contrast, the discount seems to be a win-win solution for both parties.
From the perspective of LVGEM, the introduction of Vanke reflects the Company’s deep consideration of the current market environment and its prospects, and shall be regarded as a precautionary measure.
Looking back on the past year, it can be described as an important turning point for the real estate industry. The pandemic, coupled with policy pressure, plunged many real estate companies into operational difficulties. The exposure of industry risks has accelerated, the capital market has also formed negative feedback, with share prices in the real estate sector tumbling. In this context, the financial performance of LVGEM China has also attracted the attention from the market.
As of the end of 2021, the cash to current borrowings ratio of the Company was 0.68, and the net gearing ratio was 81.2%; the assets to liabilities ratio after excluding receipts in advance was 64.8%. Although two ratios have met standards, the cash to current borrowings ratio failed, which once caused the market to question its cash flow pressure and debt repayment risk. As disclosed in the annual report, by the end of 2021, the Company’s cash and cash equivalents were RMB7.3 billion, while the short-term debt due within one year reached RMB9.8 billion, which could not fully cover the capital needs for debt repayment.
In the past six months, according to informed investors, the Company has successfully settled three convertible bonds totaling USD220 million in the first half of 2021, and the announcement of the listed company also disclosed a one-year extension of convertible bonds of USD50 million in principal amount last month. During the year, the Company only had one outstanding put-back option of a domestic public offering in small size in August and no other debts on maturity. If the domestic put-back option is settled, LVGEM China, among the bankruptcy-prone real estate sector, will be able to end the year smoothly.
It is said that Vanke has been always a cornerstone investor in LVGEM China, and this entry into Baishizhou project is a further step in the cooperation at the project level, which also deepens the existing close relationship. With the introduction of a leading real estate company as a strategic shareholder, LVGEM China, as one of the small private real estate enterprises, will be armed with more strengthen and empowerment in such slump real estate industry, which further enhances the security of the Baishizhou project and even the Group.
According to the agreement, LVGEM China will receive an initial amount of RMB1.1 billion within 30 days of the completion date, which will significantly enhance the liquidity of the Company and release pressure on the capital side.
In conclusion, although LVGEM China’s overall business performance is stable, it is not entirely worry-free, especially in the current environment of rising market uncertainty, and it is clear that a thicker safety cushion is necessary to maintain steady growth. The introduction of Vanke, a strong leader in the property industry, to LVGEM China will be undoubtedly beneficial to achieve this goal.
It is worth mentioning that during last year’s interim report period, LVGEM China’s management stressed externally that “there was no problem in terms of financial strength to develop the Baishizhou project independently, and they would not seek cooperation to address financial problems or construction capacity problems, but they were open-minded in the long run.” Given that, it is clear that the intention of LVGEM China for this cooperation are more focused on the long-term development of the Company.
Therefore, I view that the following aspects are the points of consideration for LVGEM China in choosing Vanke.
First, it is the brand and credit endorsement of the leading real estate enterprise.
Vanke, as the first-tier real estate enterprise in China, is highly recognized by the market for its strong comprehensive strength and brand influence. With the introduction of Vanke, although it is not involved in the specific project operation, it will undoubtedly bring a strong boost to the promotion of subsequent projects and sales of products with the endorsement of leading real estate enterprise.
In addition, Vanke itself is also a cornerstone investor in LVGEM China. Vanke took a stake in LVGEM (China) Real Estate back in 2015 and is still the second largest shareholder in LVGEM China. The introduction of Vanke to the Baishizhou project will enable further cooperation between two parties, which will result in smoother communication and project synergy in subsequent cooperation.
As early as Vanke took a stake in LVGEM China, Zhu Jiusheng, the president of Vanke Group, mentioned at the time that it was necessary for the Group’s industrial city layout and urban redevelopment projects. With further in-depth cooperation between them in the field of urban redevelopment, Vanke is also expected to help LVGEM to further open up financing channels, such as facilitation of bank approval for loans, further reduce financing costs, and enhance the profit margin of the project. Besides, Vanke will continue to leverage on its strengths as a leading local real estate enterprise to promote the development of subsequent projects in conjunction with LVGEM China.
In general, LVGEM China gained the participation of a heavyweight player in the industry with a relatively small equity consideration, which not only increased the security of the project against the risk of uncertainty in the current macro environment, but also ensured the maximisation of the project revenue under the endorsement effect of a strong real estate enterprise.
2· Phase I of Baishizhou Project will be launched next year, and no profit will be shared with Vanke
The Baishizhou project is a major urban redevelopment projects of LVGEM China in the core area of Shenzhen, and the value that will be brought to LVGEM has always been the focus of market investors. However, for such a large-scale project, whether LVGEM China, a small and medium-sized real estate company, has sufficient funds to complete the development has always been a market concern.
In terms of project specifics, the Baishizhou project is developed in four rolling stages in total, which effectively reduces its financial pressure through phased development. At present, the Phase I of the Baishizhou project has been successfully started, and it is expected to meet the pre-sale conditions and launch on a large-scale in 2023.
It is worth noting that LVGEM China has a credit facility of RMB20.7 billion from Everbright Bank for the Baishizhou project with an unused credit line of RMB17.5 billion, and the management expects it will still meet the project’s funding requirements.
As the Phase I of the project is about to enter the sales stage, it is expected to bring considerable cash flow to LVGEM China, which will support the development of subsequent projects. The introduction of Vanke’s funds is like the icing on the cake, and the fact that it has attracted the participation of such a heavyweight player in the industry also reflects to a certain extent that the layout of LVGEM China’s quality assets is recognized by the market, which also means that the Company’s momentum in revitalizing its assets is strongly supported. Previously, the management of LVGEM revealed that the Phase I of Baishizhou project would be opened for pre-sale next year and was expected to be sold for two to three years, and the projects of subsequent three phases would be invested and developed after enough funds were recovered.
LVGEM China revealed that Vanke’s entry would not affect the development pattern of the four phases of Baishizhou project, and the planning and construction were still proceeding as before. At the same time, Vanke would not participate in the profit-sharing for the upcoming pre-sale of Phase I of Baishizhou project, which means that the entire value of around RMB40 billion will flow to LVGEM China after the launch next year. The Phase I residences are the highest value part of the project, and no profit sharing in Phase I means that LVGEM China still firmly holds the core of Baishizhou project.
3·With over 50% rise, does LVGEM China’s share price become more expensive or cheap?
In terms of the strong growth performance of the capital market, LVGEM China may be now facing a window of revaluation.
One is about the certainty of performance.
In terms of the Phase I of the project, the total planned volume of the Phase I of Baishizhou Project is 682,000 square meters, half of which is for relocation and the other half is saleable value. With reference to the average price of RMB100,000-150,000 per square meter of the surrounding projects, it is estimated that the value will exceed RMB40 billion.
As calculated based on the above, after satisfying the pre-sale conditions next year, LVGEM China’s return will be in the range of RMB30-40 billion, and if the revenue is recognized at RMB30 billion, according to the gross margin of 60% and net margin of 30%, the Company will gain a profit of nearly RMB10 billion from Phase I project. As of the end of 2021, LVGEM China’s revenue is only RMB4.38 billion and profit is only RMB1.34 billion. Tens of billions of revenue and profit’s flow into the listed company means the realization of a leapfrog growth in both scale and earnings. The improvement in performance leads to the revision of valuation. In view of the Company’s current market capitalization of approximately HK$6 billion and a dynamic P/E ratio of less than 5 times, the Company’s valuation in the capital market will have a considerable room for subsequent improvement.
Considering the current uncertain market environment, funds are more interested in the cash flow creation ability of enterprises and are willing to pay for certainty. In this context, LVGEM China’s advantages will further help to obtain capital market premiums.
The other is about the security of enterprise.
This injection coupled with the expected subsequent income will enable LVGEM China to ensure manageable debt and enhance the overall anti-risk capability of the Company. Considering the current environment of credit risk exposure in the industry, the market often has less confidence in the operational safety of small and medium- sized real estate enterprises. This endorsement by powerful Vanke will further enhance market acceptance and boost market confidence.
Link: https://m.gelonghui.com/news/780632
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