China Puti Revitalizing under CDB

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1 J ul-13 Nov-13 Mar-14 J ul-14 Nov-14 Mar-15 J ul-15 Nov-15 China New Town Development 1278.HK China Puti Revitalizing under CDB We have recently met with management of CNTD regarding the business transformation under China Development Bank Capital. Here is the update: A new business model is being implemented Since Nov 2014, China New Town Development (CNTD) has announced 18 projects on the funding of urbanization related projects such as shanty town reformation, industrial park construction, and water conservancy in PPP. CNTD will receive handsome guaranteed unleveraged return of 10-13%. Besides, CNTD has formed a partnership with BoComm and CDB Development Fund which will provide funding support to those investments. This business model distinguishes from the old one that provides visible long-term cashflow to CNTD. Realizing synergies its parentco CDB Capital Those new projects will fully realize the synergies between CNTD and CDB, its parentco. CDB contributes its network and funding, while CNTD exerts its expertise in primary land development and infrastructure project management. CDB has heavily invested into urbanization, infrastructure and industrial zone projects which are likely to generate a good project pipeline to CNTD, in our view. Gathering sufficient financial war chest from project sale and bond issue CNTD is still sitting on 575k sq.m. of valuable land in the Shanghai Luodian project and 12mn sq.m. in Shenyang project. Management seeks to expedite the selling of those projects to recover cash for the development of new projects under CDB. Together with the successful debt issuance of Rmb1.3bn at merely 5.5%, CNTD is getting financially ready to take up new ventures. Potential optimization of shareholder structure to remove overhang CDBIH, the largest shareholder, has entered into a charge over shares with SREI (the 2 nd largest shareholder) on its 14.9% shares in CNTD, against its outstanding payment obligation of around RMB1.5bn. Since SREI is already behind the payment schedule, CDBIH has the right to dispose those shares to new strategic investors, which could possibly bring new synergies to CNTD. Could start to record recurring profit in 2016, while downside in share price is limited CNTD has locked in around Rmb1bn from investment on its own capital, and Rmb66mn on collaboration with CDB Capital. Altogether, we estimate that income from those investments would be near Rmb200mn a year, which is sufficient to cover its annual interest expense and operating expenses. It is now trading at historical PB of 0.6x plus Rmb1.2bn net cash on hand which CNTD is look to invest in new projects to pile up recurring income. Rating Target Price Current price Company Report 11 Jan 2015 Lewis Pang Lewis.Pang@cinda.com.hk (852) Trading data 52-Week Range (HK$) 3 Mth Avg Daily Vol (m) No of Shares (m) Market Cap (HK$m) Major Shareholders (%) Auditors Result Due Company description , 486 2,707 CBDIH (54.32%) SRE Inv (14.9%) ERNST & YOUNG FY15: MAR China New Town Development (CNTD) is the core operational and listed platform of CDB Capital in the field of township development business, and is principally engaged in urban master planning, investment and land development in the major cities of China. CDB Capital is fully-owned by China Development Bank. CNTD listed in Singapore in 2007 and subsequently in Hong Kong through introduction. Price chart HK$ Not Rated NA HK$0.275 Page 1 of 10

2 A new business model is being implemented Business model with visible cash inflow with wider source of projects Before China Development Bank International Holdings (CDBIH, fully-owned by China Development Bank, CDB) acquired the controlling stake in CNTD in March 2014, engaged solely in the business of primary land development in China. Its growth was limited by the difficulties in project acquisition and uncertainty of cashflow generation. With the ultimate controlling shareholder CDB s help, CNTD has undergone a palpable transformation in the past year, in terms of project acquisition and financing. Since November 2014, it has announced a series of ventures related to urbanization and infrastructure development, which unveiled a new business model that is synergetic to CNTD and CDB, its ultimate controlling shareholder. The 18 projects announced in the past year include shanty town reformation, industrial park construction, and water conservancy projects. CNTD invests via its own fund, or together with funding support of CDB and BoComm (via a venture capital fund, in which CNTD takes the junior tranche), to obtain fixed annual returns from those projects. The municipal government shall provide a guaranteed investment return to CNTD. In most of the projects, those guaranteed returns are included in the municipal fiscal budget which is paid out of revenues of the local government and municipal expenses of the central government. A RMB10bn fund established to back CNTD s projects The role of CNTD is to arrange the equity funding of those projects, act as project manager, and plan for the development of the project in the next stage. CNTD has project teams on the implementation of those projects, for tasks such as: 1. Readying land for development: Relocation and resettlement housing, planning for new urban design 2. Construction of major infrastructure: The construction of major roadwork and community facilities, sewage treatment plant and power supply infrastructure etc. 3. Developing industrial zones: Assisting the settlement of appropriate enterprises to the industrial zones 4. Financing: Assisting the financing of the urbanization projects, with the strong brand of CDB and project management credential of CNTD CNTD conducts above tasks with its solid expertise on primary land development, and now it is more a manager role in the investment fund for those projects. The investment fund is called CDB(Beijing)-BOCOMM New-Type Urbanization Development Fund ( 國開 ( 北京 )- 交行新型城鎮化發展基金, the Investment Fund ), for which the size of RMB10bn is primarily funded by BoComm and CDB Development Fund. CNTD, as a Junior-tranche limited partner, enjoys the profit sharing of the fund, backed by the guaranteed return of project that the fund invests. This business model distinguishes from the old one, and it provides visible long-term cashflow to CNTD. Page 2 of 10

3 Lucrative and guaranteed return for CNTD The Investment Fund participates in local development projects with guaranteed return from local government (backed by budget revenue). It then distributes return to investment partners at a pre-determined scheme. The top two tranches are rewarded with fixed return, while the rest shall bear the residual risks and enjoy the residual rewards. Effectively, CNTD enjoys a guaranteed reward ranging 29% to 61% by leveraging on the Investment Fund which CNTD bears neither balance sheet or off-balance sheet liabilities and risk, other than the amount it invests. Exhibit 1: Investment return calculation of CNTD over the Investment Fund Tranche Name of partner Investment amount (RMB mn) % Return Senior-Tranche Bank of Communications Schroder Fund Management 8, % PBOC 5-yr loan rate (now 4.9%) Mid-Tranche CDB Development Fund % 12% per annum Junior-Tranche CDBC 1, % The rest of residual return Junior-Tranche CDB New Town % One-eighth of the residual return General Partner CDB Investment-Development Fund Management 1 0.0% The rest of residual return 10, % Example (The Taizhou Huaxin Infrastructure Project): Investment from the Partnership Rmb500mn Of which CNTD contributes Rmb7.5mn Partnership s return 10.1% annual guaranteed return from municipal fiscal budget Rmb50.5mn Each partner s return BoComm SF Mgt Rmb500mn x 80% x 6.5% (note) = Rmb26mn CDB Dev. Fund Rmb500mn x 8% x 12% = Rmb4.8mn Return to Junior-Tr and GP Rmb50.5mn Rmb26mn Rmb4.8mn = Rmb19.7mn Return to CNTD Rmb19.7mn x 150/1200 = Rmb2.46mn or 33% over its investment Note: Bank of Communications Schroder Fund Management, as senior-tranche investment partner, recieves the return of 5-year PBOC benchmark rate plus 1.6%. The relevent PBOC rate was 4.9% in December The above example Taizhou Huaxin Project, announced in December 2015, is the infrastructure construction project located in Taizhou Pharmaceutical High Technology Industrial Development Zone. To support the project, the Investment Fund will provide debt financing amounting to RMB500mn, while CNTD contribute 1.5% of it. As of end-december 2015, CNTD has already invested Rmb66mn in 13 projects under the investment fund, which will contribute a lucrative annual recurring income for CNTD. The total projects on hand, under the above schemes, are as follows: Page 3 of 10

4 Exhibit 2: Example of CNTD s announced projects co-invested with the Investment Fund (6 of total 13 announced so far) For CNTD, it has invested in 5 projects directly via its own fund, totaling Rmb1.1bn, to obtain 12%-17% unleveraged investment return. Exhibit 3: Example of CNTD s announced projects funded directly by its own (4 of total 5 announced so far) Page 4 of 10

5 Realizing synergies its parentco CDB Capital Accessing CDB s vast development projects The numerous project announced in the past year will realize the synergies between CNTD and CDB, its parentco. CDB contributes its network and funding, while CNTD exerts its expertise in primary land development and infrastructure project management. CDB has heavily invested into urbanization, infrastructure and industrial zone projects which are likely to generate a good project pipeline to CNTD, in our view. Exhibit 4: CDB Capital s national-wide urban development project pipeline Tapping into the extensive industrial resources of CDB In Sep 2015, CNTD announced the development of Yuhuatai District Software Valley in Nanjing, which is a leading growth region in Nanjing city. CNTD will participate in the development and operation of the industrial park, and in the nurturing and investing in promising projects and companies. This is to leverage on the National IC Industrial Fund which has AUM of RMB120bn under the leadership of CDB Capital. It was also co-founded by renowned telecom and technology industry players such as China Mobile, China Electronics Technology Group, Beijing Purple Communications Technology and Sino IC Capital. The goal of the Fund is to attract social capital and leading technology for theinvestment and development of the integrated circuit industry, with the seamless integration between national strategy and market mechanism as advocated by national policies. Earlier this year, CNTD has signed a cooperation framework agreement with CDB Capital as investment manager of the National IC Industrial Fund on the construction and development of IC industrial zone. The extensive industry network and National IC Page 5 of 10

6 Industrial Fund should enable CNTD to obtain industrial zone development projects which is an extension to its primary land development business. Again, it shows that CNTD is consistently creating synergic opportunities for itself and CDB in the area of urban development. With the goal to facilitate the industrial upgrade and the development of key strategic industries, we believe that CDB will actively seek to establish other industrial funds in the future. Those will become significant backup for CNTD to obtain new industrial zone development projects in the future. Page 6 of 10

7 Gathering sufficient financial war chest from project sale and bond issue Holding of valuable land for future disposal In Dec 2014, CNTD sold its stake in Wuxi project for RMB1,134mn, which brought about a gain of Rmb620mn due to management s negative view on the land sale outlook of the region. Notwithstanding that, CNTD is still holding two quality projects, in Shanghai Luodian and Shenyang respectively. The market value or potential cashflow from future sale of those valuable pieces of land are not reflected in the balance sheets. CNTD s massive Shenyang landbank of 11.8mn sq.m. was last sold at Rmb740/sq.m., significantly above the unit cost of Rmb450/sq.m. Its landmark project in Shanghai is still left with an parcel of landbank of 575k sq.m. which was last sold at Rmb8.85/sq.m., significantly higher than its cost of Rmb3.21/sq.m. CNTD has the right to share 70% and 48% of the land proceed in the Shenyang and Shanghai project respectively. The Shanghai project is expected to be completed by end-2017 which will provide >Rmb2.4bn revenue to CNTD, at the last selling price, and gross profit of Rmb1.6bn. The Shenyang project is of very long term, however, which is expected to complete by Yet, CNTD will still receive interim cashflow from land sale. In sum, the value of those two projects amounts to Rmb8.6bn which is hidden on the cost-based balance sheets. Exhibit 5: Landbank in CNTD s primary development projects Note: 1.Cashflow to CNTD JV = Land sales proceed * proceeds sharing ratio 2.Net operating revenue of CNTD =Land sales proceed * proceeds sharing ratio * completion rate 3.Gross profit margin of CNTD = 1-cost/ (Land sales proceed * sales proceeds sharing ratio * completion rate) Successful issuance of Rmb1.3bn senior guaranteed notes at favourable rate In April 2015, CNTD announced the completion of issuing senior guaranteed notes of RMB1.3bn were senior guaranteed notes issued by the Company in The coupon rate of 5.5% is very favourable to CNTD, in our view, given that a lot of property players which are much larger in size than CNTD, have issued bond or notes at coupon rate of >6%. It is also amid the expected depreciation of Rmb and weak offshore bond market in The successful issuance attributes to a large extend to credit enhancement measures such as the keepwell deed, liquidity support and deed of equity interest purchase undertaking from CDB Capital, CNTD s controlling shareholder. With this successful attempt in tapping the credit market, CNTD has opened an important channel for gathering war chest for new projects. Page 7 of 10

8 To be rewarded in 2016, while downside on share price is limited Could start to record recurring profit in 2016 CNTD has locked in around Rmb1bn from investment on its own capital, and Rmb65mn on collaboration with CDB Capital. Altogether, we estimate that income from those investment would be near Rmb200mn which is sufficient to pay off its interest expense of <Rmb100mn and operating expenses of <Rmb80mn. Moreover, CNTD expressed that they are still searching for new investment from both CDB s project pool as well as outside sources of urbanization related projects especially PPP ones. Such income flow is more visible and stable than CNTD used to have. Market cap significantly below equity value, with hidden land value as a plus With book value of Rmb3.8bn as of end-jun 2015, CNTD is trading at market cap of merely HK$2.7bn, representing <0.6x historical book value. We believe further value to be unlocked via: 1) selling of the project land bank which valued at Rmb8.6bn assuming at the last selling price; 2) investing in new projects with the Rmb1.2bn net cash on hand (most of it were from share issuance to CNTD in 2014 and senior note sale in 2015) to generate recurring income. Nevertheless, the current share price is close to CDB s share subscription price of HK$0.27. Potential optimization of shareholder structure to remove overhang CDBIH, the largest shareholder, has entered into a charge over shares with SREI (the 2 nd largest shareholder) on its 14.9% shares in CNTD, against its outstanding payment obligation of around RMB1.5bn. Since SREI is already behind the payment schedule, CDBIH has the right to dispose those shares to new strategic investors, which could bring new synergies to CNTD. Page 8 of 10

9 Exhibit 6: Financial statements Income statement Cash flow Year to Dec (Rmb '000) FY13A FY14A Year to Dec (Rmb '000) FY13A FY14A Revenue 608,256 56,813 Pre-tax profit 11,096 (716,011) Gross profit (reported) 1,202,481 1,223,851 Taxes paid 504,974 (133,474) EBITDA 125,826 (630,088) Depreciation 0 0 Depreciation 0 0 Associates 0 0 EBIT 125,826 (630,088) CFO bef. WC change 516,070 (849,485) Net interest income (114,730) (85,923) Change in working cap (3,343,621) (14,216) Associates 0 0 Cashflow from operation (2,827,551) (863,701) Exceptionals/others 0 616,091 CAPEX (2,292,186) 2,214,562 Profit before tax 11,096 (99,920) Free cash flow (5,119,737) 1,350,861 Tax expenses (33,282) 44,941 Dividends 0 0 Minority interest 0 0 Balance sheet adj. (1,375,420) 832,237 Net profit (continued operating) (22,186) (54,979) Sharse issued 2,457,188 1,068,628 Dividends 0 0 Others 0 0 Net cash flow (4,037,969) 3,251,726 Balance sheet Net cash (debt) start 0 (2,804,529) Year to Dec (Rmb '000) FY13A FY14A Net cash (debt) at year-end -4,037, ,197 Cash & equiv 332, ,451 Trade receivables 765,104 1,970,292 Ratios Other receivables 0 0 Year to Dec FY13A FY14A Inventories 5,136,395 1,549,079 Growth rate (%) Other current assets 2,322,165 4,912,776 Revenue (90.7) Fixed assets 1,631,967 41,350 EBITDA (600.8) Intangible assets 0 0 EBIT (600.8) Investment, associates etc 1,375, ,183 Net profit Total assets 11,563,384 9,812,131 Fully diluted EPS Margins (%) Account payables 2,557, ,534 Gross margin (reported) Other payables 0 0 EBITDA 20.7 (1109.1) Short-term debt 1,338,992 4,921,570 EBIT 20.7 (1109.1) Other current liabs 2,370, ,440 Net margin (3.6) (96.8) Long-term debts 1,797,870 0 Other ratios Deferred tax and others 518,403 21,151 ROE (%) (0.7) (1.4) Other long-term liabs 0 0 ROA (%) (0.2) (0.6) Total liabilities 8,584,100 5,964,695 Net gearing (%) (11.6) Interest coverage (x) 1.1 NA Share capital 2,980,809 4,110,841 Effective tax rate (%) Reserves (523,621) (585,025) Shareholders' equity 2,457,188 3,525,816 Minorities 522, ,620 Total equity 2,979,284 3,847,436 Net cash (debt) -2,804,529-4,126,119 Page 9 of 10

10 Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Hayman Chiu Research Director (852) hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) kenneth.li@cinda.com.hk Lewis Pang Senior Research Analyst (852) lewis.pang@cinda.com.hk Wilfred Yuen Research Analyst (852) wilfred.yuen@cinda.com.hk Johnny Yum Research Assistant (852) johnny.yum@cinda.com.hk Analyst Certification I, Lewis Pang, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 10 of 10