City Developments (CDL) is selling its stake in Sincere Property Group for the nominal sum of US$1 (S$1.34), as it ends the tumultuous backing of the cash-strapped Chinese developer.
At the same time, the Singapore real estate group has raised its stake in a technology park in Shenzhen.
Its shares jumped over 2 per cent when trading began yesterday, hitting $6.81 in the opening minutes, up from $6.67 at last Friday's close. The counter closed about 5.4 per cent higher at $7.03.
CDL will sell a 63.75 per cent equity interest in HCP Chongqing Property Development - which owns an 80.01 per cent stake in Sincere, according to a statement published late last Friday. The buyer is Sure Spread, an unrelated third party incorporated in Seychelles.
Sure Spread, which is headquartered in Hong Kong, is reportedly owned by Jiangxi Copper, a state-owned enterprise. It markets semi-finished metal products, among other businesses.
The consideration was agreed upon after taking into account Sincere's current liquidity issues and its potential bankruptcy, CDL said.
For its fiscal year 2020, CDL had booked a $1.78 billion impairment for losses attributable to Sincere - effectively writing down 93 per cent of its total investment in Sincere.
A bankruptcy claim has been filed against Sincere in China. The Chinese developer has also missed payment on a bond.
Concurrently, CDL is increasing its stake in a company that owns 65 per cent of Shenzhen Longgang Tusincere Tech Park (Shenzhen Tech Park). A Shenzhen Longgang District state-owned enterprise holds the remaining 35 per cent. The transfer represents partial repayment of a loan owed by Sincere to a wholly owned subsidiary of CDL.
The Sincere divestment and the agreement with Shenzhen Tusincere Technology Park Development Co "allow the group to exit its investment in Sincere, and avoid being engaged in a possibly long-drawn bankruptcy reorganisation of Sincere", according to the statement.
CDL had in February acquired 84.6 per cent of Shenzhen Tusincere from Sincere for 850 million yuan (S$177 million).
The latest transaction will make Shenzhen Tusincere a wholly owned subsidiary of CDL, which will have direct operational control over the project management of Shenzhen Tech Park and be in a position to ring-fence its investment in the property.
Total investment in Shenzhen Tech Park, which occupies 830,000 sq m, is valued at 13 billion yuan. The park is still undergoing construction, according to the latest update posted on its official WeChat account on July 31.
The transfer will further reduce CDL's financial exposure to Sincere, which was $117 million at the end of June. CDL said the reduction in exposure would be "by the fair value" of the transfer, but it did not provide the amount. It said it will "continue to assess the recoverability of the remaining balance of its financial exposure".
All CDL nominee directors and officers will resign from Sincere and its related companies.
The group does not expect the Sincere divestment and Shenzhen Tusincere agreement to have a material impact on the group's earnings per share of net tangible asset per share for fiscal year 2021.
RHB Singapore analyst Vijay Natarajan said: "We believe the move will help management refocus on its core business in the Singapore market and hospitality segment rather than being dragged down by a possibly long-drawn litigation process in China."
Sincere investments have been a drag on the CDL's bottom line and share price, but last Friday's announcement likely means that the negative impact is easing off, he added.
"One of the key takeaways from Sincere investments has been the high gearing levels (leading) to the sharp downfall of Sincere on the back of the Chinese government's tightening credit exposure moves (China's three red lines campaign) on the real estate sector. Thus the group is likely to keep its gearing in check for its future investments."
Citi Research analyst Brandon Lee said in a research note that CDL's sale underlines the management's focus to make a clean exit from Sincere and avoid being embroiled in a potentially lengthy bankruptcy process.
The group is expected to focus on residential and hotel operations in Singapore now with Sincere on the back burner, he added.
Jefferies equity analyst Krishna Guha said the sale of the Sincere stake should not be construed as a reset of CDL's diversification strategy.
"We think management will be more calibrated in engaging in transformative deals but will continue to incrementally increase overseas exposure steadily over time. In China, it is focusing on sectors such as business parks and workers' dorms," he said.
THE BUSINESS TIMES, BLOOMBERG
• Additional reporting by Choo Yun Ting, Aw Cheng Wei