Debao unit to sell stake in loss-making Malaysia business Profit Consortium

SINGAPORE - Debao Property Development is proposing to sell a 43 per cent stake in Malaysia's Profit Consortium (PC) for four million yuan ($808,793) to Chinese management services firm Guangzhou Xu Zhuo Enterprise Management.

Debao, a Singapore-based developer of residential and commercial properties in China, intends to use the entire proceeds from the proposed disposal for working capital, it said in an exchange filing on Monday (April 29) before the market opened.

The proposed disposal is an opportunity for Debao to divest its loss-making business, as PC has been incurring significant losses since 2016 - with net accumulated losses amounting to RM7.8 million ($2.6 million) as at Dec 31, 2018 - due to the high finance cost for its Plaza Rakyat project.

Debao's wholly owned subsidiary, Pavillion Treasures Land and Development, on April 26 entered into a sale and purchase agreement (SPA) with the buyer, Guangzhou Xu Zhuo, and guarantors Guangdong Debao Property Investment and Guangzhou Xiang Chun Enterprises Management for the disposal.

Through Pavillion Treasures, Debao owns a 62 per cent interest in PC, while the remaining shares are held by independent third party shareholders.

After the proposed disposal, Pavillion Treasures will hold a 19 per cent interest in PC.

The parties to the SPA also agreed that the buyer, Guangzhou Xu Zhuo, will loan 136 million yuan to PC as working capital for the repayment of PC's accounts payables.

PC is to continue with the development of the Plaza Rakyat project - a large-scale integrated development comprising residential units, a five-star hotel, a budget hotel, offices and a shopping mall.

PC finalised the development plan in 2017 and started repair works of the existing development on the land for the project, but the works have been delayed due to PC's cash flow difficulties in funding the Plaza Rakyat project and/or working capital requirements, Debao said in the filing on Monday.

For the Plaza Rakyat project, PC entered into a SPA in October 2015 with Datuk Bandar Kuala Lumpur to acquire five Malaysian land parcels in central Kuala Lumpur for a total of RM700 million, excluding pension and interest for late payment.

Debao said it faces a strained cash flow due to tightened monetary policies by the Chinese government to curb liquidity and higher bank statutory reserves. As a result, the amount of funds available to commercial banks in China to lend to businesses including Debao has decreased. Interest rates have also risen, leading to higher finance costs.

Debao requires "significant capital injection" to fund the development of its other projects, it said. In the meantime, the sale of PC would provide working capital to fund the property development projects, reduce the group's liabilities and strengthen its financial position as a whole.

The acquisition price of four million yuan was determined based on arm's length negotiations between the buyer and Pavillion Treasures. In arriving at the price, both parties took into account, among other factors, the cash flow, value of the assets held by PC and the payment deadlines faced by PC with respect to the Plaza Rakyat project.

Debao Property Development shares were trading at $0.10 as at 9.57am on Monday, up 2.2 cents.