Chu Kong joins property development game amid energy downturn
The Guangzhou-based pipeline producer is gradually converting its original manufacturing plant into flats and commercial space
Chu Kong Petroleum and Natural Gas Steel Pipe, one of the mainland’s largest producers and exporters of the pipes used in oil and gas pipelines, has turned to the mainland’s sizzling property development sector to offset losses amid the energy industry downturn.
The Panyu, Guangzhou-based company three years ago converted a quarter of its production base in the city from industrial use to a mixture of residential, commercial and office space, with allowed built-up floor area of 550,000 square metres.
It now plans to move its production operation to Zhuhai city and the coastal province of Jiangsu, as it gradually develops the remainder of the Panyu plot over the next eight to 10 years, according to executive director Lilian Chen Zhaonian.
Construction of the first phase of the three-phased development, involving 85,000 square metres of floor space, has almost been completed.
“In the past two years, the manufacturing industry has been in the doldrums, but the property sector has boomed,” Chen told the South China Morning Post in an interview.
“Although the property development business has helped us plug the profit gap, we will never give up our core business of steel pipe manufacturing, where our competitiveness and social responsibilities lie.”
Chu Kong posted a net loss of 253.5 million yuan for the first half of this year.
Excluding fair value gains from land conversion, its pre-tax loss amounted to 484 million yuan last year, compared to a loss of 452 million yuan in 2014 on the same basis.
The losses were partly caused by a substantial drop in steel pipe orders, as the government anti-corruption drive that saw the removal of many top officials in the mainland’s oil and gas companies slowed the construction timetable of long-distance gas pipelines. Higher overseas sales were not enough to offset these losses.
Aggressive expansion of production capacity in multiple locations, which led to a sharp jump in administration and finance costs, was also to blame.
“The facilities expansion we have made are for our long-term development, which will allow us to supply steel pipes to new areas such as offshore oil and gas platform building, undersea oil and gas pipelines and offshore wind farms and bridges when demand returns,” Chen said.
Chu Kong is still optimistic that demand for steel pipes will rise once oil prices recover and infrastructure investment by oil and gas firms rebounds. The firm’s 300,000-tonnes-a-year, US$200 million joint venture plant in Saudi Arabia is scheduled to start commercial operation later this year, after it recently received international product quality certification, Chen added.
Chu Kong have in the past 12 months sold some 750 of the first-phase development’s 939 apartments - ranging in size from 43 to 90 sq metres - at an average price of around 14,500 yuan per square metre.
Their average cost - comprising land use acquisition, construction and decoration - amounted to around 7,000 yuan a square metre, giving the development a handsome profit margin.
The project’s land cost of 1,000 yuan per square metre is only a tenth of the market price of comparable land, Chen said, since it already owned the land and only paid a premium to convert its usage.
Chu Kong will also start selling 43 houses with usable space of 700 sq metres each next month, the cheapest of which will cost just over 6 million yuan.
Chen said the unit price of the smallest apartments sold by Chu Kong has surged 46 per cent in the past 12 months.
“Now that we have less than 200 apartments to be sold while prices keep rising, we can slow down our sales pace,” she said.
Prices of new homes on the mainland last month recorded their strongest year-on-year rise so far this year, with average prices in 100 major cities climbing 13.8 per cent from a year ago.
The strongest growth was seen in the three mega metropolitan regions in the Pearl River Delta, Yangtze River Delta and Bohai Rim region, with Shenzhen recording a year-on-year rise of 43 per cent.
Chen expects Chu Kong to book its maiden property development revenue and profit in this year’s second half, on units it delivered to customers.
Chu Kong is not the only Hong Kong-listed manufacturer that has benefited from diversification into property development.
Kingboard Chemical, a major maker of printed circuit boards and related chemicals, made a foray into real estate development in the mainland in 2010 and reaped just over half its total profit from the property business in the year’s first half.