China conglomerate Legend spins off property unit to focus on consumer and service sector

Legend and Sunac shares both rise after property project deals valued at almost HK$16 billion

PUBLISHED : Monday, 19 September, 2016, 10:13pm
UPDATED : Monday, 19 September, 2016, 10:22pm

The multibillion-yuan sale of property projects by mainland conglomerate Legend Holdings to home builder Sunac China Holdings is the latest move by Legend to revamp its business, after a 75 per cent decline in net profit in the first half at its property unit dragged down the group’s interim performance.

Speaking to the Post on Monday, Ning Min, chief financial officer of Legend, said: “We believe the consumer and service sectors will bring opportunities for quick growth ... the deal will facilitate Legend to focus resources on core businesses including financial services, medical services, modern agriculture and renovated consumption services.”

Revenue at the property unit increased only 3 per cent year on year in the first six months to 4.49 billion yuan, despite being driven by sales in first and second-tier cities, while net profit dropped 75 per cent to 365 million yuan.

After repaying outstanding debt of about 7.5 billion yuan in its real estate development business, net proceeds from the sale, worth 13.79 billion yuan, would be used to invest in its core business, the group said in the filing on Sunday night.

Li Xingwen, an analyst with ICBC Research, said the land package sold by Legend comprised “both good and bad land pieces all over China”, and was a bargain for Sunac.

“Sunac now has strong sales ability, good design and construction ability, so acquiring land from Legend saves money, time and energy. It will give the home builder a boost, but it is unlikely to lift financial performance this year due to settlement arrangements,” he said.

Sunac’s first-half revenue rose 94.5 per cent year on year to 10.6 billion yuan, but net profit plunged 92.3 per cent to 72.9 million yuan, as higher finance costs eroded most of the gains from increased property sales.

Analysts said the deal was a sign of a further consolidation in China’s property market amid rising competition and squeezed profit margins in the industry.

“While stronger players can acquire the land of companies that quit the market – the cost would be lower than at public auction and this is leading to further consolidation and concentration of resources in China’s property market,” he said.

Hong Kong-listed Legend and Sunac issued a joint statement on Sunday evening announcing the sale.

The deal includes equity interests in some 40 companies that hold the rights to the property projects, as well as the onshore and offshore debt they carry.

After the deal, Legend will see its property business mostly spun off, except for an interest in a Beijing industrial park, with leasable area covering about 180,000 square metres, and a 60 per cent equity interest in a Wuhan property company formerly owned by the group.

Legend said in the filing that the projects are spread across 16 mainland cities including Beijing, Tianjin, Chongqing, and Hangzhou, cover an aggregate site area of about 6.94 million sq metres, a total gross floor area of about 18 million sq metres, and an unsold area of about 7.3 million sq metres.

Sunac said the deal would allow the company to expand its property development in major and second-tier mainland cities.

Legend’s share price rose 2.04 per cent to close at HK$20 in Hong Kong on Monday.

Meanwhile, the price of Sunac’s shares increased 7.12 per cent to end at HK$5.87.