COMMERCIAL PROPERTY

Shui On Land

Shui On to sell assets to pare debt, explore new revenue sources

Shui On aims to build as many as 10 of its knowledge and innovation community projects in China over a decade

PUBLISHED : Tuesday, 07 March, 2017, 5:29pm
UPDATED : Friday, 21 July, 2017, 7:15pm

Shui On Land, the pioneer developer of China’s heritage landmarks, said it will continue to sell commercial assets and explore new revenue sources like its property management service to pay down debt.

The developer of the Shanghai Xintiandi, which is already replicating the heritage enclaves in Wuhan and Chongqing, has also begun to focus on its start-up ecosystem concept called the knowledge and innovation community. It aims to build as many as 10 such communities in China over a decade.

“It’s exactly what the Chinese government wants to promote throughout China,” Shui On’s chairman Vincent Lo Hong-sui said in an interview with The Peak magazine, published by the South China Morning Post. “We might be able to secure a couple of jobs in the near future. The next step for the Chinese economy must be in that direction.”

Shui On had been selling off commercial assets to bring down its debt, in one case to Lo’s brother Lo Ka-shui, after the company shifted direction in 2015 to what Vincent Lo called an “asset-light” strategy.

Vincent Lo admitted that his previous business model of developing commercial assets for rental resulted in too long a time frame for return on investment, leaving gearing ratios too high.

In its 2016 interim report, Shui On reported that its gearing ratio had dropped 12 percentage points to 75 per cent from the previous year.

Its asset turnover rate, a measure of the company’s efficiency in deploying its assets, exceeded 20 per cent in 2016, compared with 18 per cent in 2015 and 9 per cent in 2014, Lo said.

“We are making good progress, but we’re not stopping there,” Lo said. “We will continue. We can generate profit from our management expertise, so that’s how we are approaching it now.”

However, the average gearing ratio in the industry is about 65 per cent, leaving Shui On with a still relatively high ratio.

Danielle Wang and Andy Yee of DBS Vickers are also pleased with Shui On’s move to residential projects in Wuhan, considering this a good move for the future.

Some of China’s biggest property players have been showing more stomach for high debt levels.

Country Garden Holdings, in an effort to build up its land bank, has raised its net gearing ratio from 60 per cent to 88 per cent at the end of 2016.

Meanwhile, China Evergrande Group, one of the country’s top three developers, reported a net gearing ratio of 430 per cent by the end of June 2016. The company also appears to have cultivated its own connections in Shenzhen.

Only one knowledge and innovation community has been completed in Shanghai, a 48-hectare, mixed-use development aimed at encouraging start-up ecosystems, a subject that is of keen interest at the highest levels in Beijing, according to Lo.

(These are excerpts of an article published in the March issue of The Peak magazine, available by invitation and at selected bookshops.)

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