Financial Statement Announcement for 3rd Quarter ended 30 September 2016
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Profit & Loss
Review of Performance
Statement of Comprehensive Income
Due to the nature of the industry that the Company operates in, recognition of revenue from the sale of properties is driven by project hand-over. Consequently, quarterly results may not be a good indication of profitability trend.
For the nine months and quarter ended 30 September 2016
Revenue of the Group for 3QFY2016 increased by RMB139.2 million (124.4%) to RMB251.0 million as compared with that of 3QFY2015. The increase was mainly due to higher revenue from the Sale of Properties segment that were mainly driven by the continued handover of completed residential units at Sa Yan Wan Phase 2.
Rental Income decreased by RMB7.2 million (12.8%) in 3QFY2016 to RMB49.4 million as compared to the same period last year. The decrease was partially due mainly due to the introduction of the Value Added Tax ("VAT") regime in China, and certain tenants not renewing their leases and rent free periods that had to be provided to new tenants at the IFC office, Ying Li IMIX Park Jiefangbei and Ying Li IMIX Park Daping. With effect from 1 May 2016, VAT will be imposed on the revenue received from customers in place of business tax. Revenue received will be inclusive of VAT and the tax will be deducted directly from revenue and paid to the tax authorities.
Gross profit of the Group for 3QFY2016 decreased by RMB1.4 million (2.3%) to RMB60.3 million as compared to the same period last year. The decrease was mainly due to the decline in gross profit from the Rental Income due to certain tenants not renewing their leases and rent free periods that had to be provided to new tenants at the IFC office, Ying Li IMIX Park Jiefangbei and Ying Li IMIX Park Daping.
Gross profit margin
The Group's gross profit margin for 3QFY2016 decreased by 31.2 percentage points to 24.0%. Gross profit margin from Sale of Properties decreased as the units that were handed over in 3QFY2016 mainly comprised high-rise residential units at San Ya Wan Phase 2. Suburban high-rise residential units enjoy far lower gross profit margins as compared to those of prime office units such as those at Ying Li International Plaza that were handed over in the same period last year.
The year-on-year decrease in Other Income was mainly due to lower interest income from deposits placed with financial institutions and others.
Selling expenses increased marginally by RMB0.1 million in 3QFY2016 to RMB20.7 million as compared to 3QFY2015 mainly due to ongoing advertising and promotional activities for ongoing projects.
During the quarter under review, Administrative expenses were RMB1.4 million (5.2%) lower compared to 3QFY2015. The decrease in Administrative Expenses was mainly due to an absence of a bad debt amounting to RMB3.8 million that was written off during the same period in the previous financial year.
For the quarter under review, finance costs were RMB5.3 million (18.0%) lower as compared to 3QFY2015. This is mainly due to a reduction in borrowing cost at the Group. Interest expense directly attributable to projects would generally be capitalised as part of the project costs.
During the quarter under review, current income tax expense increased by RMB2.6 million (108.8%) as compared with 3QFY2015 mainly due to an increase in taxable profits generated from the Sale of Properties in 3QFY2016.
Total comprehensive income for the period
Total comprehensive income for the period decreased by RMB7.2 million as compared to 3QFY2015. The decrease is mainly due to a net loss after tax recorded for the period. This was due to lower gross profits generated from the Sale of Properties due to the nature of the properties that were handed over. In addition, gross profit from the Rental income was lower during the quarter due to certain tenants not renewing their leases and rent free periods that had to be provided to new tenants at the IFC office, Ying Li IMIX Park Jiefangbei and Ying Li IMIX Park Daping. This was offset by unrealised exchange gains arising from the translation of the financial statements of the entities where the functional currency differs from the presentation currency of the Group. The functional currency of the offshore holding companies are denominated in Singapore Dollars ("SGD") while the presentation currency of the Group is denominated in Chinese Yuan ("RMB"). The translation gains arose due to the strengthening of the RMB against SGD during the quarter.
Profit attributable to ordinary shareholders of the Company
Overall, net profit attributable to the ordinary shareholders of the Company decreased by RMB2.9 million to RMB0.01 million in 3QFY2016.
Statement of Financial Position
Total Assets of the Group decreased by RMB62.3 million to RMB11.9 billion during the period under review. The decrease in assets was mainly attributable to a decrease in cash and cash equivalents of RMB801.5 million mainly due to the repayment of borrowings. This was offset by: i) an increase in development properties amounting to RMB589.4 million as progress is being made on the Ying Li International Commercial Centre and Ying Li International Electrical and Hardware Centre; ii) an increase in deposits placed with government agencies for land tenders amounting to RMB64.1million; (iii) an increase in prepayments of RMB83.0 million which was mainly due to prepaid taxes for the pre-sales at the Ying Li Lion City Garden and Ying Li International Electrical and Hardware projects, transfer to sinking funds in accordance with prevailing government regulations upon the handover of the Ying Li Lion City Garden project and loan upfront fees paid to financial institutions in accordance with loan agreements; and (iv) an increase in refundable deposits of RMB9.4 million arising from deposits paid to a financial institution pursuant to a loan agreement.
The Group's total liabilities increased by RMB11.4 million to RMB6.9 billion during the period under review. The increase in liabilities was mainly due to: i) an increase in trade and other payables of RMB345.8 million that was mainly attributable to an increase in pre-sales proceeds received of RMB372.7 million; ii) an increase in unsecured borrowings amounting to RMB333.6 million arising from the issuance of a bond in April 2016; and iii) an increase in trade payables of RMB28.5 million arising from projects under development. This was offset by a reduction in borrowings amounting to RMB314.2 million due to repayment of loans.
The Group's total equity decreased by RMB74.1 million to RMB5,009.0 million during the period under review, due to i) a reduction in Retained profits mainly due to the payment of distributions on the Perpetual Convertible Securities; and ii) a decrease in the Exchange fluctuation reserve because of RMB devaluation in FY2016. The Exchange fluctuation reserve mainly comprises cumulative unrealised exchange gains/losses arising from the translation of the financial statements of the entities where the functional currency differs from the presentation currency which is the Chinese Yuan ("RMB").
Statement of Cash Flow
The decrease in cash and cash equivalent of RMB88.5 million for the quarter under review was mainly due to:
- net cash outflow of RMB202.5 million from operating activities;
- net cash outflow of RMB0.7 million from investing activities; and
- net cash inflow of RMB114.0 million from financing activities.
The net cash used in operating activities of RMB202.5 million included cash generated from operating profit of RMB16.0 million. This was offset by i) a increase in trade and other receivables of RMB37.0 million mainly due to deposits paid for land tender; ii) decrease in trade and other payables of RMB7.0 million mainly due to the handover of the completed units at the San Ya Wan Phase 2 project; iii) increase in development costs amounting to RMB85.8 million incurred in the ongoing construction of the Ying Li International Commercial Centre project and the Ying Li International Electrical and Hardware Centre; and iv) net interest and income tax paid of RMB89.2 million.
Net cash from financing activities of RMB114.0 million includes: (i) release of cash collaterals that were previously pledged to financial institutions amounting to RMB135.3 million; ii) proceeds from loan drawdowns amounting to RMB340.4 million which was mainly used for repayment and iii) repayment of borrowings amounting to RMB361.8 million.
Commentary On Current Year Prospects
According to Chongqing Statistics Bureau, Chongqing maintained its growth momentum in 3Q2016 with a GDP growth of 10.7% Yo-Y to RMB1.3 trillion. In comparison, China's overall GDP grew by 6.7% Y-o-Y to RMB53.0 trillion. Along with Chongqing's robust GDP growth, disposal income per capital rose by 8.7% Y-o-Y to RMB22,840 while total retail sales of consumer goods increased by 13.1% Y-o-Y to RMB527.5 billion in 3Q2016.
Chongqing Office Market
In 3Q2016, only one office project located in Jiangbeizui with a gross floor area (GFA) of 40,800 sqm was released while net absorption remained healthy at 79,900 sqm. Demand was mainly driven by the financial sector and local enterprises. The average rental for offices, including both grade A and non-grade A offices, in the core CBD area of Jiefangbei continues to command a premium at RMB93.6 per sqm per month, as compared to the average office rental in Chongqing, which was at RMB83.2 per sqm per month.
Jiefangbei, as Chongqing's traditional CBD, remains as the undisputed centre of Chongqing and the primary choice for foreign companies to set up offices in Chongqing. Currently, Jiefangbei has the highest concentration of Fortune 500 enterprises as compared to other CBDs due to its prime location and quality offices.
(Sources: JLL Research, 3Q16 Chongqing Property Market Overview; CBRE Research, Chongqing Property Market Overview Q3 2016)
Chongqing Retail Market
After no new release of retail spaces in 2Q2016, two retail projects located in Daping and Nan'an with a combined GFA of 114,100 sqm opened in 3Q2016. This lumpy release contributed to an increase of 88.0% Y-o-Y in new supply in 3Q2016. Despite the ongoing repositioning at various retail malls and the resulting adjustments to their tenancy mix, overall vacancy rates remained low at 15.0% in 3Q2016. This was due to the active expansion of tenants with preferences toward quality retail malls in mature shopping districts such as Jiefangbei and Guanyinqiao.
Fashion and F&B sectors continue to drive the demand in the retail market while entertainment, children-related concepts and lifestyle concepts such as fitness centres are becoming key to improving occupancy rates. In 3Q2016, concept F&B outlet Taoyuan Village Restaurant made its first foray into Chongqing at Guanyinqiao and Will's Fitness Centre – a well-known chain with 150 outlets across Chongqing debuted at Jiefangbei's Ying Li IMIX Park Jiefangbei. Outlets offering children's enrichment classes are also on the rise in community-based malls located in non-core districts.
(Sources: JLL Research, 3Q16 Chongqing Property Market Overview; CBRE Research, Chongqing Property Market Overview Q3 2016)
Chongqing Residential Market
New supply in the premium segment of residential market fell 86.7% Y-o-Y to 600 units in 3Q2016 as several developers continued to delay new project launches. However, Chongqing's strong economic growth has driven the demand for its high-end residential properties as sales increased by 29.4% Y-o-Y to 2,200 units in 3Q2016. With demand gaining momentum, the average selling price rose by 1.7% Y-o-Y to RMB11,900 per sqm in 3Q2016.
(Source: JLL Research, 3Q16 Chongqing Property Market Overview)
In 3Q2016, there were no new high-end residential apartments or serviced apartments released in the market even as demand continue to rise. The overall transaction volume of Beijing's residential market increased by 5.0% Q-o-Q, while the high-end residential market surged by 41.0% Q-o-Q. Spurred by the growing demand, prices of the overall residential market increased by 4.5% Q-o-Q and 27.8% Y-o-Y.
According to a report by South China Morning Post, quoting Midland China's Director, the property curbs enforced in Tongzhou has eased the overheated market to a certain extent since May 2016 although there was no significant drop in property prices. Based on data collected by Midland China, Tongzhou secondary market witness a 47.7% Y-o-Y price growth to an average of RMB32,140 per square meter in May 2016.
(Source: Colliers International, Beijing Residential Q3 2016, National Bureau of Statistics of China)
With Chongqing's robust economic development, JLL Research expects demand for office upgrading to remain strong, thereby providing short-term support for gradual inventory destocking. Continual strong economic growth will also bode well for the serviced apartment sector with an influx of both domestic and foreign enterprises. On the retail front, JLL Research anticipates community and neighbourhood malls that caters specifically to the needs of the region's population will continue drawing a large measure of success. In addition, the continual rise in disposal income per capita is also likely to provide an uplift to the city's retail sector. For Chongqing's residential market, as there is no existing property purchase restriction in the city, JLL Research expects the positive market sentiment to persist in the near-term.
The Group is poised to be benefit directly or indirectly from Chongqing's buoyant economic growth as the development of its three Chongqing projects (Lion City Garden, Ying Li International Hardware and Electrical Centre, and Ying Li International Commercial Centre) is still ongoing and on track for completion at the respective stipulated periods. Riding on the city's retail consumption trends, the Group continues to concentrate its efforts on repositioning two of its three malls- Ying LI IMIX Park Jiefangbei and Ying Li IMIX Park Daping, with an emphasis on in-store experiences, lifestyle and entertainment concepts tailored to the needs of their respective target audiences.
Notwithstanding Chongqing's positive macroeconomic environment as support to the Group's business, the Directors are cautiously optimistic of the city's property market due to its short-term oversupply. Barring any unforeseen circumstances, including any adverse movements in the forex market or a further deterioration of China's macroeconomic environment, the Directors expect the group to remain profitable in FY2016.