Financial Statement Announcement for the 4th Quarter ended 31st December 2017
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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 twelve months and quarter ended 31 December 2017
In 4QFY2017, the Group recorded lower revenue from the Sale of Properties of RMB224.1million (43.7%) as compared to 4QFY2016 mainly due to fewer units handed over from the Ying Li International Electrical and Hardware Centre and San Ya Wan Phase 2 project. The decrease was partially negated by sales at some of the older completed projects and Investment Properties. Rental income of the Group for 4QFY2017 also experienced a slight decrease of RMB3.9millon (7.1%) as compared to the same period last year mainly due to some tenants had opted not to renew their leases upon expiry and rent‐free periods for fitting out had to be granted to new tenants, and some Sale of Properties were sold with rental contracts. Thus, rental income from those properties sold ceased to be recognized by the Group.
For the full year 2017, Revenue of the Group increased by RMB20.7 million (1.9%) to RMB1.1 billion as compared with FY2016. Revenue from the Sale of Properties increased RMB25.3 million (2.9%) compared to FY2016 which was mainly driven by the sales of existing units from older completed projects, Investment properties as well as the continued handover of the residential units at San Ya Wan Phase 2 project and commercial units at Ying Li International Electrical and Hardware Centre ("Ying Li IEC") Phase 1A and 2A during the year. Rental income decreased marginally by RMB4.7 million (2.2%) mainly due to loss of revenue from some Sale of Properties were sold with rental contracts.
Gross profit of the Group for 4QFY2017 decreased by RMB59.6million (40.8%) to RMB86.4 million as compared to the same period last year in line with the decrease in revenue (40.2%) during the quarter under review. Gross profit for the full year from the Sales of Properties decreased by RMB31.5 million mainly due to the mix of properties that were handed over in FY2017 where gross profits are difference, as well as sale of Investment Properties where the carrying values had been revalued annually to their fair values.
Gross profit margin
Gross profit margin of the Group for 4QFY2017 decreased marginally by 0.3 percentage point to 25.4% as compared to the same period last year. The Group's gross profit margin for FY2017 decreased by 3.9 percentage point year‐on‐year to 27.4%. Gross profit margin from the Sale of Properties decreased by 4.2 percentage point due to mix of properties sold, including older completed projects, handed over in 2017 where the gross profit margins are difference, as well as sale of Investment Properties where the carrying values had been revalued annually to their fair values.
The decrease in Interest income mainly arose from the withdrawal of fixed deposits pledged to financial institutions and others. The year‐on‐year increase in Other Income was mainly due to a one‐off gain on the disposal of subsidiaries.
Selling expenses increased marginally by RMB1.3 million (4.7%) in 4QFY2017 to RMB29.0 million as compared to 4QFY2016 mainly due to an increase in marketing agency fees and amount of renovation subsidies paid to new tenants during the period under review.
Selling expenses decreased by RMB7.8 million as compared to FY2016 mainly due to lower expenditures incurred on advertising and promotion activities, and lower property management expenses.
Administrative expenses were RMB21.1 million (35.6%) lower for the quarter under review as compared to 4QFY2016. The decrease is mainly due to foreign exchange gains on foreign currency denominated loans arising from USD denominated loans as compared to a loss in the same period last year.
Administrative expenses for the full year 2017 also decreased by RMB17.8 million (13.9%) as compared to the prior year mainly due to a reversal from foreign exchange losses recorded in 2016 to foreign exchange gains in 2017 due to the weakening of the USD.
Fair value gain on investment properties
For the full year FY2017, the total fair value gain on investment properties was RMB39.3 million. This gain is the difference between the fair values of investment properties as at 31 December 2017 as compared to the carrying value of investment properties as at the equivalent period in 2016, adjusted for those Investment Properties sold during the year. The increase in fair value gain was generally due to the increase in property prices in the PRC during the year.
Fair value on other investments
For the full year FY2017, the fair value gain from investment in Beijing Tongzhou project amounted to RMB260.0 million, as compared to RMB18.0 million in FY2016. The Other investment refers to the Group's investment in Shanghai Zhao Li Investment Centre LLP where it invested directly in Shanghai Sheng Ke Investment Centre LLP. The objective of the investment is to jointly participate in the Beijing Tongzhou Project as Shanghai Sheng Ke Investment Centre LLP directly owns the project companies holding the Beijing Tongzhou Project. The fair valuation of other investment is based on the fair value of the underlying Beijing Tongzhou project.
For the quarter under review, finance costs were RMB39.9 million (185.4%) higher as compared to 4QFY2016 due to a decrease in the amount of capitalised finance costs on the Ying Li International Commercial Centre upon the disposal of the project in 4QFY2017.
Tax expense of the Group increased by RMB43.2 million (99.0%) year‐on‐year to RMB86.9 million mainly due to higher deferred tax provision arose from Fair value gain on Investment properties and other investments.
Profit attributable to ordinary shareholders of the Company
Overall, profit attributable to the ordinary shareholders of the Company increased by RMB251.4 million (381.6%) to RMB317.3 million in 4QFY2017. For FY2017, profit attributable to the ordinary shareholders of the Company increased by RMB262.6 million as compared to FY2016. The increase in profits was mainly due to one‐off gains recognized on the disposal of the subsidiary holding the Ying Li International Commercial Centre project in the last quarter of FY2017 and fair value gains on other investments.
Statement of Financial Position
Total Assets of the Group decreased by RMB778.9 million to RMB11.1 billion during the year mainly due to a decrease in development properties of RMB3.1 billion arising from the disposal of a subsidiary that held the Ying Li International Commercial Centre project ("Ying Li ICC") and the handover of completed properties to purchasers. The decrease was off‐set by i) an increase in trade receivables of RMB2.1 billion from the disposal of the subsidiary that held the Ying Li ICC; and ii) an increase in Investment properties and Other investments amounting to RMB288.8 million that mainly arose from fair value gains on these assets, negated by the sales of some investment properties.
The Group's total liabilities decreased by RMB1.01 billion to RMB5.8 billion during the period under review. The decrease in liabilities was mainly due to i) a reduction in borrowings amounting to RMB895.7 million; and ii) a decrease in trade and other payables of RMB166.1million mainly due to progress payment made for construction costs.
The Group's total equity increased by RMB231.7 million to RMB5.3 billion during the period under review mainly due to an increase in Retained profits that is attributable to the gains on disposal of a subsidiary and fair value gains on Investment Properties and Other investments held by the Group.
Statement of Cash Flow
The increase in unrestricted cash and cash equivalent of RMB187.3 million for the quarter under review was mainly due to:
- net cash inflow of RMB75.7 million from operating activities;
- net cash outflow of RMB0.2 million from investing activities; and
- net cash inflow of RMB111.8 million from financing activities.
The net cash inflow from operating activities of RMB75.7 million was mainly attributable to (1) cash generated from operating profit of RMB24.9 million and (2) a decrease of RMB2,907.0 million in development properties mainly due to the disposal of the Ying Li ICC subsidiary, handover of completed units at Ying LI IEC and San Ya wan Phase 2. This was off‐set by (1) an increase in trade and other receivables of RMB2,647.3 million mainly due to receivables from disposal of the Ying Li ICC subsidiary; and (2) a decrease in trade and other payables of RMB145.7 million mainly due to the payment made to suppliers, as well as net interest and income tax paid of RMB66.3 million.
Net cash generated from financing activities of RMB111.8 million includes a net increase in borrowings of RMB69.5 million mainly due to the refinancing of loans, and the release of cash collaterals pledged to financial institutions to secure loan facilities amounting to RMB42.3 million.
Commentary On Current Year Prospects
According to Chongqing Statistics Bureau, Chongqing posted a GDP growth of 9.3% Y‐o‐Y to RMB1,950.0 billion in 2017. Although the People's Republic of China ("PRC") exceeded expectations with a GDP growth of 6.9% Y‐o‐Y in 2017, Chongqing's steady economic growth surpassed the country's overall growth while maintaining its lead as one of the fastest growing cities in the PRC. In line with the positive economic development, Chongqing's disposable income per capita grew by 8.7% Y‐o‐Y to RMB32,193 while total retail sales of consumer goods expanded by 11.0% Y‐o‐Y to RMB806.8 billion in 2017.
Chongqing Office Market
Underpinned by the city's healthy economic growth, Chongqing's office market progressed steadily in 2017 boosted by demand from finance and professional services sectors. In the year, eight new office projects located mainly in Jiangbeizui entered the market and contributed a new supply of 651,300 sqm, of which 482,700 sqm were Grade A office spaces. In spite of the new supply, overall net absorption increased by 49.8% Y‐o‐Y to 502,900 sqm in 2017. Notably, the net absorption of Grade A office improved by 89.0% Y‐o‐Y to 331,200 sqm aided by strong office upgrade demand. As such, vacancy rate for Grade A office dropped positively by 4.2 percentage points Y‐o‐Y. Out of all the core business districts, Jiefangbei continued to outperform with the lowest vacancy rate and highest average rental in 2017, testament to its strategic and prominent location favored by multinational corporations.
(Source: JLL Research, 2017 Chongqing Property Review)
Chongqing Retail Market
2017 was a vibrant year for the retail market. A total of seven new retail projects were launched in the year, added 833,600 sqm to the retail scene. Albeit the new projects, net absorption increased by 43.4% Y‐o‐Y to 711,300 sqm while vacancy rate declined by 0.9 percentage points Y‐o‐Y. As F&B and fashion segments continued to dominate retail malls, the discernible shift in consumer spending largely driven by the burgeoning middle class and the prevalence of e‐commerce necessitate the transformation of the retail landscape. Evidently, the retail market witnessed several major developments in the year. Firstly, retails malls are providing consumers well‐beyond traditional shopping options. Value‐added elements such as service‐based retailers were rapidly expanding their presence in retails malls. These service‐based retailers include spas, fitness centres, entertainment facilities and childcare centres. Further to that, entertainment, experiential and children‐focused concepts were fast becoming important keys to attracting foot traffic. Lastly, the deployment of online‐to‐offline business strategies by retailers to enhance shopping experience was also a vital development in the year.
(Source: JLL Research, 2017 Chongqing Property Review)
Chongqing Residential Market
To address surging home prices and sales, Chongqing's municipal government rolled out its first purchase restrictions where selling of residential properties are banned for two years from date of purchase with effect from 23 September 2017. The measures prompted a slowdown of new launches by developers in 4Q2017 with new supply tapering off to 8,400 premium units by the end of 2017. Although demand was active throughout the year, the purchase restrictions and mortgage tightening policies led to a 23.3% decrease Y‐o‐Y to 7,900 premium units in 2017. However, with the launch of several premium projects during the year, the average selling price recorded a significant increase of 38.7% Y‐o‐Y to RMB 18,000 per sqm at the end of 2017.
(Source: JLL Research, 2017 Chongqing Property Review)
Following the enforcement of a price cap policy whereby the selling price of residential projects are controlled by the Beijing government, home prices faltered by 0.7% Q‐o‐Q in 4Q2017 on the back of 772 units new supply of premium apartments. Although successful in keeping a lid on price escalation, the policy was simultaneously fanning the flames of the overheated market as buyers were enticed by the new project launches which were selling at below market rates. As a result, sales volume of premium apartments increased 76.5% Q‐o‐Q in 4Q2017.
Prior to the price cap policy, the average selling price of residential projects in Beijing Tongzhou had risen from RMB 16,950 per sqm in 2010 to more than RMB 50,000 in 2017, based on statistics from Centaline Property.
(Source: JLL Research, Beijing Property News)
The Group currently has two existing projects under‐development. The Lion City Garden is at Phase 2D of development while the bespoke development Ying Li International Hardware and Electrical Centre (IEC) is progressing in accordance with development plans, particularly with the handover of IEC Phase 2A which commenced from 3Q2017. The commencement of Metro Line 10 at the end of 2017 will benefit the Lion City Garden project Phase 2D as Metro Line 10 San Ya Wan station is situated directly in front of the project.
On the retail front, the Group recognises the trends advancing through the retail space and has made targeted efforts to broaden the value proposition for consumers through repositioning and tenant‐mix adjustments. Apart from optimising retail spaces and emphasizing on experiential retailing for both its IMIX Park malls, the Group increased the proportion of service‐based retailers, such as popular wellness group Changle Foot Massage, spa chain The Ivy and fitness centre Will's in Ying Li IMIX Park Jiefangbei. While for Ying Li IMIX Park Daping, in order to better serve the residential catchment of Daping district, the Group maintained its focus on family/children and leisure/entertainment concepts which saw the opening of several education centres, indoor entertainment facilities and children‐related stores throughout the year. In addition, Ying Li IMIX Park Daping hosted numerous events throughout the year aimed at creating the mall as a hub for the local community.
Over at Beijing Tongzhou, the district had become the city's new municipal administration centre. According to the plan released by the Beijing government in March 2017, Beijing Tongzhou is expected to accommodate a population of 1.3 million by 2030 and will also serve as a hub for business, culture and tourism. With the commencement of one of the new railway lines linking Beijing's CBD with Tongzhou at the end of 2017, commuters only require 28 minutes of travelling time between the two districts.
The Group's investment in New Everbright Centre project remains healthy amidst the purchase restrictions meant to rein in rising home prices in Beijing Tongzhou. Construction for SOHO towers is progressing as planned with handover set in 2018 while the construction has commenced on the office/retail land site.
Looking ahead, the Group will remain watchful on the macro uncertainty and market volatility while continuing to scout for sound development and investment opportunities in Tier 1 and fast‐growing lower tier cities to build pipelines for future growth.