Urban renewal projects with slow turnover and high uncertainty, although they are on the right side for R&F Real Estate, which is heavily indebted, is an unknown road.
On September 20, 2021, the Hong Kong real estate sector suffered a huge plunge, and R&F Real Estate (02777. HK) fell by 7.34%.
At the critical moment, R&F Real Estate issued an announcement: the company's two major shareholders, Li Silian and Zhang Li, will provide financial support of 8 billion Hong Kong dollars to listed companies in the next two months.
The HK$8 billion shareholder fund provides R&F with timely liquidity support, calling it "life-saving money" is not excessive.
This life-saving money actually came from a big deal - Li Silian and Zhang Li sold R&F property, 10 billion yuan in cash. The buyer of R&F Property is also a giant in the real estate circle: Country Garden.
On the same day, Country Garden Services announced that it plans to acquire Furano Global for 10 billion yuan to acquire 100% of the equity of R&F Property. The deal set a record: the largest property acquisition in the history of China's real estate industry.
This is less than five months since R&F Properties submitted its listing application. And the transaction of its predecessor, Tianli Property, is only more than a year away.
However, when Li Silian and Zhang Li bought it, they only spent a "cabbage price": 300 million yuan.
01 Lost car
In April 2020, R&F Properties sold Tianli Property, its main platform engaged in property management services, to Guangzhou Fuxing, which is owned by Li Silian and Zhang Li, for a "cabbage price" of about RMB300 million.
In order to promote the listing of this platform, Li Silian and Zhang Li established an overseas holding company called Furang Global, which indirectly holds 100% of the equity of Tianli Property.
This series of transactions was widely questioned by the outside world at that time. After the announcement of the sale of Tianli Property, Galaxy CIMB Securities issued a report saying that the sale of the property company by R&F Real Estate was disappointing.
Galaxy CIMB also pointed out that if the statistics are based on the 2019 performance of R&F Property, the price-earnings ratio of the above transactions is about 6 times, which is far from the average price-earnings ratio of 23 times in the market at that time.
The doubts of many securities companies actually point to one place, selling to related parties and then seeking listing - which means that R&F Real Estate is conveying benefits to major shareholders.
Today's facts confirm this from one side – seventeen months later, the majority shareholders sold, with a transaction value of nearly 10 billion yuan and a premium of nearly 9.7 billion yuan.
The reason why R&F Real Estate will sell the property company cheaply is that "the two years ended in 2018 recorded losses and the net interest rate was low." ”
However, this statement does not convince the market, especially after the major shareholders take over. R&F Properties, which is ready to be listed, has transformed into a cash cow.
According to the prospectus of R&F Property, from 2018 to 2020, the revenue of R&F Property reached 1.823 billion, 2.17 billion and 2.597 billion yuan respectively, with a year-on-year increase of 19% and 19.7% respectively.
In 2019, R&F Property's profit turned from a loss to a profit of 63.8 million; in 2020, the company's profit broke out again, a significant increase of 275.6% year-on-year to 240 million. Overall gross profit also increased from 271 million in 2018 to 644 million in 2020.
The excellent performance of R&F Property is closely related to the upward prosperity of the property industry under the background of the second half of the real estate era. This makes R&F Property an excellent source of cash flow.
At the same time, R&F Property not only has traditional residential property management services, but also has commercial property management services.
As of the end of 2020, R&F Property has 552 projects under management, with a total GFA under management of 69.4 million square meters, of which residential properties have a GFA under management of 58.1 million square meters and commercial properties with a GFA under management of 11.2 million square meters.
Excellent business performance, as well as a good business composition, makes R&F Property a high-quality asset both internally and externally.
Internally, R&F Group's recurring turnover from property investment and hotel operations increased by 63% to RMB3.03 billion, and profitability from property investment continued to make a significant contribution, with a net profit of RMB540 million.
Externally, in the wave of property listings in 2020, R&F Property is obviously comparable. For example, at the beginning of the listing of China Resources Vientiane Life, its price-earnings ratio was as high as 120 times, and the smaller-scale China SCE Commercial Management also had a price-earnings ratio of nearly 40 times.
In the transaction with Country Garden Services, R&F Property also gave a commitment to future performance: Furang Global's audited non-attributable net profit in 2021 is not less than 500 million yuan, and the accounting income is not less than 4.2 billion yuan, which is basically double the performance of 2020.
Therefore, although Country Garden Services spent a premium of 9.7 billion yuan to make the acquisition, it is clearly very satisfied with the asset included in the bag - its high proportion of commercial property management services business can just make up for the shortcomings of Country Garden Services' business.
From this point of view, R&F sold the property sector and looked like it brought in a large premium amount of money, but it was not a good deal.
The loss of the property sector by the real estate company is equivalent to the loss of the right and left arm, and the sale of the cash cow of R&F Property is undoubtedly worse for the bleak future of R&F Group.
But for the debt-ridden R&F, this is another life-saving money that must be taken.
As the boss of the former Cantonese housing enterprises, R&F now has to face the embarrassing situation of losing the car and protecting the marshal. Its lonely road, as early as 4 years ago, has begun to appear
02 Laying mines
In 1993, Zhang Li and Li Silian co-founded R&F Real Estate, starting from the old renovation project. Twelve years later, R&F Real Estate was successfully listed on the Hong Kong stock market, and with the help of capital, R&F opened a path of rapid development; in 2007, R&F ranked 4th in the domestic real estate industry, successfully ranked among the first-line real estate enterprises, and came to the company's highlight moment.
In 2018, R&F Real Estate entered the 100 billion housing enterprise club as desired, and achieved an equity agreement sales amount of 131.1 billion yuan throughout the year.
With the sudden change of the market situation and the tightening of the policy for the real estate industry, the development of R&F Real Estate has begun to slowly decline. But companies have been looking for a shift in opportunity to find the next trillion market.
In order to bid farewell to a single real estate development model and have a continuous and stable cash flow, R&F has explored diversified businesses. In 2017, a century deal kicked off R&F's transformation.
On July 19, 2017, in order to save cash flow, debt removal and bar reduction, Wang Jianlin transferred 77 hotels of Wanda Commercial Real Estate to R&F Real Estate for 19.906 billion yuan.
The hotel industry is obviously the best entry point for R&F to have stable cash flow, it is closely related to the real estate development business, and it is an indispensable standard support for the layout of cultural tourism and commercial real estate business.
At that time, R&F, which took over Wanda Hotels, became the holder of the world's largest high-end hotels, accounting for 96% of five-star hotels, including 10 luxury brands, 32 ultra-high-end brands, 43 high-end brands and 5 ultra-mid-range brands. Behind it are Marriott International, InterContinental Hotels Group, Hilton Hotel Group, Hyatt Regency And Accor Hotels Group.
However, there are different views in the industry about this acquisition, and Wang Jianlin, chairman of Wanda Group, revealed at the Wanda annual meeting in January 2018 that "the overall average annual return rate of these hotels is less than 4%, and all hotels eat up the net profit of more than a dozen Wanda Plazas every year." For the sake of corporate security, in order to guarantee the development of the core industry, we must do this (sell). ”
With the black swan event such as the epidemic, the revenue of R&F Hotels is not ideal, and there has been a situation of continuous losses. According to the data, the loss in 2018 was 183 million, in 2019 it was 1.008 billion, and in 2020 it was 1.427 billion, increasing year by year.
At the same time, the funds for the hotel acquired by R&F are all financed, which brings high costs, and the money earned by the hotel business is not enough to repay the interest.
Obviously, hotel operations can often only guarantee a small profit, which is obviously a bit of a cup of water for R&F Real Estate. To break this situation, R&F clearly needs to find a market with more space and more abundant cash flow.
This market, from the 2020 R&F annual report, can see the answer: deep ploughing urban renewal projects.
According to the data, the total saleable area of the equity land reserve owned by R&F Group reached 51.9 million square meters, of which the soil reserve in urban renewal areas exceeded 40 million square meters, accounting for more than 77%. The city has spread across 140 cities and regions, and has signed a total construction area of cooperation projects in the country, exceeding 80 million square meters.
At the same time, from January to June 2021, r&F Group's urban renewal projects have achieved cumulative sales of 12.425 billion yuan, accounting for 19% of the total sales in the same period. The financial report also bluntly stated: "The urban renewal project is the best project for the Group to achieve high returns and provide liquidity".
The every move of the real estate giants has always been to follow the national macro-control policy, and the core strategy of R&F to deepen the urban renewal track is also the same.
On 17 November 2020, the Ministry of Housing and Urban-Rural Development (MOHD) explicitly proposed the implementation of urban renewal actions in line with the recommendations of the 14th Five-Year Plan and the Long-term Goals for 2035. Subsequently, the policies of various provinces and cities for urban renewal mushroomed one after another.
On August 31, 2021, the official website of the Ministry of Housing and Urban-Rural Development published the Notice on Preventing Large-scale Demolition and Construction in the Implementation of Urban Renewal Actions, which further clarified the importance of urban renewal actions in future urban development plans and relevant rules.
Under the policy macro-control, urban renewal has become a new track for housing enterprises to cluster and chase. For R&F, though, it's more like a return to the old business.
03 Can urban renewal save Fuli from fire and water?
Since its inception, R&F has started from the transformation of the old city, from taking over the old transformation project of Jiabang Chemical Factory in Liwan District, Guangzhou, to the transformation of more than 10 old factories such as steel plants and sulfuric acid plants in Guangzhou, and the old transformation project can be said to be the label of R&F Real Estate. By the end of 2001, 10 old renovation projects had been completed in Guangzhou with a total development area of more than 2.5 million square meters.
With this prestige, the market gave R&F Real Estate a nickname - "the king of old reform". At that time, there was a famous saying about R&F: "Every chimney in Guangzhou falls, there is a credit to R&F."
The transformation of the old city aims to eliminate dangerous old houses and roads, improve the living environment of the area, and improve the supporting infrastructure and public service facilities; while the urban renewal aims to improve urban functions and optimize the industrial structure, mainly focusing on urban villages, old commercial areas and old industrial areas.
The two models respond to different urban planning situations and complement each other, although the process is somewhat different, but the results are the same. For R&F, the scale of old land reclamation accumulated by deep ploughing for more than 20 years is the basis for continuing to base itself on the city's more projects.
Today's soil storage is tomorrow's scale, when the "king of old reform" meets urban renewal, it is like a fish. R&F Real Estate clearly hopes to use the east wind of urban renewal actions to revive the glory of the past.
Although R&F has a good scale of soil reserves on its books, the turbulent financial fundamentals have made its city more road and thorny.
As we all know, urban renewal is a typical slow turnover project, which is completely different from the previous model of bidding, auctioning, listing land, building houses, and selling houses. Although housing enterprises can get land with more price advantages with the help of urban renewal, unlike the demolition and reconstruction of old reforms, urban renewal needs to consider the old architectural style, targeted transformation to solve spatial problems, and introduce industries to revitalize the regional economy.
Therefore, a project needs to go through a transformation cycle of 5 years or even longer, and with it, there are many uncertainties. For housing enterprises, the test is not only the financial strength and land acquisition ability, but also a comprehensive and comprehensive ability, if you want to make achievements in this field, you require housing enterprises to have a capital operation that far exceeds the stock market.
R&F obviously does not have the financial fundamentals of the continuous deepening of urban reform projects, the data shows that in 2020, the asset-liability ratio of R&F Real Estate after excluding pre-collection is 76.7% (the red line requirement is less than 70%); the net debt ratio is 130.2% (the red line requirement is less than 100%); the cash short-term debt ratio is 0.40 (the red line requirement is greater than 1), and the three lines are all stepped on.
In the first half of 2021, the capital situation did not improve, R&F Real Estate excluded the pre-collection of asset-liability ratio of 74.9%; net debt ratio of 123.5%; cash short debt ratio of 0.55, still maintaining the ranks of red-grade housing enterprises.
What is more worrying is that at this time, the total debt of R&F Real Estate is as high as 331.8 billion yuan, and the interest-bearing liabilities due within one year are close to 52 billion yuan, but the cash and equivalents on the company's books are only more than 12.7 billion yuan, and the difference is like mud.
Concomitantly, on August 31, 2021, S&P downgraded the long-term issuer credit rating of R&F Properties and its subsidiary R&F Hong Kong from "B+" to "B", and on September 13, Fitch downgraded the long-term foreign currency issuer default rating outlook of R&F Properties and its subsidiary R&F Hong Kong from "stable" to "negative", and its solvency gradually became a deteriorating trend.
Due to the policy, urban renewal is obviously the key to the victory of housing enterprises in the second half, but the city more project with slow turnover and high uncertainty, for R&F Real Estate, which is highly indebted, although it stands on the right cusp, the direction is an unknown road.
04 Epilogue
High leverage, high debt and high turnover, once the magic weapon of R&F Real Estate's rapid expansion, has now become a weapon to break the balloon.
When R&F put properties, office buildings and other assets on the shelves for sale, Li Silian may recall that four and a half years ago, R&F acquired Wanda Hotel because he temporarily lowered the price at a moment before the transaction, which caused Wang Jianlin to smash the cup in anger.
Li Silian, who was full of pride at that time, now had to taste the bitterness of Wang Jianlin selling himself to pay off his debts. However, even if the broken arm survives, the shareholders have injected 10.4 billion yuan, and the net debt ratio has dropped to 103%, it still cannot change the embarrassing situation of R&F's debt being high and the three lines are all stepped on.
In Kazuo Inamori's theory, bamboo grows like a company that overcomes a depression, like a bamboo knot. When the economy is prosperous, enterprises grow blindly, there is no bamboo knot, just monotonous and fragile bamboo. There are many such bamboo knots to support the growth of enterprises again, and bamboo can be strong and tenacious.
This article originated from the Alpha Workshop Institute