China Real Estate Opportunities SA
The Company's principal objective is to achieve capital growth from a portfolio of properties in China. The Board is responsible for the Company's investment strategy and will review it from time to time in line with market conditions.
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London's only play on commercial real estate in China
It amazes many Europeans to know that, while most of the world is in reverse, the Chinese economy is still growing. Even if the Chinese government doesn't make its 8 percent target, the World Bank is estimating 6.5 percent growth for the Chinese economy. Having lost the momentum of its export sector, China's stimulus package had no choice but to target the country's two other pillars of growth; fixed asset investment and consumption.
The injection of money has led to climbing property prices to such an extent that the government is slowly bringing back cooling measures to prevent a bubble in first tier cities. And "dragging forward domestic demand" (la dong nei xu) is an almost patriotic household catchphrase. Retail sales were up 15 percent in August on the year before and retail real estate occupancy rates are at 90 percent on average.
At the same time, China's economy has begun its move towards services and away from manufacturing. It means there are new opportunities, such as the growing number of businesses in emerging cities want office space of less than 150sq m in size. Many foreign developers are as of yet not convinced. But there lies an opportunity for a well-capitalised developer, as smaller-size local real estate operators are feeling the financial tightening more acutely.
Enter AIM-listed China Real Estate Opportunities Plc (CREO), which focuses on office and retail property investments in China, currently mainly in Beijing and Shanghai.
The company's investment property assets totalled some £705m at end of 1H2009 (income generating, office and retail, based in Shanghai). Under development assets came to a total of £119m at end of 1H2009 (to be income generating on completion, office and retail, based in Shanghai and Beijing).
And although a couple of development projects had to be shelved awaiting better times (Beijing Logistics Park and Tangdao Bay), the existing investment assets have delivered a comparatively good occupancy rate of just above 85 percent (retail portfolio showed occupancy of 97 percent). The management clearly indicated it knows its priorities and its risk appetite.
The company's capital consists of £402m worth of equity and £303m worth of debt. The debt to capital ratio is thus 43 percent. The cost of capital is low, at just above 8 percent. Net rental income in H1 2009 came in at £15.2m (£11.7m in 1H2008). However, despite a very tangible reduction in admin expenses during H1 2009, assets re-valuation loss and joint venture losses pushed 1H2009 EPS to negative £0.05 (positive £0.44 in 1H2008).
Total Assets at H1 2009 stood at £888m (£1.1bn 1H2008). The reduction is mainly due to lower valuations of investment and development assets. Cash comprised £54m (£85m at 1H2008). Net Asset Value (NAV) at end of 1H2009 was declared to be £10.6 a share. Total Liabilities at 1H2009 were £486m (£588m at 1H2008). The drop is related to a reduction in borrowings and payables. Current debt amounted to £24.6m, maturing in March of 2010. Liquidity has deteriorated over the year with Current Ratio dropping from 1.3 at 1H2008 to 0.90 at 1H2009.
Cash used in operating activities in 1H2009 totalled £13.5m (£8.4m in 1H2008). The company pays no dividend. Although some 4m shares were bought back and cancelled by CREO in last year increasing the NAV by around 8 percent.
On the 25th of September CREO's stock was trading at 74 percent discount to NAV. This valuation presents a good long term upside to investors wishing to diversify and energize their current holdings. But, there certainly are risks, not least of which is CREO's current inability to generate enough cash for re-investment.
However CREO is making notable progress. It has just recently had a £27m refinancing facility agreed with a Commercial Bank of China, generating some £1.5m of extra liquidity and reducing its cost of capital, albeit by a small percentage. As foreign lenders halted their financing and adopted a "wait and see" position, the importance of building relationships with local lenders is vital.
With 66 percent of equity owned by Richard Barrett and John Ronan via their Treasury Holdings, the management has got a strong incentive to continue making steps in the right direction.
Other China Real Estate Opportunities SA news
- China Real Estate grows portfolio value 7.35% to £837 mln at end of ‘challenging’ 2009
2010-02-05 - China Real Estate Opportunities sells 50% stake in Tangdao Bay development for RMB1.389 billion
2010-01-18
