China New Town Development: The route to survival

1 parcel sold in May’09, looking to launch up to 3 more in 2H09. CNTD’s land sales division, its core business segment, with only 1 listing since the start of the year, has seen sales slowly coming through. This sale of a 250mou (c168k sqm) land parcel at Lodian New Town was successfully auctioned off to CNTD’s parent company at S$3,635psm, priced at 20% lower than the previous auctioned price. Looking ahead, the group is preparing to list up to 3 more plots of land, with sizes ranging from 90-400 mou at Lodian and Shenyang projects.

Proposed early retirement of senior notes. With hefty interest obligations on its senior yield notes and scheduled loan repayment (est. RMB 175m) continuing to burden CNTD financial flexibility, CNTD has proposed to buy back a significant portion of its senior notes through an issuance of shares and new equity. This hybrid scheme is expected to cost CNTD RMB 304m in cash coupled with new equity issue of c180m shares. This will be funded internally and a loan from the executive chairman, Mr. Shi Jian, who has opted to receive in lieu of repayment through new shares in CNTD, which could mean a further 1,104m shares or 40% of share base.

Maintain HOLD, TP S$0.10, 30% discount to RNAV of S$0.14. While the new repayment scheme could be seen as a positive step in relieving the group of its burdensome interest obligations, the potential dilution from new share issuance (estimated at 40% of revised share base) could cap re-rating opportunities.

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China New Town Development - FY08: Net loss at core earnings level lower than expected

• Improvements in topline were encouraging CNTD reported a sharp increase in net revenue in FY08, underpinned by land sales of its various projects.

• Reported bottomline numbers are misleading, distorted by exceptional items, which includes a revaluation loss on its investment properties amounting to RMB488m. FY08 core net loss of RMB35.1m is a vast improvement from the core net loss of RMB256.9m in FY07.

• This is ahead of the RMB43.7m net loss we previously estimated the difference due to higher mark-to-market valuation loss related to the repurchase of convertible bond in FY08, which are essentially non-recurring.

• CNTD was hit by the deterioration of the retail rental market. The group has provided a revaluation loss of RMB488m for the investment properties in FY08. Though not quite articulated, the group could potentially reverse the overprovision should there be a recovery of the rental market condition going forward.

• Financing cost, going forward will be greatly reduced as the increase in capitalization of the interest expenses kick in, in tandem with the progress of construction works.

• Balance sheet seems constraint after the repayment of RMB503m Shanghai project loan in FY08. However, we think that the company will still be in good stead as it has secured RMB96m facility last month to meet FY09 working capital need.

• Additionally, CNTD is finalizing its project financing facility that will step in after the group repays the RMB1.1bn Shanghai Luodianproject loan that is due in Sept09.

• We understand from management that the term of the project financing will be favorable as Municipals are now pushing ahead on various infrastructure projects to pump prime the economy.

• The relaxation of austerity measures, which included temporary exemption of the land appreciation tax could eventually lead to a revived property sector and attract developers’ interest once again.

• Though details are not given, CNTD said that it will be concluding another parcel of land auction in Shanghai next month, and has talked to about 20 developers to date.

• The group is confident that its various projects (in different provinces at different stages of development) will continued to generate decent gross profit margins between 45-50%. In addition, CNTD has also gradually built up its source of stable income streams through investments in golf courses, hotels, commercial and retail space operations, as well as hospitals and schools.

• We slashed FY09 earnings quite drastically by 74% as we realign our assumptions by imputing the pushing back of income recognition schedule for various projects. Consequently, we upped our FY10 estimates by 81% to incorporate all future contribution of these rescheduled projects.

• Reiterate Buy and target price reduced to S$0.05. Still pegged at 3.8x CY09 P/E, we derived a lower target price of S$0.05 (from S$0.17) due to earnings cut. Given a 33% upside from this level, we maintain our Buy rating. A better land auction outcome and the group’s successful refinancing activities would catalyses share performance.