The Sincere Property acquisition disaster is a warning to anyone interested in troubled Chinese assets.
Not everything cheap is a bargain. Eleven months ago, Sherman Kwek, the CEO of City Developments (CDL), rated his $ 655 million acquisition of 51% of Sincere Property as a big deal for half of the Chinese property developer’s then-net asset value. But last month, CDL wrote off virtually everything that turned into a $ 1.4 billion investment. The disaster is a warning to anyone interested in troubled Chinese assets.
CDL is one of the largest promoters in Singapore; the Kwek who control it are part of a clan of Malaysian-Singaporean billionaires. In April, CDL entered Sincere through the holding company of founder Wu Xu, a former Chongqing Housing official. That gave him effective control, but CDL agreed to share the management capacity, and let Sincere’s team run the day-to-day operations. In less than a year, CDL posted its worst ever losses due to a $ 1.3 billion impairment, which then included loans, bond holdings and debt guarantees.
CDL knew that Sincere was heavily in debt when it made this important decision. Since June, Sincere had cash available that only covered 15% of the $ 2.4 billion payable in a year, according to a bond filing in Shanghai. That precarious position was made worse by the tough measures taken by Beijing against the leverage of developers last August, which hit the small and medium-sized developers that only had little land.
CDL expects last month’s depreciation to put an end to the matter. The tough measures applied by China were a problem, but CDL’s decision to pay for the control, but allow Wu’s team to maintain considerable management capacity, was not very successful. The Singapore group may still have to increase its stake or shell out more money to protect value. This is not over yet.