Time is money for Chinese property developer

Shui On Land bought time to speed up its property developing projects in China.
Daniel Wan
Daniel Wan

Sometimes a chief financial officer is appointed to a company at the perfect time. That was the case for Hong Kong-listed Shui On Land, which appointed Daniel Wan in 2009, just when it most needed an experienced CFO.

Indeed, Wan described the timing of his appointment at the Shanghai-based property developer in March 2009 as “critical” because the company was short of cash to continue operations. “Property developers with projects in mainland China are not permitted to borrow funds [locally] to acquire land or pay for relocation costs for those projects. If developers need to borrow money for these purposes, we have to approach the foreign banks,” Wan explained.

Crossing the border from Hong Kong where he was the group CFO at the Bank of East Asia (BEA), Wan rounded up a squad of senior executives with backgrounds in banking to join him at Shui On. In his opinion, the fundamentals in both industries are very similar but he welcomes the added freedom at Shui On — banking is highly regulated in Hong Kong, said Wan, which limits the CFO role. At a China-based property developer he is responsible for a wide range of matters, from the trivial to the most strategic decisions.

His move marked the turning point of Shui On’s fortunes. Spearheading the finance and treasury teams, he organised a share placement within three months of taking office to increase the company’s capital base. With almost 20 years’ experience at BEA, Wan knew that the company’s high-gearing ratio would be very difficult to “support”.

The improved capital base put Shui On in a better position to approach partner banks with loan requests. “To put it simply, we were able to buy valuable time to reorganise and restructure the financial position of the whole company,” he said.

He attributes the success to a combination of favourable factors. The timing of his appointment and positive continuing market developments in July and August 2009 both played leading roles.

“Market sentiment was beginning to change at that time,” Wan explained.

“Coupled with our low gearing ratio and positive restructuring of the management team, we were able to re-establish our relationships with the banks and secure the necessary funds.”

Out with the old and in with the new

Shui On traditionally depended on its strategic partners for funding and seldom leveraged its balance sheet or turned to banks before Wan’s appointment. According to Wan, property sales figures before he joined Shui On were “not very attractive”. Following the share placement and renewed confidence from its partner banks, the company embarked on a new strategic journey.

“Shui On Land has very good relationships with our strategic partners. They provide the company with support upon which we can rely,” Wan explained. “However, there was a period when the company was not very active, which meant that project development used to be quite slow.”

The company has nine projects in progress across six Chinese cities. In contrast to many of its competitors, Shui On only focuses on large-scale projects. For example, the company’s 3.5 million square metre Chongqing project is “about five times the size of Hong Kong’s Tai Koo Shing”, according to Wan. “But of course not all of our projects are as large as that. For example the size of our Taipingqiao project, where our landmark Xintiandi project is located, is about 1.1 million sqm.”

The land that Shui On owns in the six cities in which it operates: Shanghai, Chongqing, Wuhan, Dalian, Foshan and Hangzhou, are largely cleared and ready for construction. If construction goes ahead on schedule, Shui On stands to book large profits. But it is a big if.

In mid-2009, Wan launched a three-year plan to accelerate project development. At the time, Shui On was developing approximately 300,000 sqm of land a year, which Wan deems “too slow”. As the architect of the plan, Wan set a target of 1 million sqm to be developed each year by 2012.

“Project development is very important to the whole company. We have a huge land bank of about 13 million sqm, which is a major advantage because we will not need to acquire more land in the near future,” said Wan.

Rules and regulations in mainland China do not allow property developers to hold onto large areas of land permanently. The Chinese government does not approve land price speculation among property developers and can “threaten” to repossess idle land, according to Wan. Such concerns weighed heavily on Shui On’s three-year plan.

For the six months ending June 2010, the company reported a turnover of more than Rmb3.1 billion ($472 million) and a profit just over Rmb1.7 billion, up from Rmb1.34 billion and Rmb656 million respectively in the same period the previous year. This represents a year-on-year increase of about 134% in turnover and 160% in profit. This is a good indication that the three-year plan is on direct course for completion despite domestic inflation and property and asset bubble concerns in the mainland.

In Wan’s view, China will continue to retain its potential and be among the fastest growing economies in the world. He encourages other senior executives to follow his lead and venture into mainland China. His goal is to establish himself in China before his retirement — and that day of accomplishment might not be far away.

This story was first published in the March 2010 issue of FinanceAsia magazine.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media