CWG International Ltd - RHB Invest 2016-11-24: Billion & Below ~ Trading at a significant 80% discount to RNAV

CWG International Ltd - RHB Invest 2016-11-25: Billion & Below Company Highlight CWG INTERNATIONAL LTD. ACW.SI

CWG International Ltd - Billion & Below Company Highlight


Company Background 


Leading property developers in China. 

  • “Quality real estate and quality living”, is what the group aims to deliver. The main focus stems from delivering a full suite of services, ranging from real estate investment and development, township planning, project management, marketing and sales to building maintenance. 
  • Having a sturdy portfolio of affordable quality residential and commercial properties, as well as educational zones in China, the Group plans to extend its reach to the overseas market.


Key management team 


Led by a team of experienced professionals. 

  • The management team of CWG International Ltd has significant experience and each key personnel have an in-depth knowledge in the property development industry. 
  • The current CEO and co-founder of CWG International Ltd himself have more than a decade of experience in the PRC property sector. He is supported by a team of property development experts, spearheading the strategies in the different areas. 
  • Over the years, the Group has built rapport and relationships with the local and provincial governments of the cities they operate.


Business Analysis


Property development 

  • As aforementioned, 99% of CWG International Ltd’s revenue is generated from property development. Given the well-established position that CWG International Ltd has built on over the years, the Group is expected to leverage on this for its overseas expansion beyond the borders of China. Currently, they have gained a foothold in the Australian market and it is at its initial phase in the United States.
  • One of the Group’s main focus is to increase their international footprint, extending its reach beyond the borders of China. The strategy to penetrate into the overseas market is to have a joint venture from the start.
  • Once established, larger projects will be taken independently. This will help to reduce the execution risk when expanding into new markets. With an established and experience management team, the Group is well-positioned to expand into the overseas market. Currently, the Gross Development Value (GDV) comprises of 82% and 18% in China and international respectively. Going forward, the Group targets to reduce the composition of the GDV of China and international to an even split of 50% each.

CWG’s investment portfolio 

  • Currently, the Group entire portfolio of investment properties comes from China. Over the years, CWG International Ltd has built rapport and relationships with the local and provincial governments of the cities they operate in. This puts the Group in an excellent position to leverage on, continuing its success in the property development industry.  
  • The investment properties of CWG International Ltd are diversified into the education, commercial, retail and hospitality sector.

Upcoming projects 

  • However, with the aforementioned of having only properties in China, this is expected to change when the upcoming projects in Australia and the United States are completed.
  • This will happen in FY18 and FY19. Many of the new developments include properties in Australia and the United States. A sizable number of property development will still come from China, but the Group is determined to change the geographical proportion of their properties going forward.


Investment Merits 


New dividend policy - SGD0.01/share annually representing 7% Yield 

  • With the aim of becoming an international property developer, the enhancement of corporate disclosure and compliance standards has to be made in order to meet the international standards and boost investor confidence.
  • Hence, changes were made to the board where an investment committee is set up, being responsible for evaluating and making recommendations on investment related activities such as proposed investments and acquisitions just to name a few. The revised board now comprised of prominent board members as independent directors, with more than half is Singaporeans. (A comprehensive write up on the team can be found under page 6, Figure 6; “Board of Directors and Key Management Team”) The new board is more committed towards distributing value back to shareholders. One of the proposed plans is to enact a dividend policy, with a payout of SGD0.01/share annually, starting as early as FY16.
  • Hence, given the strong forecasted earnings backed by projects under development, the forecasted dividend yield for FY17F and FY18F is estimated to be 12% and 15% respectively.

Prepaid sales figure going strong in 4Q16 and FY17.

  • Currently, the Group has strong presales revenue going forward. The estimated presales values are based on a 70%-90% sold figure. Going forward, we do expect the 4Q16 estimated and actual presales figure to be strong with the TOP date of three projects- Suzhou Industrial Park Royal Mansion (Phase 1), Suzhou Royale Palace (Phase 3) and Xuancheng Chiway Top Town (Phase 2 District D) to be completed. The actual percentages sold of these 3 projects are well above 80% with two projects being 90% sold. 
  • For FY17, due to the low percentage sold figure, there is a large divide between actual and estimated presales figure. However, given the long established reputation of CWG International Ltd coupled with a sound management team, we do expect the actual presales figure to reach the estimated presales figure and eventually surpassing them.

Strong 3 Year NPAT CAGR Growth of 29%. 

  • Due to its strong presales already secured, we expect to see a strong 3 year NPAT CAGR growth of 29% going forward. In addition, we also the strong RMB3.3bn presales in 4Q16 to turn FY16F around to profitability, which justifies management’s confidence in implementing the dividend policy in 3Q16.

Land prices are on an increasing trend 

  • CWG International Ltd prides itself in being selective in choosing the land site for the property development projects. Key consideration in the selection of land sites includes location and convenience for buyers. Over the years, the land sites that the Group has developed a property in have an increasing price trend. The reasons for the increase in prices differ across areas.
  • In China, urbanization is a key factor towards the increasing land prices. We can see that both Suzhou and Wuxi’s land prices where CWG International Ltd has large investments in have increased significantly over the past few years. Wuxi has increased by 13.6% while Suzhou land prices have increased by a whopping 165% over the same period. This is mainly attributed by the increasing trend for property development over these regions. Developers have been flocking to China’s biggest cities due to the anticipated high demand.
  • In Australia and the United States, increase in land prices is attributed to a high number of job openings available in the area. Over the past few years, there were more job openings in Los Angeles than any other states in the United States. Sydney has found similar patterns with the United States which led to a 30.6% increase of land prices between 2010 to 2015  Stronger gross margins due to higher land prices.
  • CWG has been investing in land bank in Suzhou and Wuxi since years ago. Land prices in these countries have surged strongly from 50% to 400% in the last few years. As a result, we expect CWG to make a hefty gain on this whenever their properties are sold.
  • Hence, we would expect higher gross margins for their projects going forward. All in all, we should see gross margins improved to 27.2% in FY16 F and 33.2% in FY17F.

Transforming into an International Integrated Property Player 

  • CWG International Ltd is aiming towards transforming from a purely Property Developer into an International Integrated Property Player. By being an international integrated property player, it includes the management of Investment Properties, Development Properties, Asset Management, Real Estate Funds and REITS. This is a long term strategy which might extend to FY20, through organic growth and acquisitions, coupled with the help of fund management to expand overseas. The Group wishes to expand into the overseas market, branding themselves as an international property developer. Here is the list of proposed steps in which the Group is working towards being an International Integrated Property Player:
    • Organic growth: To Build-and-Lease schools within China and to collaborate with more Chinese local governments on Overseas Academy School. It also includes building and leasing student housing on a global scale
    • Acquisitions: Tapping in-house knowledge of the education industry through the acquisitions of education assets in established markets (Australia, Japan, UK and US)
    • Fund Management: To support both organic growth and acquisitions, the Group can leverage on Ruize FMC platform in China to raise funds for acquisitions. 

Building and leasing schools in China for recurring income 

  • The very first strategy to become an integrated property player is to have a partnership between CWG and ChinaSingapore Suzhou Industrial Park Development (CSSD).
  • The aim is to build and lease schools in China and it will be situated in Suzhou Industrial Park (SIP).

Strategic alliance with Jiangsu Shagang Group that provides alternative financing and potential joint venture opportunities 

  • CWG International Ltd forged a strategic relationship with Jiangsu Shagang Group, one of the largest privately-owned Chinese companies with annual iron-making, steel-making and rolled products capacities of 31.9mn tons, 39.2mn tons and 37.2mn tons respectively. This relationship allows CWG International Ltd to attain a Credit Line of RMB3bn from Jiangsu Shagang Group, with RMB2bn still available.
  • With this credit line agreement between both parties, this provides CWG International Ltd with an alternative source of financing in times of uncertainties. More importantly, it provides a key opportunity for both parties to be involved in a joint venture for property development projects.
  • In addition, Jiangsu Shagang Group is a steel supplier for CIMC, a listed company in both the Hong Kong exchange and Shenzhen Exchange. CIMC is a world leading supplier of high-quality logistics and energy equipment and services, including containers vehicles, energy, chemical and food equipment, offshore, logistics services and airport facilities.
  • CIMC plays a vital role, acting as a supplier of prefabrication and modular housing for CWG Australia Ptd Ltd. With the partnership between Jiangsu Shagang Group and CIMC, this forms an indirect relationship towards CWG International Ltd which could bring potential benefits ranging from receiving lower prices to quality assurance.

Proposed Education-REIT, estimated to be SGD1bn in portfolio size 

  • Going forward, CWG International Ltd targets to have a portfolio of education asset, estimated to be worth over SGD1bn by FY20. The targeted portfolio will be done through a combination of organic growth (through Buildand-lease) and inorganic growth (Acquisition of International Education related properties). The funding of the Education-REIT will be done through 4 stages. 
    • The first SGD100m will be done through onshore funding, to inject into existing Chinese school assets and Overseas Academy Schools. 
    • The next SGD200m funds will be raised from capital markets, through a combination of debt and equity funding. 
    • Subsequent SGD300m will be funded through third party funds via strategic investors or through FMC products. 
    • The final SGD400m will be provided by the banks. However, this will be a long-term target and this strategy will only be executed if the other strategies are well in place.

Manages a fund management company for the ease of overseas expansion, branding themselves as an international property developer 

  • During April 2015, CWG International Ltd successfully launched an investment company called Shanghai Ruize Equity Investment Management. The purpose of this fund management company is to facilitate overseas expansion.
  • Given the large outflow of capital out of China, the Chinese government has put a cap on how much individuals and companies are able to withdraw. In the country’s latest efforts to prevent such outflows, individuals can only withdraw up to 50,000 yuan overseas during the last three months of this year, followed by 100,000 yuan for all of the next year. For companies, in bid to prevent capital outflow into global markets, local offices have to step up capitalflow data reports. 
  • In addition, they have to monitor closely if there are any huge foreign purchases. Bank officials also have to monitor closely if there are any large foreign currency purchases. Bank of China Ltd requires reviewing purchases greater than RMB1mn in the headquarters at Beijing. Thus, efforts taken to reduce capital outflows would affect CWG International Ltd’s strategy of expanding into the overseas market. As such, with a fund management company being established overseas, the Group is able to accumulate funds and invest in overseas projects. 
  • Since inception, the Group has successfully launched and managed seven fund products (including 4 cross border funds) invested over 10 projects with RMB3bn worth of assets under management. More than 70% of the assets portfolio is overseas assets. This would ultimately allow the company an alternative avenue to tap into funds in China, to invest in international projects.

Lowering debt could potentially free up some cash flow 

  • Currently, the Group has a high gearing ratio of > 400% as of 1H16. The high debt incurred is attributed to the nature of the business- mismatch cash expenditure and payment collection. In the nature of the property development industry, cost has to be incurred for developing the properties before payment collection can be received from the customers. As such, this creates a mismatch in cash flows coupled with high uncertainty as there are potential risks of defaults or last minute withdrawals form the customers. Furthermore, developing a property requires huge capital expenditure (Land costs, material costs, labour, legal fees etc). Hence, huge amount of debt is required for the initial phase of the development.
  • Based on our estimates, the finance cost incurred by the company is roughly around 9%. Assuming the interest rates is reduced by 1% to 8%, this would imply an 11% savings in terms of finance cost. This cost savings could potentially provide more financial flexibility for the company. 


Valuation 


Trading at a significant 80% discount to RNAV. 

  • Based on information provided by the management, our RNAV valuation of CWG comes up to SGD0.83.
  • As a result, CWG is trading at a significant discount of 80% to RNAV at current share price levels, accompanied by a 7% yield as well. With its earnings upside over the next few years, we feel that CWG is substantially undervalued.


Key Risks 

  • China’s property sector is susceptible to macroeconomic policies and austerity measures. 
  • Mismatch of cash expenditure and payment collections. 
  • Subject to finance risk. 
  • Susceptible to interest rate risk. 
  • Dependent on independent third party contractors, service providers and cost of construction materials.






Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-24
RHB Invest SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.83 Same 0.83




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