Financials

UNAUDITED FINANCIAL STATEMENTS ANNOUNCEMENT FOR THE FOURTH QUARTER AND FINANCIAL YEAR ENDED 31 DECEMBER 2016

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INCOME STATEMENT FOR THE FOURTH QUARTER AND FINANCIAL YEAR ENDED 31 DECEMBER 2016



STATEMENT OF COMPREHENSIVE INCOME FOR THE FOURTH QUARTER AND FINANCIAL YEAR ENDED 31 DECEMBER 2016



BALANCE SHEET



REVIEW OF GROUP PERFORMANCE

4Q2016 vs 4Q2015

Revenue

The Group achieved revenue of RMB3,443.8 million for the quarter ended 31 December 2016 ("4Q2016"), an increase of 59% or RMB1,272.0 million from RMB2,171.8 million in the corresponding period in 2015. This is primarily due to the increase in the selling price of property units handed over to customers, of approximately RMB 9,786 per sqm, from RMB 8,732 per sqm in 4Q2015 to RMB 18,518 per sqm in 4Q2016. This is despite the aggregate Gross Floor Area ("GFA") sold and recognised decreasing by approximately 25% or 62,298 square metres ("sqm"), from 248,014 sqm for the quarter ended 31 December 2015 ("4Q2015") to 185,716 sqm for 4Q2016. Revenue for the projects sold and recognised was mainly attributable to Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace, which contributed RMB2,352.1 million and RMB968.5 million, respectively, or approximately 68% and 28% of the total revenue generated for 4Q2016.

Besides higher revenue, the Group experienced an increase in its pre-sales activities for 4Q2016. The Group recorded pre-sales GFA of approximately 141,706 sqm with an aggregate consideration of approximately RMB1,469.9 million for its development properties projects in the People's Republic of China ("PRC") during 4Q2016. This represents an increase of GFA by 24%, or 27,366 sqm from 114,340 sqm, and an increase in aggregate consideration by 10%, or RMB133.9 million from RMB1,336.0 million, as compared to 4Q2015. In this period, Suzhou Chiway Prime Palace and Suzhou Industrial Park Royal Mansion which are located in a first tier city, achieved good pre-sales results, representing approximately 28% and 15% of the total consideration. Xuancheng Chiwayland and Xuzhou Royal Palace which are located in second tier cities, also achieved approximately 21% and 18% of the total consideration. Overall, the average selling price ("ASP") of pre-sales decreased from RMB 11,684 per sqm in 4Q2015 to RMB10,373 per sqm in 4Q2016 as a result of the higher mix of projects from second tier cities.

The Group also continued with its pre-sales activities for four of its property development projects in Australia. During 4Q2016, a total of ten units from these property development projects – Illumina, Uptown, Marine's Hill and Stellar – were pre-sold with a total aggregate consideration of AUD14.2 million.

Note:
Revenue from property sales is recognised when the control and risk and rewards of the properties have been transferred to the buyer, i.e. when the legal title passes to the buyer or when the equitable interest in the property vests in the buyer upon signing of the property handover notice by the buyer, whichever is the earlier. Payments received from buyers prior to this stage (i.e. at pre-sales) are recorded as advances from customers for sale of properties and is classified as current liabilities. Please refer to the circular dated 10 June 2014 for more details on, amongst others, the policies and risks on the Company's pre-sales activities, as well as significant factors affecting the Company's results of operations.

Cost of sales and gross profit margin

With the increase in revenue, the Group's cost of sales, comprising land acquisition costs, construction costs, capitalised borrowing costs and indirect costs incurred on the development properties sold, increased by 36% or RMB702.5 million from RMB1,973.0 million in 4Q2015 to RMB2,675.5 million in 4Q2016.

Gross profit increased by 286% or RMB569.5 million, from RMB198.8 million in 4Q2015 to RMB768.3 million in 4Q2016. Overall gross profit margin increased from 9.2% in 4Q2015 to 22.3% in 4Q2016. This was due to higher profit margin contribution from revenue recognition of Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace which both recorded higher gross profit compared to last year's projects.

Other income

Other income, comprising gain on disposal of financial assets available-for-sale, and gain on disposal of property, plant and equipment, decreased by 98% or RMB90.6 million from RMB92.6 million in 4Q2015 to RMB2.0 million in 4Q2016.

Selling and distribution expenses

Selling and distribution expenses comprising advertising and promotion expenses, sales commissions, sales offices rental expenses and maintenance costs, increased by 168% or RMB35.9 million from RMB21.3 million in 4Q2015 to RMB57.2 million in 4Q2016. This was due mainly to the increase in expenditure on sales and marketing activities for new projects.

Administrative expenses

Administrative expenses comprising salaries and staff related expenses for general administrative staff, utilities expenses, telecommunication expenses, entertainment expenses, professional fees, travelling expenses and other general overheads expenses, increased by 177% or RMB28.6 million from RMB16.2 million in 4Q2015 to RMB44.9 million in 4Q2016. This was attributable to higher staff costs and other related staff expenses from higher headcount, as a result of business expansion in Australia, USA and the new Richmont Capital private equity unit.

Other operating expenses

Other operating expenses, comprising net foreign exchange loss, and loss on disposal of property, plant and equipment, and fair value loss arising from investment properties, increased by 109% or RMB6.4 million from RMB5.9 million in 4Q2015 to RMB12.2 million in 4Q2016. The increase was due to net foreign exchange loss of RMB8.7 million, and fair value loss arising from investment properties of RMB3.3 million.

Net finance costs

Net finance costs were RMB9.8 million in 4Q2016, compared to RMB14.1 million in 4Q2015. This was due to finance costs that could not be capitalized in development projects during the current quarter, which include the interests of loans and unquoted debt securities to the companies that have no projects under construction.

Share of results of joint ventures, net of tax

Share of results of joint ventures, net of tax was a profit of RMB0.2 million in 4Q2016, as compared to profit of RMB0.8 million in 4Q2015. This was attributed to the profits of Suzhou Ruixin in China and UCCH in the USA, and the losses of Brisbane in Australia and Shengeng Hongye in China.

Income tax expense

Income tax expense include enterprise income tax and land appreciation tax ("LAT"). The Group incurred a tax expense of RMB263.6 million in 4Q2016, as compared to an income tax expense of RMB127.8 million in 4Q2015. The Group's income tax expense increased due to higher profit margin ratio in the current quarter.

Profit for the period

As a result of the foregoing, the Group reported a profit after tax of RMB382.8 million in 4Q2016, while the profit for the period in 4Q2015 was RMB106.8 million.

12M2016 vs 12M2015

Revenue

The Group achieved revenue of RMB4,778.9 million for the period ended 31 December 2016 ("12M2016"), an increase of 34% or RMB1,201.6 million from RMB3,577.3 million in the corresponding period in 2015. This was primarily due to the increase in the selling price of property units handed over. The aggregate Gross Floor Area ("GFA") sold and recognised decreased by approximately 26% or 114,007 square metres ("sqm") from 446,106 sqm for the period ended 31 December 2015 ("12M2015") to 332,099 sqm for 12M2016, while the average selling price ("ASP") increased by 79% from RMB 7,962 per sqm in 12M2015 to RMB 14,290 per sqm 12M2016. The revenue recognised was attributed to the Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace, which contributed RMB2,352.1 million and RMB1,775.9 million, or approximately 49% and 37% of the total revenue generated for 12M2016, respectively. In addition, Xuancheng Chiway Top Town and Suzhou Hetai Garden contributed RMB283.5 million and RMB177.4 million , or 6% and 4% of the total revenue respectively. The increase in ASP was due to the sales of Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace in 12M2016, which are situated in good locations and therefore, were able to command higher ASP.

The Group also achieved strong pre-sales for 12M2016, with GFA of approximately 435,119 sqm and an aggregate consideration of approximately RMB4,322.6 million for the development properties projects in the People's Republic of China ("PRC"). This represents an increase of 15% in GFA, or 57,425 sqm from 377,694 sqm, and an increase of 2.6% in aggregate consideration, or RMB110.8 million from RMB4,211.8 million, from 12M2015. In this period, Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace which are located in a first tier city, achieved good pre-sales results, attributing approximately 23% and 16% of the total consideration, and Xuzhou Chiway and Xuancheng Chiwayland which are located in second tier cities, achieved approximately 19% and 16% of the total consideration. Overall, the ASP of pre-sales decreased from RMB 11,151 per sqm in 12M2015 to RMB 9,934 per sqm in12M2016 as a result of the higher mix of projects in second tier cities.

The Group also presold four of its property development projects in Australia. During 12M2016, total of 78 units from these property development projects – Illumina, Marine's Hill, Uptown and Stellar – were pre-sold and 6 units from Vivir, a completed project in Brisbane, were sold with a total aggregate consideration of AUD60.0 million.

Cost of sales and gross profit margin

In tandem with the increase in revenue, the Group's cost of sales, comprising land acquisition costs, construction costs, capitalized borrowing costs and indirect costs, increased by 18% or RMB583.5 million from RMB3,279.5 million in 12M2015 to RMB3,863.0 million in 12M2016.

Gross profit increased by 208% or RMB618.0 million, from RMB297.8 million in 12M2015 to RMB915.9 million in 12M2016, due to the increase in gross profit margin. Overall gross profit margin increased from 8.3% in 12M2015 to 19.2% in 12M2016. This was due to higher revenue contribution from the Suzhou Industrial Park Royal Mansion and Suzhou Royal Palace project, which has a higher gross profit compared to the projects of last year.

Other income

Other income, comprising gain on disposal of financial assets available-for-sale, and gain on disposal of property, plant and equipment, decreased by 94% or RMB89.0 million from RMB95.0 million in 12M2015 to RMB6.0 million in 12M2016.

Selling and distribution expenses

Selling and distribution expenses comprising advertising and promotion expenses, sales commissions, sales offices rental expenses and maintenance costs, increased by 86% or RMB65.4 million from RMB76.3 million in 12M2015 to RMB141.7 million in 12M2016. This was due to an increase in expenditure on sales and marketing activities for more new projects, as the company seeks to scale up in the PRC with more projects.

Administrative expenses

Administrative expenses comprising salaries and staff related expenses for general administrative staff, utilities expenses, telecommunication expenses, entertainment expenses, professional fees, travelling expenses and other general overheads expenses increased by 47% or RMB46.1 million from RMB98.3 million in 12M2015 to RMB144.4 million in 12M2016. This was attributable mainly to staff costs and other related expenses from higher headcount, as a result of business expansion in Australia, USA and the new Richmont Capital private equity unit.

Other operating expenses

Other operating expenses comprising net foreign exchange loss, loss on disposal of property, plant and equipment, fair value loss arising from investment properties, and donations, increased by 67% or RMB8.3 million from RMB12.3 million in 12M2015 to RMB20.6 million in 12M2016. The increase was due to net foreign exchange loss of RMB14.9 million, and fair value loss arising from investment properties of RMB3.3 million.

Net finance costs

Net finance costs were RMB56.1 million in 12M2016, compared to of RMB41.4 million in 12M2015. This was due to finance costs that could not be capitalised in development projects during the current period, which include the interests of loans and unquoted debt securities to the companies that have no projects under construction.

Share of results of joint ventures, net of tax

Share of results of joint ventures, net of tax was a profit of RMB6.3 million in 12M2016, as compared to loss of RMB1.3 million in 12M2015. This was due to the handover of the Group's Vivir project in Australia, the profits of Suzhou Ruixin in China and UCCH in the USA, and the losses of Shengeng Hongye in China, as compared to the operating loss incurred by Suzhou Gaoxin in 12M2015.

Income tax expense

Income tax expense include enterprise income tax and land appreciation tax ("LAT"). The Group incurred a tax expense of RMB296.8 million in 12M2016 as compared to the income tax expense of RMB91.9 million in 12M2015. The Group's income tax expense increased due to higher profit margin ratio in the current period, and in 12M2015 there were reversal of overprovisions of income tax expense of RMB27.2 million previously recognised on certain development projects in the PRC.

Profit for the period

As a result of the foregoing, the Group reported a profit after tax of RMB268.6 million in 12M2016, while the profit for the period in 12M2015 was RMB71.3 million.

Statement of Financial Position

Non-current Assets

Non-current assets comprised property, plant and equipment, investment properties, interest in joint ventures and deferred tax assets. As at 31 December 2016, non-current assets amounted to RMB1,426.4 million as compared to RMB1,056.9 million as at 31 December 2015.

The increase in non-current assets of RMB369.5 million was due mainly to:

  • increase in investment properties of RMB197.0 million due to the costs incurred for investment properties under development and gain from change in fair value of investment properties;
  • increase in joint ventures of RMB92.1 million from RMB15.1 million as at 31 December 2015 to RMB107.2 million as at 31 December 2016 mainly due to the new investment of Shengeng Hongye and Suzhou Ruixin in China and UCCH in the USA. The increase is partially offset by the liquidation of Suzhou Gaoxin;
  • increase in deferred tax assets of RMB81.1 million from RMB43.0 million as at 31 December 2015 to RMB124.1 million as at 31 December 2016; and
  • partially offset by the decrease in property, plant and equipment of RMB0.9 million.
Current Assets

Current assets increased by RMB3,886.4 million from RMB10,099.1 million as at 31 December 2015 to RMB13,985.5 million as at 31 December 2016 due mainly to:

  • increase in development properties of RMB2,193.9 million as the amount of costs incurred for the Group's development properties is larger than the costs recognised in the previous year;
  • increase in trade receivables, other receivables and advance payments of RMB1,048.5 million mainly due to the increase in advance payments made to land suppliers amounting to RMB1,939.8 million;
  • increase in cash and cash equivalents of RMB824.2 million; and
  • partially offset by the decrease in financial assets of RMB195 million.

Contract work-in-progress refers to a contract that the Group has entered into with the Suzhou Municipal Government to develop an education park, with an approximate land area of 3,500,000 sqm, on behalf of the local government. The construction costs incurred were funded by advances from the Suzhou Municipal Government.

Contract work-in-progress is stated as construction costs incurred on behalf of the Suzhou Municipal Government. It is not intended for the Group to derive a profit from the development of the education park.

Non-current liabilities

As at 31 December 2016, non-current liabilities were RMB5,874.7 million as compared to RMB3,266.0 million as at 31 December 2015. The increase in non-current liabilities of RMB2,608.7 million was due mainly to an increase of RMB2,613.1 million in loans and borrowings to meet the financing demand of new projects.

Current liabilities

Current liabilities as at 31 December 2016 amounted to RMB8,050.5 million as compared to RMB6,643.8 million as at 31 December 2015. The increase in current liabilities of RMB1,406.7 million was mainly due to the increase in loans and borrowings of RMB1,372.2 million to meet the financing demand of new projects.

Advance receipts from the government amounted to RMB439.9 million as at 31 December 2016 and 31 December 2015. The amount was provided by the government to fund the contract work-in-progress as aforementioned in the paragraph above entitled "Current assets".

Total equity

As at 31 December 2016, total equity was RMB1.49 billion as compared to RMB1.25 billion as at 31 December 2015. Please refer to the section 1(d)(i) for the movement of total equity as presented in the statement of changes in equity.

Cash flow statement

4Q2016 vs 4Q2015

During 4Q2016, the Group had a net cash outflow from operating activities of RMB859.6 million comprising operating cash inflows before movements in working capital of RMB656.6 million, net working capital outflows of RMB1,465.2 million and income tax payment of RMB50.9 million. The net working capital outflows were mainly due to the increase in trade receivables, receivables and advance payments of RMB404.2 million, the decrease in trade payables, other payables and advance receipts of RMB1,347.3 million, partially offset by decrease in development properties of RMB280.1 million.

The Group recorded a net cash outflow from investing activities of RMB141.8 million due mainly to the increase in amounts due from associates of RMB126.4 million, acquisition of financial assets held for trading of RMB55 million, investments in joint ventures of RMB69.4 million, and development expenditure on investment properties of 28.8 million, partially offset by the decrease in amounts due from non-controlling interests, non-trade of RMB92.5 million and interest received of RMB43.2 million.

The Group recorded a net cash inflow from financing activities of RMB1,587.4 million during 4Q2016. This was due mainly to the net proceeds of borrowings of RMB1,283.6 million, and the decrease in restricted cash of RMB332.2 million, partially offset by the interest paid of RMB140.9 million.

Overall, the Group's cash and cash equivalents increased by RMB254.3 million from RMB1,773.4 in 3Q2016 to RMB2,027.7 million in 4Q2016.

12M2016 vs 12M2015

During 12M2016, the Group had a net cash outflow from operating activities of RMB2,626.4 million comprising operating cash inflows before movements in working capital of RMB619.0 million, net working capital outflows of RMB3,112.3 million and income tax payment of RMB133.0 million. The net working capital inflows were due to an increase in trade receivables, other receivables and advance payments of RMB1,090.0 million, and an increase in development properties of RMB1,850.2 million.

The Group recorded a net cash outflow from investing activities of RMB31.5 million due to development expenditure on investment properties of RMB200.3 million, the increase in amounts due from associates of RMB126.4 million, investments in joint ventures of RMB102.7 million, and acquisition of financial assets held for trading of RMB56.5 million, partially offset by proceeds from the disposal of financial assets available-for-sale of RMB253.4 million, decrease in amounts due from non-controlling interests, non-trade of RMB126.0 million and interest received of RMB61.4 million during 12M2016.

The Group recorded a net cash inflow from financing activities of RMB3,461.2 million during 12M2016. This was due mainly to the net proceeds of borrowings of RMB3,930.3 million, offset by interest paid of RMB469.3 million.

Overall, the Group's cash and cash equivalents increased by RMB824.2 million from RMB1,203.5 million in 31 Dec 2015 to RMB2,027.7 million in 31 Dec 2016.

Commentary

Despite economic uncertainties in global markets, the Group remains cautiously optimistic of its operating environment.

As the U.S. economy continues to see sustained growth, demands for real estate in cities that are attracting strong investments with competitive tax regimes have been buoyant. This uptrend is expected to hold steady despite potential policy uncertainties from the Trump Administration, due to high consumer confidence and low unemployment rate. The Group currently has a pipeline of projects in Dallas and intends to develop them with external funds raised through its fund management subsidiary, Richmont Capital.

In Australia, the real estate market in Sydney is expected to remain positive1. Despite concerns of oversupply in the market, housing prices in Sydney remain stable, inclined towards the upside2. This can be attributed to the population growth in Sydney because of supportive immigration policies. In fact, some property analysis firms, SQM Research, remains bullish and expects home prices to keep rising in Sydney with a forecasted price growth of between 11.0-16.0%3. The Group's property projects in Sydney are on track with the Group set to deliver its Uptown project by end of 2017, and the planned launch of two of its projects – Lapointe and The Peak – in the second quarter of 2017. Projects in Brisbane are mostly sold, with no planned new projects currently as the real estate market in Brisbane is fairly soft.

In China, despite the implementation of the property cooling measures in Q4 2016, average home prices are forecasted to rise 4.1% in 2017 from the previous year, and growth in property investment to rise 5.4% due to expectations of further depreciation of the yuan and more US rate hikes4. While price increases in first and second-tiered cities may overall slow down from the peak in 2016, these are unlikely to stop as demand continues to be supported by higher net urbanization, supported by a dynamic economy5. The Group remains focused to scale up and tap growth in cities that are still growing. Overall, the Group is positive about its prospects in these growth cities and is targeting RMB10.0 billion in advanced receipts in 2017 inclusive of JV projects, to reach RMB40.0 billion by 2021.

For 2017, the Group expects to deliver six projects comprising one project in Sydney, two projects in our core market of Suzhou, and the remainder in the Rest of China market – one project in Shanghai, one project in Xuzhou and one project in Xuancheng – with a total gross development value of RMB5.5 billion.

In addition, the Group will continue to expand and scale its fund management business so as to capitalise on external funds for its property development projects, particularly in the international markets. Richmont Capital has launched a total of seven funds, with a total fund size in excess of RMB700.0 million, with the proceeds of four of these funds utilised for the Group's international expansion plans.

Beyond property development, the Group seeks to generate higher recurrent income to provide earnings stability. The Group announced on 2 November 2016 its intention to expand its fund management activities beyond China. This will allow the Group to more effectively expand its property development business beyond the residential segment and to undertake projects in other segments. The Group has a track record of building education campuses and international schools in the PRC. Within the larger group, our sister company has experience in running business internationally, which includes a US aviation school that was acquired recently. The Group has submitted its circular to obtain shareholders' mandate to expand its fund management unit to SGX for approval, and will hold an EGM for this purpose thereafter.

1 "Australia property price surge set to take a breather in 2017", Daily Telegraph, 31 December 2016
2 "House prices rising again: sellers in Sydney, Melbourne, Brisbane ask for more", Domain, 4 October 2016
3 "Home prices to keep surging in Sydney, Melbourne over 2017, risk of 2018 bust: SQM Research", ABC, 3 November 2016
4 "China home prices, property investment likely to rise in 2017", Financial Review, 8 January 2017
5 "China's second cities post big property price gains as two-speed market develops", CNBC. 19 June 2016