Financials

UNAUDITED FINANCIAL STATEMENTS ANNOUNCEMENT FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2017

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INCOME STATEMENT FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2017



STATEMENT OF COMPREHENSIVE INCOME FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2017



BALANCE SHEET



REVIEW OF GROUP PERFORMANCE

3Q2017 vs 3Q2016

Revenue

The Group achieved revenue of RMB193.0 million for the quarter ended 30 September 2017 ("3Q2017"), an increase of 63% or RMB74.9 million from RMB118.1 million in the corresponding period in 2016. This is primarily due to an increase in the number of property units in Australia handed over to customers. Revenue for the property units sold and recognised was mainly attributable to Uptown Roseville, which contributed RMB133.8 million, or approximately 69% of the total revenue generated for 3Q2017. The Group saw an increase in the average selling price ("ASP") of its completed properties as a whole, of approximately RMB21,888 per sqm, from RMB8,760 per sqm for the quarter ended 30 September 2016 ("3Q2016") to RMB 30,648per sqm in 3Q2017. The increase was mainly due to the sales of Uptown Roseville in 3Q2017, which is situated in Sydney, Australia and therefore, able to command higher ASP. Although ASP increased, the aggregate Gross Floor Area ("GFA") sold and recognised decreased by approximately 50.4% or 5,919 square metres ("sqm"), from 11,738 sqm in 3Q2016 to 5,819 sqm for 3Q2017.

Together with higher revenue recognized, the Group experienced an encouraging increase in its presales activities for 3Q2017. The Group recorded pre-sales GFA of approximately 63,608 sqm with an aggregate consideration of approximately RMB1,447.0 million for its development properties projects in the People’s Republic of China (“PRC”) during 3Q2017. This represents a decrease of GFA by 40%, or 41,672 sqm from 105,280 sqm, but an increase in aggregate consideration by 41%, or RMB420.6 million from RMB1,026.4 million, as compared to 3Q2016. In this period, Zhangjiagang Chiway Royal Paradise Bay and Suzhou Chiway Star Hub which are located in second tier cities, achieved good pre-sales results, accounting for approximately 33% and 24% of the total pre-sale consideration. The ASP of pre-sales increased from RMB9,749 per sqm in 3Q2016 to RMB22,748 per sqm in 3Q2017.

The Group also continued with its pre-sales activities for four of its property development projects in Australia. During 3Q2017, total of 20 units from these property development projects – Illumina, Uptown, Elan and Stellar, were pre-sold with a total aggregate consideration of AUD17.1 million (RMB89.1 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

In tandem with the increase in revenue, the Group’s cost of sales, which comprises mainly of land acquisition costs, construction costs, capitalised borrowing costs and indirect costs incurred on the development properties sold, increased by 62% or RMB46.0 million from RMB74.2 million in 3Q2016 to RMB120.2 million in 3Q2017.

Gross profit increased by 66% or RMB29.0 million, from RMB43.8 million in 3Q2016 to RMB72.8 million in 3Q2017. Overall gross profit margin increased from 37.1% in 3Q2016 to 37.7% in 3Q2017. This was mainly due to higher profit margin contribution from revenue recognition of properties in Uptown Roseville which recorded a higher gross profit compared to the projects of last year.

Other income

Other income, which mainly comprised of gain on disposal of financial assets available-for-sale, foreign exchange gain and gain on disposal of property, plant and equipment, increased by 1,211% or RMB7.1 million from RMB0.6 million in 3Q2016 to RMB7.7 million in 3Q2017. The increase was also attributed to more foreign exchange gain in 3Q2017.

Selling and distribution expenses

Selling and distribution expenses comprised primarily of advertising and promotion expenses, sales commissions, sales offices rental expenses and maintenance costs. Selling and distribution expenses decreased by 14% or RMB5.2 million from RMB37.0 million in 3Q2016 to RMB31.8 million in 3Q2017. This was due mainly to the decrease in marketing expenditure on newly-launched projects and marketing activities in 3Q2017. Four projects were launched in 3Q2016, while one project was launched in 3Q2017.

Administrative expenses

Administrative expenses comprised of salaries and staff related expenses for general administrative staff, utilities expenses, telecommunication expenses, entertainment expenses, professional fees, travelling expenses and other general overheads expenses. The increase in administrative expenses by 92% or RMB24.3 million from RMB26.4 million in 3Q2016 to RMB50.7 million in 3Q2017, was mainly attributed to higher staff costs and other related staff expenses as a result of higher headcount, as we expanded our business activities for new projects, and also for mid-year staff bonuses, which were not paid last year.

Other operating expenses

Other operating expenses, which mainly comprised of net foreign exchange loss, and loss on disposal of property, plant and equipment, decreased by 95% or RMB7.3 million from RMB7.7 million in 3Q2016 to RMB0.4 million in 3Q2017. Other operating expenses in 3Q2016 was mainly due to net foreign exchange loss of RMB4.8 million.

Net finance costs

Net finance costs were RMB26.6 million in 3Q2017, compared to RMB20.3 million in 3Q2016, an increase of 31% or RMB6.3 million. This was mainly due to finance costs that could not be capitalized in development projects during the current quarter, which includes the interests of loans and unquoted debt securities to the companies that have no projects under construction.

Share of results of joint ventures and associate, net of tax

Share of results of joint ventures and associate, net of tax was a loss of RMB1.7 million in 3Q2017, increased by RMB0.8 million from RMB0.9 million in 3Q2016. The share of results of joint ventures and associate in 3Q2016 was attributed to the loss of the Group’s Vivir project in Australia, and the share of results in joint ventures and associate in 3Q2017 was mainly from UCCH, Suzhou Ruixin, Suzhou Xinglun and Shengeng Hongye which were at the project of construction phase.

Income tax expense

Income tax expense comprises of enterprise income tax and land appreciation tax ("LAT"). The Group incurred a tax expense of RMB4.5 million in 3Q2017, as compared to an income tax expense of RMB8.7 million in 3Q2016. The Group’s income tax expense decreased mainly due to higher amount of deferred tax assets recognised.

Loss for the period

As a result of the foregoing, the Group reported a loss for the period of RMB35.1 million in 3Q2017, whilst the loss for the period in 3Q2016 was RMB56.6 million.

9M2017 vs 9M2016

Revenue

The Group achieved revenue of RMB1,455.9 million for the period ended 30 September 2017 ("9M2017"), an increase of 9% or RMB120.8 million from RMB1,335.1 million in the corresponding period in 2016. This was primarily due to the increase in the number of property units handed over. As a result, the aggregate Gross Floor Area ("GFA") sold and recognised increased by approximately 11% or 16,210 square metres ("sqm") from 146,383 sqm for the period ended 30 September 2016 ("9M2016") to 162,593 sqm for 9M2017, while the average selling price ("ASP") decreased by 2% from RMB 8,927 per sqm in 9M2016 to RMB 8,726 per sqm in 9M2017. The revenue recognised was mainly attributed to the Xuzhou Royal Palace, which contributed RMB650.0 million, or approximately 46% of the total revenue generated for 9M2017. In addition, Shanghai Royal Palace and Suzhou Industrial Park Royal Mansion which contributed RMB242.7 million and RMB214.9 million respectively, or 17% and 15% of the total revenue, respectively. The decrease in ASP was mainly due to the sales of Xuzhou Royal Palace in 9M2017 with lower selling price as the development property was located in a Tier-3 city.

The Group also achieved strong pre-sales for 9M2017, with GFA of approximately 341,937 sqm and an aggregate consideration of approximately RMB5,617.5 million for the development properties projects in the People’s Republic of China ("PRC"). This represents an increase of 17% in GFA, or 48,523 sqm from 293,414 sqm, and an increase of 97% in aggregate consideration, or RMB2,764.8 million from RMB 2,852.7 million, from 9M2016. In this period, Nanjing Chiway and Suzhou Chiway Shangcheng, and other projects located in Suzhou which are located in second tier cities, achieved a good pre-sales results, approximately 21% and 56% of the total consideration. The ASP of pre-sales increased from RMB9,722 per sqm in 9M2016 to RMB16,429 per sqm in 9M2017.

The Group also presold four of its property development projects in Australia. During 9M2017, 148 units from these property development projects – Illumina, Uptown, Elan and Steller were pre-sold and 3 units from Vivir were sold with an aggregate consideration of AUD121.9 million (or RMB 634.6million).

Total pre-sales from both China and Australia reached RMB6,252.1 million, as at end of 9M2017.

Cost of sales and gross profit margin

Despite the 9% increase in revenue, the Group’s cost of sales, which comprises mainly of land acquisition costs, construction costs, capitalized borrowing costs and indirect costs, increased marginally by 1% or RMB9.6 million from RMB1,187.5 million in 9M2016 to RMB1,197.1 million in 9M2017.

Gross profit increased by 75% or RMB111.3 million, from RMB147.5million in 9M2016 to RMB258.8 million in 9M2017, due to the increase in gross profit margin. Overall gross profit margin increased from 11.1% in 9M2016 to 17.8% in 9M2017. This was mainly due to higher revenue contribution from the Suzhou Industrial Park Royal Mansion, which has a higher gross profit compared to the projects of last year.

Other income

Other income, which mainly comprised of gain on disposal of financial assets available-for-sale, foreign exchange gain and gain on disposal of property, plant and equipment, increased by 438% or RMB17.7 million from RMB4.1 million in 9M2016 to RMB21.8 million in 9M2017. The increase was mainly due to foreign exchange gain of RMB16.6 million.

Selling and distribution expenses

Selling and distribution expenses comprised of primarily advertising and promotion expenses, sales commissions, sales offices rental expenses and maintenance costs. Selling and distribution expenses increased by 39% or RMB33.1 million from RMB84.5 million in 9M2016 to RMB117.6 million in 9M2017. This was due mainly to the increase in expenditure on sales and marketing activities for new projects.

Administrative expenses

Administrative expenses comprised of salaries and staff related expenses for general administrative staff, utilities expenses, telecommunication expenses, entertainment expenses, professional fees, travelling expenses and other general overheads expenses. The increase in administrative expenses by 34% or RMB34.3 million from RMB99.6 million in 9M2016 to RMB133.9 million in 9M2017, was attributable mainly to higher staff costs and bonus and other related expenses due to higher headcount, which was in line with the increase in business activities for new projects.

Other operating expenses

Other operating expenses which mainly comprised of net foreign exchange loss, loss on disposal of property, plant and equipment, and donations, decreased by 77% or RMB6.5 million from RMB8.4 million in 9M2016 to RMB1.9 million in 9M2017. The increase was mainly due to net foreign exchange loss of RMB6.2 million, and donation of RMB1.0 million.

Net finance costs

Net finance costs were RMB74.6 million in 9M2017, compared to of RMB46.3 million in 9M2016. This was mainly 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 and associate, net of tax

Share of results of joint ventures and associate, net of tax was a loss of RMB4.1 million in 9M2017, as compared to profit of RMB6.2 in 9M2016. The share of results of joint ventures and associate in 9M2016 was attributed to the handover of the Group’s Vivir project in Australia, while the share of results of joint ventures and associate in 9M2017 was mainly from UCCH, Suzhou Ruixin, Suzhou Xinglun and Shengeng Hongye which were at the beginning of construction.

Income tax expense

Income tax expense comprises of enterprise income tax and land appreciation tax (“LAT”). The Group incurred a tax expense of RMB28.5 million in 9M2017 as compared to an income tax credit of RMB33.2 million in 9M2016. The Group’s income tax expense decreased mainly due to higher amount of deferred tax assets recognised.

Loss for the period

As a result of the foregoing, the Group reported a loss for the period of RMB80.0 million in 9M2017, while the loss for the period in 9M2016 was RMB114.2 million.

Statement of Financial Position

Non-current Assets

Non-current assets comprised of property, plant and equipment, investment properties, interest in joint ventures and associate, financial assets, deferred tax assets and other receivables. As at 30 September 2017, non-current assets amounted to RMB1,928.7 million as compared to RMB1,596.6 million as at 31 December 2016.

The increase in non-current assets of RMB332.1million was due mainly to:

  • increase in joint ventures from RMB98.8 million as at 31 December 2016 to RMB296.9 million as at 30 September 2017 mainly due to the purchase of Suzhou Xinglun;
  • increase in investment properties of RMB118.9 due to new construction costs incurred for investment properties under development;
  • increase in deferred tax assets of RMB22.3 due to the deductible temporary differences recognised; and
  • partially offset by the decrease in other receivables of RMB8.9 million.

Current Assets

Current assets increased by RMB5,219.8 million from RMB13.72 billion as at 31 December 2016 to RMB18.94 billion as at 30 September 2017 due mainly to:

  • increase in development properties of RMB5,198.0 million largely due to new construction costs incurred for the Group’s development properties;
  • increase in cash and cash equivalents of RMB918.4 million; and
  • offset by a decrease in trade receivables, other receivables and advance payments of RMB902.2 million mainly due to advance payments made to suppliers utilized in the current period.

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 at 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 30 September 2017, non-current liabilities were RMB4,925.2 million as compared to RMB5,738.4 million as at 31 December 2016. The decrease in non-current liabilities of RMB813.2 million was mainly due to the net increase in loans and borrowings of RMB1,123.4 million, less RMB1,936.7 which were reclassified into current liabilities as their repayment due date is less than a year.

Current liabilities

Current liabilities as at 30 September 2017 amounted to RMB14,742.0 million as compared to RMB8,091.4 million as at 31 December 2016. The increase in current liabilities of RMB6,650.5 million was mainly due to the increase in loans and borrowings of RMB1,936.7 million reclassified from non-current liabilities as their repayment due date is less than a year, and the increase in advance receipts of RMB4,062.3 million due to the increase of proceeds from on-going projects.

Advance receipts from government amounted to RMB442.5 million as at 31 September 2017 and RMB439.9 million as at 31 December 2016. 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 30 September 2017, total equity was RMB1.20 billion as compared to RMB1.49 billion as at 31 December 2016. 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

3Q2017 vs 3Q2016

During 3Q2016, the Group had a net cash inflow from operating activities of RMB930.4 million comprising operating cash outflows before movements in working capital of RMB7.4 million, net working capital inflows of RMB1,004.2 million and income tax payment of RMB66.4 million. The net working capital inflows were mainly due to the increase in trade receivables, receivables and advance payments of RMB4,797.5 million, partially offset by increase in trade payables, other payables and advance receipts of RMB4,751.0 million.

The Group recorded a net cash outflow from investing activities of RMB445.0 million mainly due to an increase of RMB181.6 million due from joint ventures, investment in financial assets of RMB59.0 million, development expenditure on investment properties of RMB71.6 million, acquisition in subsidiary of RMB59.9 million, and an increase of RMB67.5 million due from non-controlling interests.

The Group recorded a net cash outflow from financing activities of RMB75.6 million during 3Q2017. This was mainly due to the net proceeds of borrowings of RMB919.4 million, and the increase in restricted cash of RMB864.6 million, and interest paid of RMB153.0 million.

Overall, the Group's cash and cash equivalents increased by RMB409.8 million during 3Q2017, from RMB845.3 million in 1H2017 to RMB1,256.1 million in 3Q2017, net of effect of exchange rate changes on cash held.

9M2017 vs 9M2016

During 9M2017, the Group had a net cash inflow from operating activities of RMB1,124.8 million comprising operating cash inflows before movements in working capital of RMB9.0 million, net working capital inflows of RMB1,430.4 million and income tax payment of RMB314.6 million. The net working capital inflows were mainly due to the increase in trade receivables, other receivables and advance payments of RMB6,743.3 million, partially offset by an increase in trade payables, other payables and advance receipts of RMB2,286.2 million and increase in development properties by RMB3,025.1 million.

The Group recorded a net cash inflow from investing activities of RMB741.9 million mainly due to an increase of RMB404.1 million due from joint ventures, investment in financial assets of RMB59.0 million, development expenditure on investment properties of RMB118.9 million, acquisition in subsidiary of RMB144.2 million, and investment in joint ventures of RMB199.8 million.

The Group recorded a net cash outflow from financing activities of RMB752.7 million during 9M2017. This was mainly due to the net proceeds of borrowings of RMB1,121.7 million, offset by the increase in restricted cash of RMB1,284.6 million, and interest paid of RMB489.7 million.

Overall, the Group's cash and cash equivalents has decreased RMB369.7 million during 9M2017, from RMB1,622.4 million in 12M2016 to RMB1,256.1 million in 9M2017, net of effect of exchange rate changes on cash held.

Commentary

In China, the cooling measures introduced last year, has caused structural changes in the real estate market, with numerous price and funding control measures put in place, and a perceptible shift in market demand to the lower-tier towns and cities.

DBS opined that “property bubbles will continue to persist due to the reliance on leveraging the property market to support growth...In the absence of reliable and deep investment alternatives, households remain reliant on property as both a storage of wealth and investment. Forthcoming policies are only meant to slow down the pace of the property market’s growth. Authorities will aim to stabilise the price increase rather than allowing a collapse.”1

Indeed, our own observations are that property prices in the first and second-tier cites, such as Nanjing, Wuhan and Suzhou amongst others, are beginning to stabilize after a series of cooling measures. Price increases in such cities are expected to slow down as demand continues to be supported by higher net urban immigration supported by a dynamic economy and ongoing reforms in the rural agricultural sectors.

The Group is progressing beyond cities with mature growth to tap on others that continue to yield fair returns and remains optimistic of its prospects in these growth cities. It has since acquired seven land parcels - six in Jiangsu province and one in Anhui province, all in tier-3 cities.

For 4Q2017, the Group plans to launch two new projects in Suzhou and one in Wuhan by the end of FY2017. The three projects slated for launch by the end of the year have a total gross floor area of more than 270,000 sqm with an approximate GDV of RMB5.98 billion. In the same period, the Group plans to deliver two major projects – Suzhou Industrial Park Royal Mansion (Phase 2) and Xuancheng Chiway Top Town (Phase 3, District C) in 4Q2017. These projects are well received by the market, which has both sold more than 80%.

The Group’s property projects in Australia are on track with the Group set to deliver two of its projects – Illumina and Elan in the first half of next year. Stellar, on the other hand, is expected to be deliver in the first quarter of FY2019.

The Group has extended its financial year end to June 2018 for a total of six quarters from 1 January 2017 to 30 June 2018. The change will enable us to improve the accuracy of our reported taxes and better plan our audit schedule with our auditors, enabling greater administrative efficiency and cost savings.

The Group continues to actively look out for opportunities to generate higher recurrent income to provide earnings stability. This includes increasing its investment properties and asset management which will provide higher rental and management fees. In particular, the Group will seek to unlock greater shareholder value by leveraging on its strengths in the education field, where it has existing international schools via its sister company and good knowledge of the industry globally.

1"Eight predictions from the 19th NPC", DBS Group Research, 02 November 2017