Extracted from Annual Report 2011
Dear Shareholders,
2011 was a year filled with challenges and uncertainties, both in the domestic (the PRC) and global economies. Amidst escalating inflationary pressures, the PRC government continued with its measures to contain growing property prices, which included implementing restrictions on property buying and land supply, while closely monitoring the supply and prices of foodstuff and daily consumables. The tightened monetary policies effectively put a cap on liquidity as interest rates continued to mount on an uptrend. Compounded by the higher bank statutory reserves mandated in 2011, credit lending was further tightened. All these macroeconomic policies had somewhat cast a shadow on the outlook of the PRC property market in the near future.
While the property market may be losing its shine in many PRC cities, it remains stable in Foshan city, as evident from the marginal increase in the city's average transacted property prices from RMB7,448/square metre in 2010 to RMB7,674/square metre in 2011, albeit that there was a lower transaction volume as some buyers adopted a wait-andsee approach in the hope that the PRC government would ease some of its tough housing measures soon. The property market in Foshan city was able to buck the general price trend because Foshan remains one of the cities in the PRC with the highest home affordability ratios. Many buyers have genuine intentions to purchase properties to stay in or to hold for the long term.
There are also other factors in Foshan's real estate market that work in our favour. These include the support from beverage City, a business zone for the beverage industry housing big names such as Budweiser, Coca-Cola and Yeo Hiap Seng, as well as automotive industry chains like Toyota, Honda and Volkswagon AG. Foshan is also well known for its furniture, lighting, home appliances and aluminium products, as well as ceramic industries. all these support the city's economic development and population growth.
Against this backdrop, we have reasons to believe that the Group is operating in the right market. Our recent projects, including Shanshui Longpan villas - a cluster of high-end villas and residential township, Jiangnan Mingju Phases 5 and 6 - acclaimed for its modern design, greenery landscaping and full ancillary facilities support, as well as our joint venture project Jin Long Garden - South Zone (Phase 2) - have been well-received. As at 31 December 2011, we are heartened to have sold/pre-sold approximately 41,000 square metres, 1,000 square metres, 29,000 square metres and 140,000 square metres of Shanshui longpan phase 1 villas, Shanshui longpan phase 1(ii) villas, Jiangnan Mingju Phases 5 and 6, and Jin Long Garden - South Zone (Phase 2) respectively.
The Group's 71% improvement in average selling prices, from RMB6,400/metre in FY2010 to RMB11,000/square metre in FY2011, was mainly due to the contribution from our premium development, Shanshui Longpan Phase 1 Villas, comprising high-end bungalows, semi-detached and triple-linked villas.
Financial Review
during the year in review, the Group's revenue declined 49% to RMB447.0 million as a result of a 70% dip in the total gross floor area ("GFA") recognised, from 127,000 square metres in FY2010 to 37,600 square metres in FY2011. a lower GFA was recognised because of lower sales from Jiangnan Mingju Phases 5 and 6 as the bulk of the residential units were sold and handed over to purchasers in 3Q2010. the lower revenue was also attributed to a 64% decrease in revenue contribution from our Construction Contracts as the majority of the construction contract work for Jin Long Garden - South Zone (Phase 2) was completed in 2010.
However, the decline in revenue was offset by the sales of Shanshui longpan phase 1 villas and Jiangnan Mingju Phases 5 and 6 car park lots, as well as higher revenue contribution from our Property Rental income and Property Management Services income arising from the new property management project for Jiangnan Mingju Phases 5 and 6.
Despite the lower revenue, gross profit margin improved significantly from 20% in FY2010 to 33% in FY2011, driven by a higher ASP for Shanshui longpan phase 1 villas, lifting the Group's overall ASP by 71%.
In FY2011, the Group also incurred lower selling and distribution, and administrative expenses due mainly to lesser marketing activities and the absence of expenses associated with our initial public offering in FY2010. the change in fair value of convertible loan notes, which is notional and has no bearing on the Group's operating cash flow and cash position, also decreased by RMB198.4 million. these lower expenses were offset by an increase of RMB38.2 million in finance cost due to interest expenses incurred for new and existing loans. We had also incurred a loss of RMB2.3 million in FY2011 in our 55% joint venture stake in Jin Long Garden due to minimal sales as the bulk of the residential units for north Zone (phase 1) were recognised in FY2010.
Correspondingly, net profit stood at RMB55.7 million in FY2011 against a loss of RMB104.6 million in FY2010. our pro-forma consolidated financial statements, which excludes a notional adjustment on cost of sales, would present a higher net profit of RMB69.1 million.
Cash and bank balances as at 31 December 2011 decreased 44% to RMB143.9 million, primarily attributable to the net cash used in operating activities of RMB330.4 million, offset by net cash from investing activities of RMB43.4 million and financing activities and the effect of exchange rate changes totalling RMB172.9 million in FY2011.
Relative to the industry in the PRC, we are enjoying a healthy net gearing level of 42% with a back of net asset value per share at 109.44 RMB fens as at 31 December 2011.
Rising To Meet Challenges
There is no doubt that the PRC real estate sector will remain challenging. We believe that the present property buying restrictions will remain intact in the short term and that many potential buyers may choose to wait out until the PRC government eases the current tough regulations. The Minister of Housing and Urban-Rural Development of China reported in october 2011 that the property buying restrictions will be scrapped upon the completion of the national database of property ownership and other related information. This wait-and-see sentiment by buyers may therefore only have a short-term downward pressure on our transaction volume.
Our strategy is to continue to present our competitive edge to homebuyers by offering premium developments at right locations and attractive prices as we believe the demand for this category holds strong.
The high borrowing costs, as a result of the slew of measures implemented by the PRC government to curb inflation, also means that banks and financial institutions will stipulate tougher lending criteria, making it more difficult for the Group to borrow funds for expansion. So far, we have managed to minimise the impact of the tightened credit environment on our financials as we have built up a good credit track record and established good business relationships with major banks and financial institutions over the years.
Moving ahead, we will also continue to source for quality and commercially viable land bank, including retail mall development, redevelopment of industrial land as well as tourism development projects that will further propel the Group's growth.
Latest Developments
As at 31 December 2011, the Group has two ongoing projects - the multi-phases premium township development - Shanshui longpan and Jin Long Garden South Zone (Phase 2) - with a total GFA of approximately 1 million square metres under development.
We are also excited about the approximately 383,000 square metres of land held for future development in the pearl river delta area - one of China's leading economic zones and a major manufacturing and logistics hub. this includes our land bank in Sihui City of about 133,000 square metres, acquired in July 2011.
We expect our existing pipelines and land bank to support our developmental projects from now to 2017, providing us with a firm platform for sustainable growth.
In November 2011, the Group had also successfully tendered for a 16,500 square metres plot of land adjacent to the existing Shanshui longpan Hotel building. We intend to utilise the space to develop an ancillary commercial building to complement the Shanshui longpan Hotel operations when the entire Shanshui longpan area is more developed.
Separately, shareholders can also look forward to fairly secured project revenue and profits in FY2012 as we expect to recognise revenue or profits from the sale of Shanshui longpan phase 1(ii) villas and Jin Long Garden - South Zone (Phase 2) residential units in 2H2012 upon the completion of these two projects.
Dividend
To reward loyal shareholders, the Board of Directors is happy to declare a final dividend (tax-exempted and one-tier) of 2.39 RMB fens (equivalent to 0.465 Singapore cents) per share - our first dividend pay-out since the Group's listing in 2010.
Word Of Appreciation
On behalf of the board of directors, I would like to thank all our staff for their dedication and hard work. I look forward to working closely with each and every staff in FY2012 and the years ahead to further cement the Group's strong reputation as an integrated property developer in Foshan City and other second and third tier cities.
More importantly, I would like to thank you, our valued shareholders, for your continued support and trust in the Group.
Yuan Le Sheng
Executive Chairman and CEO