First Sponsor Group Ltd develops and owns real estate properties in the People’s Republic of China (PRC), the Netherlands. The Group is also a hotel owner and a provider of property financing services in the PRC.

• Strong sponsors provide an avenue to funding
• Low gearing with high debt headroom
• Higher recurring income from Europe
• High property sales turnover in Dongguan, with short term cash boost expected
• Unhedged FX exposure to RMB
• Uncertain impact of Coronavirus on performance

We participated in a corporate roadshow by First Sponsor Group Ltd. Below are the highlights:

• Issuer profile: We are POSITIVE on First Sponsor Group Ltd (FSG). Strong sponsors, including Hong Leong group, City Developments Ltd and Tai Tak Estate, provide the group access to liquidity. The group has low gearing and high debt headroom, as well as increased recurring income from its investment properties and hotels. With high sales turnover from property development projects in China, we expect a short-term boost in cash as more units are handed over.

Company Background

First Sponsor Group Ltd is a Singapore-based real estate company listed on the Mainboard of the Singapore Exchange (SGX) on 22 July 2014. They develop and own real estate properties in the People’s Republic of China (PRC), the Netherlands. The Group is also a hotel owner and a provider of property financing services in the PRC.

Principle activities:

• Property development: Residential and commercial property developments in tier-two cities in the PRC, namely Chengdu and Dongguan, as well as in the Netherlands.
• Property holding: Hotel ownership and operations as well as investment properties held for rental income in the PRC and the Netherlands. These assets generate recurring income for the group.
• Property financing: Financing services for real estate projects through entrusted loan arrangements in the PRC, with particular focus on Shanghai, and more recently Melbourne, Australia.

FY2019 Results

Revenue of the group increased by S$41.8mn or 15.1%, from S$277.4mn in FY2018 to S$319.2mn in FY2019. This was due mainly to the increase of S$20.6mn, S$18.7mn and S$5.1mn from revenue from sale of properties, hotel operations and property financing respectively. The increase in revenue from sale of properties was from recognition of revenue from the handover of more commercial and residential units in the Chengdu Millennium Waterfront project (FY2019: 867 residential units and 122 commercial units, FY2018: 647 residential units and 71 commercial units). Revenue from hotel operations increased by S$18.7mn or 44.6%, from S$42.0mn in FY2018 to S$60.7mn in FY2019 due to the additional contribution from Bilderberg Bellevue Hotel Dresden acquired in March 2019 and Hampton by Hilton Utrecht Centraal Station which commenced operations in June 2019.

The group’s gross profit increased by S$27.5mn or 17.0%, from S$161.5mn in FY2018 to S$189.0mn in FY2019. The group’s gross profit margin for FY2019 remained fairly constant at 59.2% (FY2018: 58.2%).

The Positives

+  Strong sponsors provide an avenue to funding. The Hong Leong group (through City Developments Ltd), City Developments Ltd (through M&C Hospitality International Ltd), and Tai Tak Estates Sendirian Berhad (through First Sponsor Capital Ltd and Tai Tak Asia Propperties Ltd) indirectly own more than 80% of FSG. Hong Leong group is one of is a globally-diversified company with gross assets of over S$40bn, owned by the Kwek family. City Developments Ltd is one of Singapore’s largest listed real estate company. And Tai Tak Estates is the holding company of Singapore’s Ho family, which has stakes in United Overseas Bank, Carlsberg Brewery Malaysia, Heineken Malaysia, and Cordlife Group.

According to management, FSG has strong support from its key stakeholders. Through them, they have acquired funding for projects at low rates of c.1.38%, and have worked together on deals previously. In addition, FSG’s rights issue exercises were heavily anchored by the key stakeholders. The group’s 2018 and 2019 rights issues exercises raised about S$300mn, with key stakeholders owning c.80% of all outstanding warrants issued.

+  Low gearing with high debt headroom. As at 4QFY2019, FSG’s gearing ratio was 0.20. Their net gearing ratio of 0.39 is significantly lower than their financial covenant net gearing ceiling of 0.80. As of 31 December 2019, the group had a debt headroom of S$410.2mn. This comprises mainly of committed credit facilities and covers debt due in 2020 of S$251.9mn.

+  Higher recurring income from Europe. Gross profits from the group’s property holding segment grew c.38.6% in FY2019, from S$22.0mn to S$30.5mn. This was mainly from contribution from the Bilderberg Bellevue Hotel Dresden acquired in March 2019 and Hampton by Hilton Utrecht Centraal Station which commenced operations in June 2019. This recurring income made up c.16.1% of total gross profits in FY2019.

+  High property sales turnover in Dongguan, with short term cash boost expected. Over FY2019, FSG procured 3 more projects in Dongguan, The Pinnacle, Chang’an and the Skyline Garden, Wanjiang (formerly known as Wanjiang Victory Land) projects. This brought the total projects in Dongguan to 5. The group experienced strong sales in the tier-2 city. According to management, inventory turnover in Dongguan was 0.6 years, comparatively short compared to 1.6 years in Singapore and 1.1 years in Sydney, and reflects the strong demand there.

The group is expecting a short term cash boost as handover of the Star of East River project is expected to continue in 2020 and 2021 while the rest of the group’s Dongguan projects are expected to be handed over from 2021 onwards.

The Negatives

–  Unhedged FX exposure to RMB. FSG does not actively hedge their RMB foreign exchange exposure due to hedging instruments being expensive. However, the group has started to hedge its new exposure to the PRC property development and property financing operations to the extent that these are not funded by onshore RMB assets by drawing CNH-denominated borrowings and/or executing CNH cross currency swaps.

In 2019, the RMB depreciated c.2.6% in 2019, leading to a recorded cumulative translation loss of S$18.6mn, down from a positive S$12.8mn from the beginning of 2019. Given the group’s total assets of over S$2.8bn, we view the year’s FX translation losses of S$31.4mn as manageable.

–  Uncertain impact of Coronavirus on performance. Management stated that they have yet to see impact to their European hotels’ income. As for their China hotels, management conducted a sensitivity analysis that showed little financial impact, with <8% cash burn should the situation last 6 months. There is some uncertainty near-term over property sales in China. However, management is prudently looking for opportunities that may appear in China from market fears.