Extracted from Annual Report 2010
Dear Shareholders,
Despite the Chinese government's recent tightening policies to curb speculation in the property market through land supply and credit control, the property market in major tier-2 cities, such as Foshan, continued to maintain its growth momentum with steadily increasing transaction prices. This is because consumers continued to take the view that holding a property is still a better hedge against inflation in light of the strong growth that China is experiencing.
We feel that these measures are largely targeted at speculators who rely heavily on mortgages and own more than two properties, and therefore, have limited impact on Foshan. From our own research, most of the property buyers and potential buyers in Foshan are local residents who have higher levels of income and are mostly owner-occupiers. As a matter of fact, we have seen average selling prices per square metre inching up since the second half of 2010 and Foshan is still one of the cities with the highest home affordability in China. All of these are very positive signs! Moving forward, we will focus on brand building and offering quality property development projects to our targeted market so as to maximise profit margin and minimise the impact from government's tightening policies.
China has been experiencing phenomenal growth. In 2009, GDP growth reached 9.2% and in the year that just ended, China recorded 10.3%. To pay more attention to inclusive growth which focuses more on improving social safety nets and a more even wealth distribution, China will moderate growth in 2011 from an earlier estimate of 8% down to 7%. Rising affluence to a wider population will result in intensifying the rate of urbanisation, and will drive continued demand for housing for the most populous country in the world.
We are very encouraged at how well received our projects have been. This is of course no coincidence as one of the keys to our success is the attention we pay to sourcing for land parcels in the very best locations to maximise the development return. We have worked hard to ensure that these are ideally situated in close proximity to potential growth areas within the city and to popular lifestyle offerings, while land cost is still maintained at a reasonable level in proportion to the overall development costs.
Incidentally there are several factors that are in favour of the real estate market in Foshan. These include the establishment of Beverage City, a business zone for the beverage industry housing big names such as Budweiser, Coca-Cola and Singapore's Yeo Hiap Seng, and the announcement by German carmaker, Volkswagon AG that it was going to build a factory in Foshan with an annual production capacity of 300,000 units. These two developments are expected to boost the city's population and economic activities and bode well for Debao's portfolio of projects including Shanshui Longpan, Jiangnan Mingju and Jin Long Garden.
Since its soft launch in May 2010, transactions at Shanshui Longpan (Phase 1) have been encouraging. The development consists of bungalows, semi-detached and triple-linked villas and is our very first luxury villas and residential township project, of which we are very proud. Its proximity to Beverage City and Shishan Industrial Park, where Volkswagon AG and the automotive supply chain is located, is also expected to boost sales.
Elsewhere, we are extremely pleased with the response since the launch of our joint venture project Jin Long Garden - South Zone (Phase 2) in December 2010, which is located near a stylish leisure mall and a heritage and cultural hub.
Construction of Jiangnan Mingju Phases 5 and 6 was completed and handed over to buyers in 4Q2010. The project is highly regarded by the market for its modern and innovative design, greenery landscaping, as well as full ancillary facilities support and close proximity to CBD area. More than 800 car park lots in Jiangnan Mingju Phases 5 and 6 were substantially sold since its launch in 4Q2010 and we have seen strong response from the owners of the development, as well as from neighbouring developments.
Financial Review
In FY2010, the Group's revenue dipped by 2% to RMB566.7 million due to a decrease in GFA sold and recognised - 58,200 sq m compared to 88,300 sq m in FY2009, as the majority of our Jiangnan Mingju Phases 5 and 6 project was pre-sold last year. However, the pre-sales of our newly-launched Shanshui Longpan high-end township project has been encouraging, which led to higher ASP per sq m achieved - RMB8,800 per sq m as opposed to RMB6,100 per sq m in FY2009. We are also pleased with our ability to hold and even achieve higher ASP despite the PRC government's cooling measures which did not seem to affect demand for our properties.
In the second half of 2009, our joint venture project Jin Long Garden Phase 2 (South Zone) had started construction, and generated construction revenue of RMB43.5 million for the Group in FY2010.
We ended the year with an Actual Accounting net loss of RMB126.5 million, although the Group is operationally profitable. This is primarily due to a 248% increase in fair value adjustments of the convertible loan notes to RMB198.4 million upon conversion date. These fair value adjustments are "notional" and have no impact on shareholders' equity. It also has no bearing on the operating cash flow and cash position of the Group. You will be pleased to note that there will be no further charge of this nature to the income statement of the Group in FY2011. Excluding the non-cash fair value adjustment to the cost of property development sales and its associated tax due to application of the Singapore Financial Reporting Standards 103 (the "SFRS 103"), our Proforma Accounting net loss was RMB48.0 million for FY20101.
As at 31 December 2010, the Group's cash and bank balances increased by 68% to RMB258.1 million primarily due to net cash inflow from operating and financing activities, and partially offset by net cash used in investing activities. Similarly, our net borrowings decreased by 77% to RMB215.3 million mainly due to conversion of convertible loan notes and repayment of borrowings during the year. We also enjoy a healthy net gearing level of 18% in comparison with 197% in the year-ago period.
As at 31 December 2010, our net asset value per share stood at RMB1.08.
Looking Ahead
Moving forward, Debao expects to continue riding on the aggressive plans of Foshan's local government to attract both domestic and international brand names to base their operating activities in the city. Its growth presents numerous opportunities for real estate development and we plan to take advantage of these.
As such, we will continue to focus our efforts on Foshan where we are headquartered. At the same time, we have also identified other regions in China that are also experiencing exponential growth and we will seek opportunities there. These include the Pearl River Delta, Guangxi Province, Hunan Province, Jiangxi Province, Liaoning Province and Tianjin City.
Part of the reason for our IPO was to raise cash to build up our land reserves and our portfolio of investment properties through direct acquisitions, joint ventures and business alliances. We will continue to look for prospects in these areas to maintain a sufficient project pipeline, while at the same time maintaining the balance between our land bank and capital sufficiency.
As at 28 February 2011, we have two projects with a gross floor area of approximately 1.1 million sq m under development and approximately 250,000 sq m of gross floor area of land held for future development in the Foshan area. These are expected to be separately completed in various phases between 2011 and 2016, providing us with secure and strong business growth opportunities in the foreseeable future. At the same time, we will continue to source for quality and commercially viable new land that is either similar to our current development projects, i.e. high-end villas project on industrial land for redevelopment, or commercial development projects.
With the impending launch of Phase 2 of Shanshui Longpan, we continue to expect strong response from buyers. The central location of our joint venture project, Jin Long Garden, is expected to continue to garner strong response as evidenced by the robust take up in its South Zone pre-sales since December 2010. With such encouraging indicators from our projects, the Group is cautiously optimistic about our performance in FY2011.
Appreciation
In closing, I would like to thank our Board of Directors and our staff for your commitment. I draw my inspiration from your dedication and I am determined to build a bright future for our Group.
I also want to thank our shareholders and investors for your trust in us. We hope to have your continued support as we embark on our plans to bring Debao to greater heights in the coming years.
Yuan Le Sheng
Executive Chairman and CEO
1The application of the purchase method under the Singapore Financial Reporting Standards 103 (the "SFRS 103") for the acquisition of the PRC subsidiaries by the Group requires, inter alia, the development properties and properties held for sale by the respective PRC subsidiaries to be recorded at fair value at the respective dates of acquisition by the Group. Pursuant the application of SFRS 103, the cost of property development sales had a fair value upward adjustment of RMB104.4 million with its associated tax of RMB26.2 million in FY2010.