China's R&F Properties roars back into the spotlight on Wanda deals

HONG KONG - 26 August 2017: Once the leader of the elite group of developers known as the “Five South China Tigers”, Guangzhou R&F Properties (2777.HK) gradually became overshadowed by bigger beasts, but it’s now back in focus even as many rivals shy from the limelight.

The developer, with a market value of HK$52.5 billion ($6.7 billion), has grabbed international headlines over the past few weeks with two property deals linked to one of China’s richest men, Wang Jianlin, and his Dalian Wanda Group.

On Tuesday, R&F said it had teamed up with China’s CC Land (1224.HK) to buy Nine Elms Square in London in a 470 million pound ($606 million) deal. R&F stepped in after Wanda scrapped plans to buy the property, the latest setback for Wanda as Beijing tightens controls on overseas investment.

The purchase came just weeks after R&F bought 77 hotels from Wanda for 19.9 billion yuan ($3 billion), as part of a $9 billion restructured deal. The pair of deals has prompted some analysts to suggest the Hong Kong-listed company is a white knight of billionaire Wang’s property to cinemas conglomerate.

Wanda has become a target in China’s clampdown on capital outflows, and sources say Chinese banks have been told to stop providing funding for several of its overseas acquisitions in order to curb its appetite for offshore deals.

“Wang Jianlin and I are long-time friends,” R&F Chairman Li Sze Lim said at an earnings conference in Hong Kong on Tuesday. “We bumped into each other in an event in Beijing, and struck the deal after 20 to 30 minutes,” he said, referring to the hotel purchase in July.

Buying the hotels at a 40 percent discount showed Wang’s trust in R&F, he added.

If indeed it took less than 30 minutes to strike a $3 billion deal, the pair must certainly be well-acquainted. Sources have told Reuters Wanda approached R&F about taking on some of the assets from the initial deal with Sunac China (1918.HK) in order to speed up full payment.

Wanda has declined to comment further on R&F, but Wang has told a press conference last month the hotel deal is a win for all parties, being a “rare chance in a hundred years” for R&F to acquire the portfolio at a discounted price.

HOTEL POWERHOUSE

A mathematics graduate, Li comes across as a modest and mellow businessman.

Traditionally a low-profile tycoon, the 60-year old was born and grew up in Hong Kong. He made his fortune from China’s real estate market in the 1990s when he first ventured into the urban redevelopment projects and construction of low-end apartments in southern China’s Guangzhou city.

Hong Kong was still a British colony when Li started the company in 1994 with his mainland Chinese partner Zhang Li, who is now co-chairman and CEO of R&F.

Together with Country Garden (2007.HK), China Evergrande Group <3333.HK, Agile Group (3383.HK) and Hopson Development (0754.HK), the five Guangzhou-based property developers are commonly known as the “Five South China Tigers” for their aggressive business style.

In 2007, R&F ranked No.4 in terms of sales nationwide, but it slipped to 25th place in the first half of this year, trailing cross-town peers Country Garden and Evergrande, which ranked No.1 and No.3.

R&F’s active investment in commercial property, in contrast with the other four, had helped the company expand by diversifying its income base during the boom years.

But when the financial crisis hit in 2008, these assets weighed on R&F’s cashflow as their cash turnover is much slower than residential property.

Partnering with luxurious hotel management groups such as Hyatt Hotels (H.N) and InterContinental Hotels (IHG.L), R&F owned 34 high-end hotels across China prior to the deal with Wanda. Now, with 111 hotels in total, it has become the world’s biggest luxury hotel owner.

“The London deal could be more related to Wanda rather than its overseas expansion strategy, because it had rarely talked about plans to flex its muscles overseas”, said RHB Research analyst Toni Ho.

“The hotel deal with Wanda was a surprise to the market too, though it’s a good buy given its long history and asset size in hotel business. The deal would help its expansion and profitability.”

Indeed, Li told reporters on Tuesday overseas business accounts for only "single digits" of the group to keep risk contained.

The developer, which is awaiting a dual-listing in mainland China, has developments in Malaysia and Australia which accounted for 4 percent of R&F's total contracted sales in the first six months of this year.

R&F added its footprint in the U.K. earlier this year after snapping up Nestle Tower in south London for around 60 million pounds and Vauxhall Square for 157.77 million pounds.

On Tuesday, the developer posted a 22 percent rise in core profit in the first six months to 2.1 billion yuan ($315.40 million), and it raised its full-year sales target to 80 billion yuan, 31 percent higher than the sales achieved last year.

Moody's Investors Service described the results as weak, highlighting persistently high debt leverage as consistent with its negative outlook on the company's credit rating.