Thawing credit markets and the re-emergence of investors are throwing a lifeline to businesses that need massive amounts of funding.

One such business is that of China New Town Development, which designs the master urban plan for new towns, as well as clears and prepares land for Chinese authorities to sell to property developers.

The business requires high capital expenditure, which amounted to Rmb 279.5 million in FY08, or half its revenue (Rmb 564 million).

Finance costs alone, at Rmb 193.7 million (S$41 million), amounted to a third of revenues. But the company has made headway in breaking its yoke of indebtedness.

By issuing 680 million new shares (25% dilution) on 15 May to its major shareholder, SRE Group, it managed to raise cash of S$29 million and capitalize loans of HK$28.6 million (S$5.35 million).

SRE’s stake in China New Town rose from 32% to 49% as a result.

With credit markets thawing, China New Town now stands a much better chance of refinancing its Rmb 523.9 million of high yield notes burdened with an effective interest rate of 25.75%.

From 8.5 cents last Fri, its stock price has leapt 40% over the week to 12 cents a share (yesterday’s close price).

“We are very mindful of cash flow as this is the key to our success,” said its CEO, Ben Cheng, at a road show held yesterday at Financial PR to a group of about 30 investors, including fund managers.

That’s why the urban planner does not fully complete its development before selling land. One of its criteria for undertaking a project is the existence of land parcels that are immediately saleable.

Once it embarks on a project, it attempts to sell some of the land even at very low prices to generate cash flow to finance the main construction.

On 30 Apr this year, the Shanghai land administrative bodies completed the sale of land use rights on a land parcel of 96,842 square meters prepared by China New Town.
This latest land sale is expected to contribute revenues of Rmb 270 million and gross profits of Rmb 155 million to 2Q09.

The transacted land parcel comprises 1.4% of China New Town’s flagship new town project at Luodian in suburban Shanghai totaling 6.8 square kilometers.

With the operation of a metro line in late 2009, Luodian will be a mere 30 minutes train ride away from the heart of Shanghai.

“We are targeting annual revenues of a billion yuan from the Luodian project,” said Ben, who expects to sell another 60,000 square meters from the suburban Shanghai new town by the end of this month.

Developed over 2002-2008 and 19% sold over 9 land auctions, Luodian is now a cash cow.

Net operating cash flow in FY08 was Rmb 289 million, but plagued by hefty financing costs, write-down in fair values of investment properties and loss in cancellation of convertible bonds, China New Town reported a net loss of Rmb 987 million.

Ben concedes that the timing and quota of land sales by the authorities is uncertain.

Every year, China New Town has to cajole land reserve officials to sell land. The frustration arises out of austerity measures that are a legacy from the days of China’s overheated property market.

The company has also secured land planning and development rights for another 32.6 square kilometers.

It is developing 3 other new town projects in Wuxi (near Shanghai), as well as Shenyang and Changchun (in the northeast).

The projects at Wuxi and Shenyang are just over a year old, with 3 successful land auctions from each, while the master plan for the Changchun new town has yet to be approved.

According to Ben, the major driver for China New Town’s revenue is not real estate demand. Rather, it is urbanization, which is highly dependently on government infrastructure spending.

And development of northeastern regions figures high in China’s eleventh ten-year plan.