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Weiye To Reinforce Henan Foothold, Tap On China Tourism Growth
Corporate Digest | 23 July 2014
By: Shane Goh
Articles (99) Profile

Located in Southern China, the Hainan province offers tourists a tranquil resting spot, away from the hustle and bustle of the city life.

The Chinese government has identified Hainan as a key tourism destination within the world’s most populous country and intends to transform the province into a top international tourism spot by 2020.

Within the Singapore Exchange sits a leading property developer in Henan that offers investors an opportunity to ride on the growing demand for vacation homes in Hainan.

In an interview with Shares Investment, Weiye Holdings’ executive chairman, Zhang Wei, shared with us his outlook on the property development industry in China and the company’s prospects.

Weiye Holdings' executive chairman, Zhang Wei

Key Business Segments
Weiye derives its turnover from three sources, namely, development properties, housing construction and clean room equipment.

Weiye’s property development business’ roots can be traced back to the Henan province. The company started with a primary focus in the residential market, before making inroads towards the luxury segment.

In 2010, Weiye expanded into Hainan to tap on the growing demand for holiday homes. Zhang highlighted the province’s environment and air quality as desirable attributes which attracts tourists.

In FY13, Weiye began generating revenue by providing housing construction services to Henan’s local government. The latter contracted Weiye to build settlement houses as part of its plan to drive urbanisation.

This segment would help cultivate relationship and reputation with the government which can be leveraged on to secure future projects at potentially lower cost.

Lastly, Weiye clean room equipment arm markets grilles, diffusers and damper products to consumers. Presently, the company is conducting research and development to roll out new products as it aims to bolster income from this segment.

Operating Business Models
Zhang described Weiye’s three core business models to be involved with a development project, namely, vertically-integrated property development, joint-venture property development and project management services

Vertically-integrated property development allows them to incorporate all phases of the property development including product design, costing, scheduling and sales. Joint-venture property development allows Weiye to collaborate with third-party land owners to develop projects. This enables Weiye to participate in a project with lower capital and usually, with a quick turnaround time.

Project management services allow Weiye to earn management fees by providing development services pertaining to the client’s projects. Apart from the monetary benefit, this platform allows Weiye to enhance its reputation and train its junior staff.

As of 22 July, Weiye has completed 13 projects with a total net saleable floor area (NSFA) in excess of 950,000 square metres (sqm) across Henan and Hainan. Moving forward, Weiye has six development properties with a combined NSFA of approximately 408,000 sqm.

Reinforcing Henan
Situated at the heart of China’s construction boom, Henan province recorded a 9 percent gross domestic product (GDP) growth for 2013 to Rmb3.2 trillion, outpacing the national average GDP growth of 7.7 percent in China.

Zhang shared that Weiye is keen to reinforce the firm’s position in the province. Out of the six development properties, four of them, with a combined NSFA of about 338,000 sqm, are situated in Henan.

Hainan’s Pull
According to data from Hainan Statistical Yearbook 2013, the total number of domestic tourists visiting the province in 2012 grew 10.9 percent year-on-year to 32.4 million. This compares with a population of 8.9 million in Hainan as at the end of 2012.

Two key factors drive the allure of Hainan: 1. Weather, 2. Lack of air pollution. During winter, the Northern part of China endures a harsh chill, while the air pollution plaguing Beijing and Shanghai is a well-known story that doesn’t seem to be letting up anytime soon.

In order to escape their respective climate woes, residents seek shelter in the comfort of Hainan. Some of these folks buy a second home in the province as their vacation getaway. This has resulted in a demand surge for vacation homes.

Vacation home in Hainan

Rising China Urbanisation Rate
The Chinese government recently released an urbanisation plan to lift the nation’s urbanisation rate from 53.7 percent in 2013 to 60 percent by 2020.

Zhang views the move favourably as it will push the demand for properties within first-tier cities. However, Zhang reckons that the real urbanisation rate could be lower.

Workers living in the cities may have inflated the actual percentage as they seek residence near their workplace, while their homes and families could be back in their hometown of third- and fourth-tier cities shared Zhang.

Zhang is bullish on the prospects of the bustling cities such as Shanghai and Shenzhen. Although Weiye had intended to foray into first-tier cities for some time, prices were too high for its liking.

With a potential softening of China’s properties prices looming around the corner, Zhang noted that it presents a golden opportunity for the company’s entry.

Potential Pitfalls
While one may be attracted to the positive side of a company, an investor must be aware of the risks involved with any potential investments.

In the case of Weiye, if Hainan fails to meet expectations in terms of tourism growth, demand and take up rate of development properties may be subdued.

Additionally, a rising interest rate environment looming around the corner could spell higher interest expenses for companies worldwide. As a property developer, Weiye would take on debt with each development project.

Not only will a larger interest expense erode a developer’s profitability, it would also hinder property buyers’ ability to rely on leverage to enable their purchases.

As of 31 March 2014, Weiye had a cash hoard of Rmb551.9 million, compared to total borrowings of Rmb959.3 million, with properties held for sale and development valued at Rmb1.5 billion.

If Weiye is able to offload the properties at prices equivalent to the value carried on their balance sheet, the firm would be in a net positive cash position.

Looking ahead, Zhang highlighted that Weiye has not tap onto the capital markets since its reverse-takeover in August 2011 but may consider seeking fresh funds if an attractive target emerges.

Despite concerns on higher interest expense and credit crunch, Weiye’s listing status offers the firm a diverse range of financing options to fund its property pipeline.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

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