CDL wrote down 93% of its Sincere Property stake, then sold it for US$1

In September 2021 Singapore's City Developments (CDL) agreed to sell a 63.75% interest in HCP Chongqing Property Development, which owns 80.01% of Chinese developer Sincere Property Group, to an unrelated Hong Kong-based buyer, Sure Spread, for US$1. The price reflected Sincere's liquidity issues and potential bankruptcy. A bankruptcy claim had been filed against Sincere in China and it had missed a bond payment.

CDL had already taken a S$1.78 billion impairment in FY2020 for losses attributable to Sincere, effectively writing down 93% of its total investment. Its exposure was S$117 million at the end of June 2021, and it said it would keep assessing whether the remaining balance was recoverable. All CDL nominee directors and officers would resign from Sincere and its related companies once the sale completed.

At the same time CDL raised its stake in the company that owns 65% of the Shenzhen Longgang Tusincere tech park, valued at 13 billion yuan, as partial repayment of a loan Sincere owed a CDL subsidiary. CDL said the exit let it avoid a possibly long bankruptcy reorganisation, ring-fence the Shenzhen investment and refocus on residential and hotel operations in Singapore.

S$1.78B FY2020 impairment (93% of the investment); stake sold for US$1; S$117M exposure remaining at end-June 2021

RHB analyst Vijay Natarajan said Sincere's sharp downfall came from its high gearing as Chinese regulators tightened credit to the property sector under the 'three red lines' campaign.

Sincere could not meet its obligations, and a bankruptcy claim and a missed bond payment left CDL as a creditor and shareholder in a distressed Chinese group.

CDL chose to exit rather than be embroiled in a lengthy bankruptcy process; Citi's Brandon Lee described it as a clean exit.

The Sincere investment had been a drag on CDL's bottom line and share price, according to RHB.

Backing a highly geared developer in another country works only while its credit lines stay open. When they close, the investor owns the downside and a long bankruptcy.

CDL said the divestment and the Shenzhen Tusincere agreement would have no material impact on its FY2021 earnings per share or net tangible assets per share. Its shares rose about 5.4% on the day. Analysts expected CDL to keep its gearing in check and focus on Singapore residential and hotels, although Jefferies' Krishna Guha said it did not signal a reset of the group's diversification strategy and CDL would keep increasing overseas exposure gradually.