King Wan Corporation

(23-11-2015, 11:06 AM)cif5000 Wrote:

(23-11-2015, 12:07 AM)GFG Wrote: Using SOTP analysis, even if you writeoff the ENTIRE Dalian project currently, that takes off about 2.4cents off the book value, which still gives it about a 25 cent book value. I find it hard to imagine the Dalian project is worth $0. 

Dalian Shicheng (DSPS) is in a net liability position. $105.8m of assets vs $117.9m of liabilities. 

Bank loans rank higher over shareholders' loan if the project gets "written off". Under such scenario (not saying that it will happen), the outstanding bank loans will have to be repaid and King Wan being the guarantor to the associate will be liable.

My point is: $0 is not the worst case.

FY2015 Annual Report Wrote:The Group is a party to financial guarantee contracts where an entity in the Group has provided financial guarantee of $148,118,810 (2014 : $130,720,728) to banks in respect of associates of the Group. The Company also provides financial guarantee of $191,305,882 (2014 : $158,639,794) to banks in respect of loans borrowed by certain subsidiaries and associate

That sounds like a black swan scenario.. then SembCorp, Yanlord or Hyflux all would be gone too by then.. I wonder who else would invest in high level bilateral agreement signed btw china and sin recently.
I agree that somehow the delegation of local listed co. investment in China doesn't all turn out to be good. But nonetheless, to say it is totally worthless its a little unjust.
small stake vested.

(23-11-2015, 12:35 PM)DP28 Wrote:

(23-11-2015, 11:06 AM)cif5000 Wrote:

(23-11-2015, 12:07 AM)GFG Wrote: Using SOTP analysis, even if you writeoff the ENTIRE Dalian project currently, that takes off about 2.4cents off the book value, which still gives it about a 25 cent book value. I find it hard to imagine the Dalian project is worth $0. 

Dalian Shicheng (DSPS) is in a net liability position. $105.8m of assets vs $117.9m of liabilities. 

Bank loans rank higher over shareholders' loan if the project gets "written off". Under such scenario (not saying that it will happen), the outstanding bank loans will have to be repaid and King Wan being the guarantor to the associate will be liable.

My point is: $0 is not the worst case.

FY2015 Annual Report Wrote:The Group is a party to financial guarantee contracts where an entity in the Group has provided financial guarantee of $148,118,810 (2014 : $130,720,728) to banks in respect of associates of the Group. The Company also provides financial guarantee of $191,305,882 (2014 : $158,639,794) to banks in respect of loans borrowed by certain subsidiaries and associate

That sounds like a black swan scenario.. then SembCorp, Yanlord or Hyflux all would be gone too by then.. I wonder who else would invest in high level bilateral agreement signed btw china and sin recently.
I agree that somehow the delegation of local listed co. investment in China doesn't all turn out to be good. But nonetheless, to say it is totally worthless its a little unjust.
small stake vested.

Sorry that I have to repeat this. Dalian Shicheng is in a net liability position. How much would you value Dalian Shicheng if $0 is unjust? 

Furthermore, King Wan has provided financial guarantee to this associate. You can write off the project or assets, but you can't write off the liabilities.

More details on the guarantees:

FY2015 Annual Report Wrote:The right to recovery of the amount due from Dalian is subordinated to the right of a bank for loans given to Dalian. The Company together with another shareholder of Dalian, have provided joint and several corporate guarantees of $60,480,615 for bank loans given to Dalian which is included in Note 36 to the financial statements.

(23-11-2015, 02:26 PM)cif5000 Wrote: More details on the guarantees:

FY2015 Annual Report Wrote:The right to recovery of the amount due from Dalian is subordinated to the right of a bank for loans given to Dalian. The Company together with another shareholder of Dalian, have provided joint and several corporate guarantees of $60,480,615 for bank loans given to Dalian which is included in Note 36 to the financial statements.

So to summaries for DSC, loaned out $18mil, write off $12mil.  $6mil in BS.  Further there is a joint corporate guaranteed of $60mil.  KW share is 36.6% so about $22mil of liabilities if DSC totally kaboom?  So pretty much cancelled out benefits from KTIS gains?

(23-11-2015, 06:07 PM)GPD Wrote:

(23-11-2015, 02:26 PM)cif5000 Wrote: More details on the guarantees:

FY2015 Annual Report Wrote:The right to recovery of the amount due from Dalian is subordinated to the right of a bank for loans given to Dalian. The Company together with another shareholder of Dalian, have provided joint and several corporate guarantees of $60,480,615 for bank loans given to Dalian which is included in Note 36 to the financial statements.

So to summaries for DSC, loaned out $18mil, write off $12mil.  $6mil in BS.  Further there is a joint corporate guaranteed of $60mil.  KW share is 36.6% so about $22mil of liabilities if DSC totally kaboom?  So pretty much cancelled out benefits from KTIS gains?

 
Hi GPD, believe you have computed based on KW share of 36.6% on $60m = $22m.

DEFINITION of 'Joint And Several Liability '
When multiple parties can be held liable for the same event or act and be responsible for all restitution required. In cases of joint and several liability, a person who was harmed or wronged by several parties could be awarded damages and collect from any one, several, or all of the liable parties. The liable parties would be required to pay the entire damage award, which could be split among multiple parties or could come from just one party. Each party would be liable for part of the damages, or up to as much as all of the damages.

http://www.investopedia.com/terms/j/join...bility.asp

Copromisors are liable “jointly” if all of them have promised the entire performance which is the subject of the contract. The effect of a joint obligation is that each joint promisor is liable for the whole performance jointly assumed. It has been said that persons who bind themselves jointly for the performance of one entire duty become sureties for one another for performance of the contract.

A “joint and several” contract is a contract with each promisor and a joint contract with all, so that parties having a joint and several obligation are bound jointly as one party, and also severally as separate parties at the same time.

But making an obligation joint and several doesn’t affect what can be recovered. Regarding joint obligations, the Restatement says, “A and B owe $100 to C jointly, and C obtains a judgment against A and B for $100. Execution may be levied wholly on the property of either A or B, or partially on the property of each.”
 
http://www.adamsdrafting.com/exploring-j...d-several/

Bank loan of $60,480,615 made to Dalian based on joint and several corporate guarantees provided by
(a) The Company together with (b) another shareholder of Dalian.  In the unfortunate event that the loan are not recovered by the bank, the bank would probably go after the one [(a) or (b)] with the deeper/deepest pocket.  Thus the maximum exposure by (a) or (b) on the guarantee obligation is the full loan amount of $60.5m.

PS:  Joint and several obligation, though commonly used, has wide implication.  Please treat with care.

(23-11-2015, 06:07 PM)GPD Wrote:

(23-11-2015, 02:26 PM)cif5000 Wrote: More details on the guarantees:

FY2015 Annual Report Wrote:The right to recovery of the amount due from Dalian is subordinated to the right of a bank for loans given to Dalian. The Company together with another shareholder of Dalian, have provided joint and several corporate guarantees of $60,480,615 for bank loans given to Dalian which is included in Note 36 to the financial statements.

So to summaries for DSC, loaned out $18mil, write off $12mil.  $6mil in BS.  Further there is a joint corporate guaranteed of $60mil.  KW share is 36.6% so about $22mil of liabilities if DSC totally kaboom?  So pretty much cancelled out benefits from KTIS gains?

TA Corp has a clearer breakdown on this. Note that TA and KW have different FY closing dates. In TA, the guarantees were disclosed at 2 levels -
1. Singapore holding company (aka The Associate) $24.5m
2. China operating company $53.9m
Total $78.4m

The KW disclosure on guarantees ($60.5m) could be for the loans that are senior to KW's loan only.

KW and TA are the only 2 shareholders of Dalian Shicheng to provide the guarantees. Since KW is the bigger shareholder, I would expect them to shoulder at least half of the guarantees should the day come. It's only fair that they charge a fee for the financial guarantees.

As GFG has noted, the fees are booked as income and had increased over the last 3 financial years. These fees that contributed to the accounting profit could also be impaired subsequently (see $12m impairment). I'm not exactly thrilled by this risk/reward arrangement.

TA Corp FY2014 Annual Report Wrote:A subsidiary together with another shareholder of the associate, Dalian Shicheng Property Development (S) Pte. Ltd., provided joint and several corporate guarantees for $24.5 million (2013: $24.5 million) to a bank in respect of loan facilities utilised by Dalian Shicheng Property Development (S) Pte. Ltd. and the Company together with that same shareholder of the associate provided joint and several corporate guarantees for RMB250 million (approximately $53.9 million) (2013: RMB250 million (approximately $51.9 million)) to a bank in respect of development loan facilities utilised by Dalian Shicheng Property Development Co., Ltd (an associate held through Dalian Shicheng Property Development (S) Pte Ltd).

Shareholders of KW should at least find out the asset breakdown and quality of Dalian Shicheng. Cash, receivables, unsold properties, prepayment, etc. They will need these assets to cover the liabilities (or kaboom, to borrow a word).

Questions:

1. There were no disclosures on the guarantees on Dalian Shicheng until the latest annual report. Why?

2. TA Corp publishes the guarantees on Dalian Shicheng since 2011 (furthest I'd looked) and the figures were more or less constant over the years.
a. Why doesn't TA Corp charge a fee for the guarantees like King Wan?
b. Why is the fees charged by King Wan continue to rise despite the guarantees staying constant?

(23-11-2015, 11:02 PM)cif5000 Wrote:

(23-11-2015, 06:07 PM)GPD Wrote:

(23-11-2015, 02:26 PM)cif5000 Wrote: More details on the guarantees:

FY2015 Annual Report Wrote:The right to recovery of the amount due from Dalian is subordinated to the right of a bank for loans given to Dalian. The Company together with another shareholder of Dalian, have provided joint and several corporate guarantees of $60,480,615 for bank loans given to Dalian which is included in Note 36 to the financial statements.

So to summaries for DSC, loaned out $18mil, write off $12mil.  $6mil in BS.  Further there is a joint corporate guaranteed of $60mil.  KW share is 36.6% so about $22mil of liabilities if DSC totally kaboom?  So pretty much cancelled out benefits from KTIS gains?

TA Corp has a clearer breakdown on this. Note that TA and KW have different FY closing dates. In TA, the guarantees were disclosed at 2 levels -
1. Singapore holding company (aka The Associate) $24.5m
2. China operating company $53.9m
Total $78.4m

The KW disclosure on guarantees ($60.5m) could be for the loans that are senior to KW's loan only.

KW and TA are the only 2 shareholders of Dalian Shicheng to provide the guarantees. Since KW is the bigger shareholder, I would expect them to shoulder at least half of the guarantees should the day come. It's only fair that they charge a fee for the financial guarantees.

As GFG has noted, the fees are booked as income and had increased over the last 3 financial years. These fees that contributed to the accounting profit could also be impaired subsequently (see $12m impairment). I'm not exactly thrilled by this risk/reward arrangement.

TA Corp FY2014 Annual Report Wrote:A subsidiary together with another shareholder of the associate, Dalian Shicheng Property Development (S) Pte. Ltd., provided joint and several corporate guarantees for $24.5 million (2013: $24.5 million) to a bank in respect of loan facilities utilised by Dalian Shicheng Property Development (S) Pte. Ltd. and the Company together with that same shareholder of the associate provided joint and several corporate guarantees for RMB250 million (approximately $53.9 million) (2013: RMB250 million (approximately $51.9 million)) to a bank in respect of development loan facilities utilised by Dalian Shicheng Property Development Co., Ltd (an associate held through Dalian Shicheng Property Development (S) Pte Ltd).

Shareholders of KW should at least find out the asset breakdown and quality of Dalian Shicheng. Cash, receivables, unsold properties, prepayment, etc. They will need these assets to cover the liabilities (or kaboom, to borrow a word).

I am not familiar with TA Corp, some anyone who has done a thorough analysis pls share.
But with regards to this qn about asset breakdown and quality of DSC, unfortunately DSC is not doing well.
They have 2 remaining phases (7 and 8) which comprises mainly commercial properties (shop spaces in malls and hotels)in Dalian,
From my communication with management : "The associate is of the view that the current local market is not ready for the 2 remaining phases and might not be ready in the next 2 years. It is continuously monitoring the local situation and will only launch the 2 phases when demand has improved."
I think they got caught out in the china property market crash. The major cities will always be ok, but the 2nd and 3rd tier cities are experiencing a bust.
The earlier qn about the loans and guarantees: Yes, it is true that the guarantee is not based on proportion of the loans guaranteed. Meaning you can be liable for 100% of the loans (although this is unlikely)
In the event that there is a credit event, the creditors will try to get back the loan sum based on your proportion first, and failing that, they'd get their pound of flesh from anyone who has it. I said this is unlikely because it means TA Corp basically goes bankrupt.

a. Why doesn't TA Corp charge a fee for the guarantees like King Wan?
- No idea bout TA Corp

 b. Why is the fees charged by King Wan continue to rise despite the guarantees staying constant?
The fees charged by KW is not determined by KW. I was initially concerned about them booking in the earnings for these guarantees and then shuffling that into "other receivables" but apparently this is in accordance to FRS.
Just google and read FRS 39
Its pretty dense and I took some time to understand that. Basically what I am saying is that I may not agree with it, you may be concerned about it,  but KW is OBLIGED to do it this way according to FRS.
The fees charged are not proportional and from what I understand, it is a pretty complex structure.
Having said that, these "fees charged" are recorded under "Investment in associates and a joint venture", which amounts to a total sum of about $5mil, of which about $3mil + is related to Dalian.
(I mentioned in an earlier post that its under "other receivables" which is wrong. Lazy to edit that)

If you write off the entire sum of "earnings related to the guarantees" of $3mil +, well actually, lets be even more anal, lets write off the entire $5mil investment in associates, and write off the ENTIRE receivables in Dalian currently of $8.35mil +, that's a total of $13.35mil.
Under Other receivables, there's a $17.7mil sum under "investment properties" which relate to properties in China, mainly commercial. This sum has NOT been fully utilised by the associate (meaning some are still cash) though I don't know the breakdown.
To be ultra conservative, let's write off say another $7mil from this
(meaning we project that in the near future, the associate has to write down another 40% off these investment properties, again keeping in mind that not the entire sum is actually invested in properties, some are not utilised, so the actual write down is >40%)
The total sum ,in such a stressed scenario, that you'd write off is $20.35mil, which works out to be about 5.9 cents
Which brings the RNAV to about 21.7 cents
Yes, yes of course I am not forgetting the liability from the guarantees, that management has currently indicated that there's no likelihood of impairment.
So the gist is:
If you believe the entire Dalian project will go to hell, all those physical commercial properties are not going to be worth the loans taken out to build them, and the associate will become insolvent and KW will be chased by creditors and will have to pay up, (it doesn't matter how much is the exact proportion of the liability), then of course you can forget about the RNAV calculation above.  the entire 60mil+ liability would be like 17 cents in book value alone. In such a doomsday situation, more than half of the NTA of KW will be annihilated.
If you think the Dalian project will eventually be worth something other than $0 or -ve, the associate wont go belly up, then at current valuations it is certainly still attractive. Based on the terrible scenario highlighted above, the RNAV is still slightly higher than current price.

(29-11-2015, 01:01 AM)GFG Wrote: If you believe the entire Dalian project will go to hell, all those physical commercial properties are not going to be worth the loans taken out to build them, and the associate will become insolvent and KW will be chased by creditors and will have to pay up, (it doesn't matter how much is the exact proportion of the liability), then of course you can forget about the RNAV calculation above.  the entire 60mil+ liability would be like 17 cents in book value alone. In such a doomsday situation, more than half of the NTA of KW will be annihilated.
If you think the Dalian project will eventually be worth something other than $0 or -ve, the associate wont go belly up, then at current valuations it is certainly still attractive. Based on the terrible scenario highlighted above, the RNAV is still slightly higher than current price.

I'm glad that you have come to realize that the worst case scenario for the Dalian Project is not simply a write-off and assigning a $0 value to it. That was exactly the point I wanted to make. 

Since KW has a foot (or more) into property development, it would only be fair to compare it with other property stocks. Many are trading below RNAV or even NTA, with stronger balance sheets and clearer development projects.

(29-11-2015, 11:29 PM)cif5000 Wrote:

(29-11-2015, 01:01 AM)GFG Wrote: If you believe the entire Dalian project will go to hell, all those physical commercial properties are not going to be worth the loans taken out to build them, and the associate will become insolvent and KW will be chased by creditors and will have to pay up, (it doesn't matter how much is the exact proportion of the liability), then of course you can forget about the RNAV calculation above.  the entire 60mil+ liability would be like 17 cents in book value alone. In such a doomsday situation, more than half of the NTA of KW will be annihilated.
If you think the Dalian project will eventually be worth something other than $0 or -ve, the associate wont go belly up, then at current valuations it is certainly still attractive. Based on the terrible scenario highlighted above, the RNAV is still slightly higher than current price.

I'm glad that you have come to realize that the worst case scenario for the Dalian Project is not simply a write-off and assigning a $0 value to it. That was exactly the point I wanted to make. 

Since KW has a foot (or more) into property development, it would only be fair to compare it with other property stocks. Many are trading below RNAV or even NTA, with stronger balance sheets and clearer development projects.

Thanks for pointing the liabilities out, but as I mentioned earlier, of the 2 groups, I belong to the latter where I don't think it's a doomsday scenario for KW.
In the latter scenario, even a complete write off to $0, plus a further write down of china investment properties (unrelated to DSC), still makes it worthwhile based on valuations. (you can also start analysing earnings/quality of earnings etc but that's another story there again)
Sure, if it's the 1st scenario, then KW is screwed. But that can be said of almost any investment. (eg. if oil goes to $10 and stays there, many many O&G are dead too). The key qn is an assessment of the risk/reward ratio.
In fact, IMHO, as soon as 2016 (FY17), KW's BS will improve substantially. DSC will still do poorly (management guided for 2 yrs for phases 8 and 9), but proportionally, DSC is not that significant after the writedowns. The bulk of the capital intensive projects (Skywoods, Starlight and worker's dorm) will TOP/be operational in 2016 (FY17) and start paying down the receivables once they are cashflow positive.
The time to be bearish (on hindsight) for KW should be 2-3 quarters ago, just before the writedown of DSC, not now.