Wednesday, December 20, 2006
Shanghai Home At RMB10,000 per square feet???
Many say Shanghai is gonna catch up with Hong Kong or maybe even to surpass us in 10 years, but no one quite expects the residential price to break RMB10,000 per sq.ft. now.
One company is trying to do just that, Tomson Development (258). Its landmark residential project, Tomson Riviera, situated along the waterfront of the Pudong financial district and in neighbourhood of Citibank Tower and Grant Hyatt Hotel, has an asking price of over RMB10,000 per sq.ft.. Try Tomson Riviera or its Chinese name in Google and you'll get tons of negative news about this development, that it sold only 2 units out of 220 after marketing for over one year, or complaints by local residents over the ever rising property prices and evil land developers.
I had some working knowledge of the company and once met the late David Tong Cun Lin, whom is now succeeded by his widow Ms. Xu and his son Albert. In late 80s, Mr. Tong was involved in a mega fraud trial against the HK government over the purchase of World Trade Center Group shares but was acquitted in the end. I heard thereafter Mr. Tong assumed a low profile and moved its base to Pudong, Shanghai. This was done in early 90s when Pudong was pretty much farm land or worse uninhabited. This long term vision has brought handsome rewards to Tomson for all its developments sold in recent years were acquired at dirt cheap costs.
Despite my knowledge of the company I didn't pay much attention to Tomson until Vincent Lam of Quam Capital mentioned it. I became more curious after finding out all USD50m of convertible bonds Tomson issued to institutional investors in 2004 (due 2009) were converted to shares this year, and that the conversion price of HK$1.85 was not far off from the current market price of around HK$2.
Back to Tomson Riveria. One block (out of four) was put up for sale in the summer in a global tender which ended with no taker. Restrictions on foreign investment in properties were cited as the chief reason. Of course there was no mentioning of the bids being too low and unacceptable to the company.
I have no intimate knowledge of the Shanghai property market but I do believe the asking price is certainly attainable in the years to come, if not now, for Shanghai is becoming the northern financial center of China and possibly an international one too. Moreover, upscale property in prime district of a metropolis is never cheap nor intended for common souls like you and me. It'll just be a matter of time before people are used to this "absurd" prices.
In my last visit to Shanghai in August, I noted that the latest phase of the Shui On development in Xintiandi was asking like RMB4,000-7,000 per sq.ft (this is only from my memory). So I'd expect Tomson will have no problems clearing its stocks at that price level as its development is more upscale and offers larger units with an average size of ~5,300 sq.ft.. The PRC government's austerity measures will only ensure lesser supply of similar offerings in the future.
Take a more conservative figure of RMB5,000 per sq.ft. to compensate for the uncertain timing of sale, Tomson Riviera is worth RMB5.9 billion. Just this piece of asset alone is more than twice the market value of Tomson of HKD2.69billion today! And RMB5,000 per sq.ft. is likely to be the floor rather than the ceiling.
Tomson's other businesses in Pudong include a hotel, a Golf club with some golf properties (the majority of which have been sold), and via its associate company the development of Zhangjiang Hi-Tech Park. Take a quick glance at the balance sheet and you'll be more delighted. Tomson has assets of over 4.5 billion against bank debt of only HK$200m. This has not even reflected the market value of Tomson Riviera as it's recorded at cost. Here we have an essentially debt free company holding what possibly is the landmark luxury residential project in Shanghai, and it's trading at only 2/3 of its NAV! Bears can claim assets other than Tomson Riviera are all inflated rubbish with low earnings, or that Albert without his father's guidance will squander most of the proceeds and destroy his father's lifework. But I'm willing to give him time and Tomson the benefit of doubt now.
So pick your reason, RMB appreciation, uprising Shanghai, luxury residential property market, gross undervaluation. I can't be sure of the timing of the rise but if it does, it won't be ordinary to say the least.
p.s. financial performance of a small cap is by definition less predictable and reliable, so one should always diversify and vary his bet accordingly.
DISCLOSURE: I hold 258 at time of writing.
One company is trying to do just that, Tomson Development (258). Its landmark residential project, Tomson Riviera, situated along the waterfront of the Pudong financial district and in neighbourhood of Citibank Tower and Grant Hyatt Hotel, has an asking price of over RMB10,000 per sq.ft.. Try Tomson Riviera or its Chinese name in Google and you'll get tons of negative news about this development, that it sold only 2 units out of 220 after marketing for over one year, or complaints by local residents over the ever rising property prices and evil land developers.
I had some working knowledge of the company and once met the late David Tong Cun Lin, whom is now succeeded by his widow Ms. Xu and his son Albert. In late 80s, Mr. Tong was involved in a mega fraud trial against the HK government over the purchase of World Trade Center Group shares but was acquitted in the end. I heard thereafter Mr. Tong assumed a low profile and moved its base to Pudong, Shanghai. This was done in early 90s when Pudong was pretty much farm land or worse uninhabited. This long term vision has brought handsome rewards to Tomson for all its developments sold in recent years were acquired at dirt cheap costs.
Despite my knowledge of the company I didn't pay much attention to Tomson until Vincent Lam of Quam Capital mentioned it. I became more curious after finding out all USD50m of convertible bonds Tomson issued to institutional investors in 2004 (due 2009) were converted to shares this year, and that the conversion price of HK$1.85 was not far off from the current market price of around HK$2.
Back to Tomson Riveria. One block (out of four) was put up for sale in the summer in a global tender which ended with no taker. Restrictions on foreign investment in properties were cited as the chief reason. Of course there was no mentioning of the bids being too low and unacceptable to the company.
I have no intimate knowledge of the Shanghai property market but I do believe the asking price is certainly attainable in the years to come, if not now, for Shanghai is becoming the northern financial center of China and possibly an international one too. Moreover, upscale property in prime district of a metropolis is never cheap nor intended for common souls like you and me. It'll just be a matter of time before people are used to this "absurd" prices.
In my last visit to Shanghai in August, I noted that the latest phase of the Shui On development in Xintiandi was asking like RMB4,000-7,000 per sq.ft (this is only from my memory). So I'd expect Tomson will have no problems clearing its stocks at that price level as its development is more upscale and offers larger units with an average size of ~5,300 sq.ft.. The PRC government's austerity measures will only ensure lesser supply of similar offerings in the future.
Take a more conservative figure of RMB5,000 per sq.ft. to compensate for the uncertain timing of sale, Tomson Riviera is worth RMB5.9 billion. Just this piece of asset alone is more than twice the market value of Tomson of HKD2.69billion today! And RMB5,000 per sq.ft. is likely to be the floor rather than the ceiling.
Tomson's other businesses in Pudong include a hotel, a Golf club with some golf properties (the majority of which have been sold), and via its associate company the development of Zhangjiang Hi-Tech Park. Take a quick glance at the balance sheet and you'll be more delighted. Tomson has assets of over 4.5 billion against bank debt of only HK$200m. This has not even reflected the market value of Tomson Riviera as it's recorded at cost. Here we have an essentially debt free company holding what possibly is the landmark luxury residential project in Shanghai, and it's trading at only 2/3 of its NAV! Bears can claim assets other than Tomson Riviera are all inflated rubbish with low earnings, or that Albert without his father's guidance will squander most of the proceeds and destroy his father's lifework. But I'm willing to give him time and Tomson the benefit of doubt now.
So pick your reason, RMB appreciation, uprising Shanghai, luxury residential property market, gross undervaluation. I can't be sure of the timing of the rise but if it does, it won't be ordinary to say the least.
p.s. financial performance of a small cap is by definition less predictable and reliable, so one should always diversify and vary his bet accordingly.
DISCLOSURE: I hold 258 at time of writing.
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your analysis makes this opportunity so wonderful and i can't resist to research more on this company.
i would agree IF Tomson really manages to sell the Tomson Riviera at whatever reasonable valuation, the gain would be hugh. No Doubt! But timing is a big concern. Given the current market sentiment and Tomson's strategy, i guess it will not or cannot lower the asked price to any price that can be considered as reasonable. perhaps it overshot the asked price in its first place and make itself ending up in this embarassing position (note also it reflects management quality). i guess its CEO may stand firm on this Rmb10k/sq feet price because lowering the price will attract lots of problems and cut short its big dream. On the other hand, Tomson can consider leasing it while waiting for the market to pick up but it can just yield a minimal rental return in that case. I think we can agree that it will take quite a long time to sell a substantial portion of the Tomson Riviera. to name a few hurdles it needs to tackle:
- macron econ control on the real estate sector, especially the Shanghai market which was red hot in the recent past, and also measures that indirectly discourage foreign investment (i.e. a major source of fund for premium properties)
- high vacancy rate for property in the premium segment
- the above immediately leads to a low investment return (i.e. from rental) of, say, 2-3% according to my friends living in Shanghai
- there are 2 very premium real estate projects nearby Tomson Riviera (鵬利海景、盛大金磐) which are trading at more reasonable prices but sales have been slow. if the high end property market in Shanghai is about to pick up or resume its growth, i think the above competing projects are about to move one step in advance of Tomson Riviera (see also the next point) because of their lower per feet price and smaller apartment size which make the purchase more affordable
- forgive me if i am too micro in my following analysis. i have a strong concern whether Tomson Riviera targets its focus customers correctly. imagine if you are a very successful billionaire and is considering buying a very very luxury property in china. you must be doing out of one of the two purposes – investment or own consumption. if you are investing, you need to be able to foresee a potential rise in asset price in the luxury property market, I think the increase should be at least 30-50% in say 5 years in order to compensate the risk involved. Meanwhile the rental return should be at least 5% to justify the finance cost or opportunity cost and I also see a gap in searching for appropriate tenants (see also below). I don’t feel comfortable to anticipate the happening of the above, particular the first scene given the already high asked price of Tomson Riviera as a further 50% increase will make it Rmb15k/sq feet!!! Alternatively, if you are living in the purchased property, you are opened up to almost all available choices in china because the cheapest apartment at Tomson Riviera costs Rmb60m. if you can afford that money, you can demand a lot of luxury things (e.g. garden, private pool, surrounding trees, a house in a private but a little far-away location, say 30 minutes, that can be way larger at the same purchase cost) and you don’t need to limit yourself to an apartment that is so close to the financial district. Most importantly, if you are that successful, you may not need to work at all as many smart people are helping you to run your business, so why you need to restrict yourself in an apartment there? Bearing in mind you yourself do not need an at least 4000 sq feet apartment and if you are living with your family, they (assume no need to work too) would prefer a country side house than a flat down town. This logic also applies to tenant searching.
- if the Tomson Riviera cannot be sold property, it is not an asset generating real cash – just like a premium property constructed by Chinachem (the HK little sweetie’s company) in Repulse Bay that is not selling and remain idle for quite some time.
- I personally think a better strategy is to monitor the move of Tomson and the sale of the nearby competing projects and ONLY invest until there is sign of selling
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i would agree IF Tomson really manages to sell the Tomson Riviera at whatever reasonable valuation, the gain would be hugh. No Doubt! But timing is a big concern. Given the current market sentiment and Tomson's strategy, i guess it will not or cannot lower the asked price to any price that can be considered as reasonable. perhaps it overshot the asked price in its first place and make itself ending up in this embarassing position (note also it reflects management quality). i guess its CEO may stand firm on this Rmb10k/sq feet price because lowering the price will attract lots of problems and cut short its big dream. On the other hand, Tomson can consider leasing it while waiting for the market to pick up but it can just yield a minimal rental return in that case. I think we can agree that it will take quite a long time to sell a substantial portion of the Tomson Riviera. to name a few hurdles it needs to tackle:
- macron econ control on the real estate sector, especially the Shanghai market which was red hot in the recent past, and also measures that indirectly discourage foreign investment (i.e. a major source of fund for premium properties)
- high vacancy rate for property in the premium segment
- the above immediately leads to a low investment return (i.e. from rental) of, say, 2-3% according to my friends living in Shanghai
- there are 2 very premium real estate projects nearby Tomson Riviera (鵬利海景、盛大金磐) which are trading at more reasonable prices but sales have been slow. if the high end property market in Shanghai is about to pick up or resume its growth, i think the above competing projects are about to move one step in advance of Tomson Riviera (see also the next point) because of their lower per feet price and smaller apartment size which make the purchase more affordable
- forgive me if i am too micro in my following analysis. i have a strong concern whether Tomson Riviera targets its focus customers correctly. imagine if you are a very successful billionaire and is considering buying a very very luxury property in china. you must be doing out of one of the two purposes – investment or own consumption. if you are investing, you need to be able to foresee a potential rise in asset price in the luxury property market, I think the increase should be at least 30-50% in say 5 years in order to compensate the risk involved. Meanwhile the rental return should be at least 5% to justify the finance cost or opportunity cost and I also see a gap in searching for appropriate tenants (see also below). I don’t feel comfortable to anticipate the happening of the above, particular the first scene given the already high asked price of Tomson Riviera as a further 50% increase will make it Rmb15k/sq feet!!! Alternatively, if you are living in the purchased property, you are opened up to almost all available choices in china because the cheapest apartment at Tomson Riviera costs Rmb60m. if you can afford that money, you can demand a lot of luxury things (e.g. garden, private pool, surrounding trees, a house in a private but a little far-away location, say 30 minutes, that can be way larger at the same purchase cost) and you don’t need to limit yourself to an apartment that is so close to the financial district. Most importantly, if you are that successful, you may not need to work at all as many smart people are helping you to run your business, so why you need to restrict yourself in an apartment there? Bearing in mind you yourself do not need an at least 4000 sq feet apartment and if you are living with your family, they (assume no need to work too) would prefer a country side house than a flat down town. This logic also applies to tenant searching.
- if the Tomson Riviera cannot be sold property, it is not an asset generating real cash – just like a premium property constructed by Chinachem (the HK little sweetie’s company) in Repulse Bay that is not selling and remain idle for quite some time.
- I personally think a better strategy is to monitor the move of Tomson and the sale of the nearby competing projects and ONLY invest until there is sign of selling
# posted by 
: 2:31 PM, January 09, 2007
: 2:31 PM, January 09, 2007Subscribe to Post Comments [Atom]
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