Abaci's Common Sense Investing

Albert Tong was quoted saying that Tomson will not be affected by the land VAT at all as most of its projects have been completed and are for rental, and that it is a debt-free company. This reply shows his immaturity and maybe lack of in-depth understanding of the matter. But he's only 22/23 and I remember what I was like when at his age.

I don't see how his reasoning can lead to his conclusion (especially that rental properties are required to be taxed too). Tomson Riviera being such a focal point of the Shanghai property boom would surely attract attention from the public and may even become a precedent setting case of enforcement. This can be a good or bad thing. I wishfully think there may be some leeway as after all Tomson helped build Pudong from nothing years ago when no body else was interested. If I don't misread the guidelines Tomson should have about 2 years to cut a deal with the local tax bureau, assuming it'll not liquidate the units. It may require a cash call at that time to pay for the tax. I'll be more comfortable if units are sold progressively from now till then as there should still be money left on the table after tax.

The last interim report showed the book cost of properties under development, which I assumed to be Tomson Riviera, at ~$1.2b. Tomson hasn't made any provision for land VAT and gave an estimate of $150m as contingent liability in the last annual report. I think this figure probably has excluded Tomson Riviera in the calculation as it was under construction. I also found out from the company's circular that the land was acquired in year 2000 at $450m. I'm waiting to see how DTT the auditor will deal with this potential timebomb when the 2006 final results are due in April. But now I'll assume the worst.

The estimated market value of Tomson Riviera in my last analysis is $5.9b @5000 per sq.ft.. I don't think the local tax bureau will use the asking price of $10,000 per sq.ft. in the calculation as there is no turnover at that price and Tomson can simply hire a bunch of valuers to appeal. If the tax was levied today, the ball park exposure* would be ($5.9b x 95% - $1.2b) x 60% = $2.6b! And Tomson's gain would shrink to only $1.8b, and to $1.5b after a further 15% profit tax! In other words, a little more than 2/3 of the profits will be taken away for the society's good! If this does become reality I think all land developers will think twice before erecting another building! To continue, net proceeds from Tomson Riviera will be $5.9b x 95% - $2.6b - $0.3b = $2.7b. This is about the market capitalization of Tomson now so I'm still getting my money's worth, although not much more (indeed there's some $2.8b net assets but I'm not counting on them in my analysis).

Hope for the best but be prepared for the worst.

* readers interested in the exact calculation can go to http://www.ctaxnews.com.cn/sydjch/t20061219_1441042.html. thanks accountboy hing for providing the link. i did not apply it here as the cost of the project was so low that the end result wouldn't be much affected. btw, it's funny that the numeral example in the link was actually set up in a way to demonstrate developers could earn more by lowering the price(!), explaining there is a tax advantage (no VAT) for mass housing projects with a <20% gross margin. however whoever wrote this is probably clueless as to how market functions. i wonder how many commercial developers will be interested in earning 20% on a property which they have to buy, borrow, build, and sell and which will take at least 3 years' time, unless they can borrow like hell!

DISCLOSURE: I hold 258 at time of writing.