Midea property unit takes smart route

| Jimmy Ding 17 Sep 2018

Midea Real Estate Holding has filed an application for an initial public offering in Hong Kong and reportedly plans to raise as much as US$5 billion (HK$39.25 billion).

The company's business operations are aimed at mid-to high-end customers, including property developments and sales, property management services, as well as investment and operation of commercial properties such as hotels, property leasing, and cultural-tourism projects.

Midea Real Estate's aggregate gross floor area of total land reserves amounted to 33.08 million square meters as of March 31, 2018, among which the completed GFA available for sale was 1.36 million sq m. The aggregate value of property interests of Midea Real Estate as of March 31 this year was 95.01 billion yuan (HK$108.61 billion), according to JLL Valuation Advisory Services.

The company has a property development portfolio of 117 projects across 33 cities in 11 provinces and one municipality in mainland China. In addition, it participated in 24 projects through joint ventures and associates.

Its business activities mainly focus on the Pearl River Delta Economic Region, Yangtze River Delta Economic Region, and core districts of second-, third-, and fourth-tier cities.

Chinese billionaire He Xiangjian, who is the founder of China's largest appliance maker Midea Group, acquired Midea Real Estate in 2004. The company was previously known as Foshan Shunde Welling Realty Company.

He and his daughter-in-law, Lu Deyan, own a combined 100 percent of Midea Real Estate.

Net profit of Midea Real Estate grew rapidly through 2015 to 2017 and it recorded 383.50 million yuan, 993.31 million yuan, 1.89 billion yuan for the years ended December 31 in 2015, 2016, 2017 respectively, while gross profit margin was 21.5 percent, 22.8 percent, and 27.6 percent respectively.

Net profit was 379.94 million yuan and 679.28 million yuan for the three months ended March 31 in 2017 and 2018 respectively, while gross profit margin during the same period was 33.7 percent and 33.5 percent.

The company says in its prospectus that it intends to pay nearly 30 percent of its consolidated profit as dividends from the financial year ending December 31, 2018.

Although both net profit and gross profit margin have been increasing from 2015 to 2017, the company has heavy debts.

The total outstanding borrowings amounted to 11.45 billion yuan in 2015 and increased to 24.36 billion yuan in 2016. The borrowings further jumped to 38.25 billion yuan in 2017, up 57.05 percent year-on-year.

The property arm says the rise in borrowings is to help meet the increased capital needs related to new development projects in light of business expansion and cash flow planning. The total outstanding borrowings for three months ended March 31 increased to 43.58 billion yuan.

The gearing ratio increased slightly from 622.1 percent in 2015 to 624.7 percent in 2016 and decreased to 118.9 percent in 2017. The decline in 2017 was led by a capital injection. About 6 billion yuan was put in the company by the controlling shareholders in 2017, while the gearing ratio as of three months ended March 31, 2018 rebounded to 181.4 percent.

The capital raised by going public in Hong Kong, will be used for land acquisition to increase the land reserves, construction for potential prefabricated construction projects, research and development of smart home solutions, and general working capital.

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