23 February 2019
Vincent Lo took over management control of Shui On Land last year to reposition the company's business strategy. Photo: HKEJ
Vincent Lo took over management control of Shui On Land last year to reposition the company's business strategy. Photo: HKEJ

Did Shui On just sell a Shanghai cash cow?

Shui On Land Ltd. (00272.HK) may be pursuing the wrong business strategy by offloading its hotel holding to focus on property development, the Hong Kong Economic Journal reported Monday. 

The developer recently divested its stake in Langham Xintiandi Hotel in Shanghai to Great Eagle Holdings Ltd. (00041.HK).

It said the sale was intended to cut debt and sharpen the company’s focus on property development at a time when Shanghai is expected to receive a tourism boost from the opening of Shanghai Disneyland next year.

Also, it highlights difficulties in its business strategy to redevelop old districts in Shanghai which involves the acquisition of large plots of land and a lengthy relocation of residents and property owners. 

Langham Xintiandi is ranked as one of the best hotels in Shanghai, with a rating of 4.8 out of five, second only to the Peninsula Shanghai at 4.9 and matching Four Seasons, the report said, citing online travel agency

The divestment means Shui On, controlled by Hong Kong billionaire Vincent Lo, will miss the growth potential from the opening of the Disney theme park that has driven up related Shanghai-listed companies, including Shanghai Jin Jiang International Hotels Development Co. Ltd. (600754.HK).

When China’s property market was thriving, a slow turnover strategy such as Shui On’s brought revaluation gains over the years.

But when the market began to head south, such a model became a disadvantage.

For instance, Shui On’s property sales in the first half slumped 56 percent to HK$2.82 billion (US$363.86 million) from the same period last year.

Developers with a high-turnover, light-asset model, such as China Vanke Co. Ltd. (02202.HK) and Evergrande Real Estate Group Ltd. (03333.HK), have done much better.

Lo took over management control of Shui On last year to reposition the company to a high-turnover strategy, seeking to cash in on its non-core assets to support annual interest costs of HK$3 billion on a gearing of more than 60 percent.

It needs another 18 to 24 months to see the effects of the new business model.

Meanwhile, its core projects have only just finished the demolition phase and could start to contribute to the group’s sales revenue in the second half next year.

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