Financial Statement Analysis of Kaisa's Group

Financial Statement Analysis of Kaisa’s Group

Executive Summary

Kaisa Group Holdings Ltd (“Kaisa”, or the “Group”) and its subsidiaries are large-scale integrated property developer. It was established in 1999 and listed on The Stock Exchange of Hong Kong in 2009 (Stock Code: 1638). Over the years, the Group has been primarily focusing on urban property development. The scope of its business covers property development, commercial operation, hotel management and property management services with products comprising residential properties, villas, offices, serviced apartments, integrated commercial buildings and mega urban complexes.

Over the years, the Group has been primarily focusing on urban property development. The scope of its business covers property development, commercial operation, hotel management and property management services with products comprising residential properties, villas, offices, serviced apartments, integrated commercial buildings and mega urban complexes. Kaisa was selected the most valuable real estate company.

However, Kaisa has trod a tortuous path over recent years. Trouble started in December 2014 when the local government imposed a sales ban on some of its projects in Shenzhen. The following month, it confirmed it had missed a coupon payment on its US dollar bonds and had several of its bank accounts frozen. A number of financial institutions applied to the court to seize its assets.

In 2015, Sunac China Holdings Limited proposed to acquire Kaisa and help it achieve debt restructuring by splitting the debt into domestic debt restructuring and overseas debt restructuring. However, the plan has not yet landed, former Chairman Guo Yingcheng returned to the company and continued to lead debt restructuring. After several rounds of negotiations with creditors, the company finally reached an agreement with domestic creditors and overseas creditors in 2016.

For the year ended 31 December 2017, the Group’s turnover and gross profit increased significantly by approximately 84.4% and 286.4% to approximately RMB32,779.3 million and RMB8,934.2 million respectively, as compared to 2016.

How can Kaisa turn around and get out of the woods? What is Kaisa’ financial position after the debt restricting？

1. Overall summary of financial statements

1. Cash Flow Statement

The Net Increase in Cash and Cash Equivalents in 2017 (the level is 1,108,201,000 RMB) is mainly contributed by CFF and it is much lower than the counterparty in 2016 with the level of 8,484,007,000 RMB. Compared with 2016 cash flows, CFO in 2017 has turned to be negative with the scourge of a much higher interest paid that is approximately 63.9% higher than its interest payment in 2016, which should be attributed to expansionary addition to property, plant and equipment achieving 1,251,264,000 RMB increased from 2016’s 106,089,000 RMB, and over 85% of the enhancement comes from Hotel Properties as well as Furniture, Fitting and Equipment, which suggests Kaisa’s future focus.

In 2018 interim cash flow statement, the entity’s cash flow has been improved with a great positive CFO of 8,864,965,000 RMB compared with -1,802,346,000 RMB CFO in 2017. CFF has also been reduced from 11,216,436,000 RMB to 8,741,973,000 RMB. With the need to recover and grow, CFI outflow has been enlarged. In other words, a significant pressure from meeting the obligations of debt has been shifted towards profitable operating activities with operating profit of 5,218,566,000 RMB increased from 3,287,330,000 RMB in 2017.

1. Income Statement

Kaisa’s revenue has boosted from 17,771,517,000 RMB in 2016 to 32,779,347,000 RMB in 2017, in which revenue from Property Development Segment is the biggest contributor in 2017 and its segment result reached 6,628,275,000 RMB compared with its value of -908,192,000 RMB in 2016. Furthermore, the segment’s result in 2017 is 6,628,275,000 RMB with share of results from associates of 74,066,000 RMB. However, in 2018, the share of results of associates came out to be negative (-54,659,000 RMB), which indicates the inefficient operations and unwise holding of the entity’s associates, so in 2018, the entity has diluted its equity interests in certain subsidiaries and gained 1,994,891,000 RMB from the disposal. What’s more, Kaisa’s goodwill has increased rapidly to the carrying value of 332,379,000 RMB since 2016 but it has not been amortized or written off at all in the recent 3 years. In 2018, the gain from subsidiaries’ disposals is an unneglectable factor for maintaining the upward trend of gross profit.

1. Balance Sheet

Kaisa’s expansionary policy in 2017 is mainly reflected in the rapid increases of Investments in Associates, Investment in Joint Ventures and PP&E Non-Current Asset Accounts as well as Properties under Development, Debtors, Deposits and other Receivables and Short-term Bank Deposits Current Asset Accounts. Goodwill and intangible assets increase with the frequent acquisitions, and intangible assets other than goodwill have been allocated more and more value over time to limit the volatility brought by the potential goodwill amortization towards net income. One critical change in Current Liabilities lies in the increased Borrowing realized at 22,173,037,000 RMB jumping from the level of 7,762,301,000 RMB in 2016, but still lower than its 2015 level of 33,713,019,000 RMB. One possible reason for the low level of borrowing in 2016 is the high level of Advance Proceeds Received from Customers and Deposits Received reaching 27,973,395,000 RMB from 14,524,168,000 RMB in 2015. In the 2018 interim Balance, its net assets have already reached 32,272,560,000 RMB, which shows a strong potential growth momentum of the entity.

1. Solvency analysis

During 2015 to 2016, Kaisa struggled in debt restructure for all onshore and offshore debt, including borrowing from banks, bonds and other off-balance-sheet debt. According to the 2014 balance sheet, Kais has around 80 billion RMB liability and around 30 billion RMB interest bearing debt after excluding clients’ prepayment as well as operating liabilities. However, according to the result of due diligence by Sunac, Kaisa’s interest bearing debt was estimated to be 65 billion RMB and 30 billion RMB worth of debt was due in a year, which was unable to be fully repaid. Therefore, Kaisa must implement debt restructure.

Major arrangement includes: debt extension, coupon decrease, and payment in kind (pay bond as coupon). Firstly, debt extension greatly eased short-term repayment pressure. Secondly, coupon decrease and payment in kind greatly eased cash outflow pressure. In a word, Kaisa’s short-term debt paying pressure was converted to long-term solvency pressure (see Table 1 in Appendix).

In the following part, we use some ratios to analyze the change in Kaisa’s debt paying ability. The ratios we selected are divided into three categories. 1) Capital Structure: Asset-Liability Ratio, Current Asset-Current Liability Ratio, and Debt Structure; 2) Long-term Solvency: Net Debt / EBITDA; 3) Short-term Debt paying ability ratio: (CFO + Interest + Tax)/Current Debt.