Sichuan Languang Development Says Sale of Chengdu Dikang Pharmaceutical Is Strategic Decision, Not Driven by Liquidity Needs; Proposed Sale of Interest in Languang Justbon to Generate More Than 50% of Total Net Profit in Current Accounting Period

Relevant Document:
Clarification memo (Chinese)

In a memo sent to investors today, March 4, in response to recent media reports, an investor relations representative of Sichuan Languang Development again refuted the rumor that the company is contemplating exiting its Shanghai headquarters and relocating back to its native Chengdu. It reiterated that Shanghai and Chengdu constitute its dual headquarters, and that Shanghai has played an important role in accessing capital, investment and talent.

“The Yangtze River delta area has always been an important strategic region for the company,” the memo reads, which was seen by Reorg. It added that it continues to be committed to the Yangtze River delta and the eastern China region.

Languang called the rumor “baseless,” adding that it “does not and will not plan to exit the Shanghai headquarters.”

In response to the disposal of drug maker Chengdu Dikang Pharmaceutical in July 2020, Languang denied that the sale was due to its liquidity needs. Property development has been the core business of the company, and the original acquisition of Dikang was to facilitate Languang’s backdoor listing in 2015. Languang has been trying to introduce shareholders and sell Dikang when appropriate since 2019. It pointed out that the timing of the announcement of the sale was a function of the natural progression of the negotiations.

In terms of the planned sale of 115.1 million H shares, or 64.6%, of subsidiary Languang Justbon to Country Garden Property Services HK Holdings, Languang said the transaction is a voluntary, strategic decision designed to improve the company's cash flow and help it focus on its core business of property development. Profit generated by the proposed transaction will account for more than 50% of the total net profit in the current accounting period, the memo shows.

As for share pledges by largest shareholder Languang Investment Holding (with 46.9% stake) and second-largest shareholder Yang Keng (with 11.5% stake), total shares pledged by the two shareholders combined account for about 49.6% of Languang’s total share capital, in line with the average level of comparable A-share property developers.

Since 2018, Languang has been acquiring land in joint ventures and expanding its minority interests. About 80% of joint venture partners are companies in the same industry or strategic partners, it said.

Languang also refuted media reports that the trust products it involved in are debt and not equity. It said the trust products are indeed equity interests that do not have guaranteed yield and whose gains or losses depend on performance of the projects.

Financial Positions, Operation

Cash balance was approximately RMB 30 billion as of the end of 2020, of which RMB 1.5 billion ($231.8 million) was restricted. Languang’s restricted assets amounted to RMB 68.5 billion, which accounted for 29% of the total asset or 1.46x of the net asset as of Sept. 30. About RMB 6.3 billion is restricted because of borrowings against inventory collaterals. It is common for property companies to pledge their inventory for construction loans, the company noted in the memo.

The company posted 2020 operating revenue of RMB 45.591 billion, up 16.3% over a year earlier. Contracted sales totalled RMB 103 billion, with an attributable ratio of 70%. About RMB 57 billion sale proceeds was collected in 2020, representing a cash collection rate of 79%.

Contracted sales were up 14% and 23%, respectively, during the third and fourth quarter of 2020 over a year earlier. During the first two months of 2021, contracted sales were approximately RMB 16 billion, up 110% over a year earlier.

By the end of 2020, Languang had a net debt ratio of 92.9%, and if excluding prepayment, a net debt ratio of 73.7%; and a cash to short term debt ratio of 1.1, meaning the company was in compliance with two of the “three red lines.” Languang aims to be in compliance with all three red lines during the first half of 2021.

About 70% of the company’s land is in second-tier cities, with the remaining in third or fourth-tier cities. Its land bank has a total value of RMB 280 billion, sufficient to meet the expansion of the company in the next two to three years. It has more than 400 projects in over 60 cities.

Below is Sichuan Languang’s capital structure: