On behalf of the Board of Directors, I am glad to present the 2020 Annual Report for First Sponsor Group Limited. 2020 was a difficult year due to the material adverse business impact of the Covid-19 pandemic on a significant part of the Group's operations. Despite this, the Group managed to achieve a net profit of S$103.2 million for FY2020, although this was a decrease of 38.3% compared to that of FY2019.
In recognition of our shareholders' unwavering support, the Board announced a second interim tax-exempt (one-tier) cash dividend of 2.0 Singapore cents per ordinary share in lieu of a final dividend for FY2020. This brings the total dividend declared for FY2020 to 3.1 Singapore cents per ordinary share, 14.8% higher than the FY2019 full year dividend. The Board will continue to work towards a stable dividend payout with a steady growth when appropriate, subject to the successful implementation of the Group's business strategy and prevailing market conditions amidst the current economic uncertainties arising from the Covid-19 pandemic.
The Group's European operating hotels were adversely affected by successive waves of restrictions imposed by the various governments to control the Covid-19 pandemic. This resulted in the European operating hotels incurring an overall loss before interest, tax, depreciation and amortisation ("LBITDA") of €1.1 million for FY2020 (FY2019: earnings before interest, tax, depreciation and amortisation ("EBITDA") of €17.8 million) after taking into account an estimated €8.4 million in government subsidies. The performance of the European operating hotel portfolio is expected to remain weak and uncertain in the near future. This poor performance will be further aggravated should the various government subsidies be withdrawn or if the Group's European operating hotels cease to be eligible for them in the future. The protracted nature of the Covid-19 pandemic has led to varying business challenges for some of the Group's tenants and business counterparties. The Group actively engages such tenants and counterparties to try to find a fair and reasonable solution for all parties.
In Dongguan, the Group's property development projects have seen both strong underlying demand and sales performance such as the selling out of all 830 units of the first four residential apartment blocks of Skyline Garden and 168 units of the last two residential apartment blocks of The Pinnacle on the first day of their sales launch on 31 December 2020 and 1 January 2021 respectively. The Group is hence optimistic about the mega 1 million sqm gross floor area ("GFA") Humen Transit-Oriented Development ("Humen TOD") project that was acquired in late June 2020. The Group has also been actively pursuing further opportunities in the Greater Bay Area ("GBA") region to capitalise on the positive outlook of the GBA development plan such as the acquisition of an 18% equity interest in a company that has a 100% economic interest in a real estate developer that has the rights to redevelop a plot of land (subject to the successful resettlement of existing inhabitants on the land and the obtaining of re-zoning approval) in Fenggang, Dongguan in January 2021, and the entry into a conditional sale and purchase agreement to acquire a company with a 100% equity interest in a property development project in Panyu, Guangzhou in February 2021, in which it will own an effective interest of 95% on completion.
The Group's property financing segment achieved another record year with its highest full year average PRC loan book to-date of RMB2.4 billion.
The Group recorded revenue and net profit of S$203.9 million (FY2019: S$319.2 million) and S$103.2 million (FY2019: S$167.1 million) respectively for FY2020. The resilient performance by the Group despite the Covid-19 outbreak can be attributed to the Group's successful business and geographical diversification. Revenue for FY2020 was lower due mainly to profit from the sale of residential units of the Millennium Waterfront project having been fully recognised in prior years and the material adverse impact of the Covid-19 pandemic on the European hospitality property holding segment. The Group's property financing segment became the key contributor to the Group's revenue and profitability, delivering a record S$97.9 million in gross profit which accounts for 57% of the Group's FY2020 total gross profit.
As at 31 December 2020, the Group's total equity, consolidated gross borrowings and consolidated net gearing ratio based on book value amounted to approximately S$1.7 billion, S$747.6 million and 0.16 respectively.
Foreign exchange exposure to RMB remains one of the key risks that the Group faces. Unlike its European and Australian investments which are substantially hedged via a combination of local currency-denominated borrowings and financial derivatives such as cross-currency swaps and foreign currency forward swaps, the Group's RMB-denominated net assets remain largely unhedged as the cost of hedging remains prohibitive. However, the Group has gradually increased its hedge against RMB exposure as compared to FY2019 and will continue to monitor the situation closely in order to adjust its RMB hedging strategy accordingly. RMB appreciated against S$ in 2020 resulting in a translation gain of S$37.0 million recorded in FY2020. As at 31 December 2020, the Group recorded a cumulative translation gain of S$19.3 million (Dec 2019: loss of S$18.6 million) arising mainly from the Group's exposure to RMB.
The segment generated a net revenue of S$57.0 million (FY2019: S$160.0 million) and a gross profit of S$64.9 million (FY2019: S$78.8 million). The decrease in both revenue and gross profit was mainly because revenue from the development sale of Plots A to D of the Millennium Waterfront project had already been largely recognised in previous years, with revenue in FY2020 relating mainly to the bulk sale of the remaining carpark inventory. Gross profit was higher than net revenue for the year as a result of the reversal of cost provision that was no longer required.
Despite the negative economic impact arising from the Covid-19 pandemic, sales of the Group's various Dongguan property development projects have to-date been very strong. All 830 units of the first four residential apartment blocks of Skyline Garden and 168 units of the last two residential apartment blocks of The Pinnacle were sold on the first day of their sales launch on 31 December 2020 and 1 January 2021 respectively. While there will be a time lag between project sales and the accounting profit recognition, the sale proceeds collected will bolster the Group's immediate overall financial position, thereby enhancing corporate resilience.
The Group is hence optimistic about the Humen TOD project acquired in late June 2020. The project is planned to be developed over 4 phases and the sales launch for Phase 1 is expected to commence in 2H2021. Other than the Group's recent entry into Fenggang, Dongguan in January 2021 and the expected acquisition of a property development project in Panyu, Guangzhou that was recently announced in February 2021, the Group continues to actively pursue further opportunities in the GBA region to capitalise on the positive outlook of the GBA development plan and to expand its property development footprint in this region. The Group is pleased to have scaled up its property development segment exposure in the midst of this exciting development phase of the GBA.
All the residential, SOHO and office units in the Star of East River project have been fully sold as at 31 December 2020. Handover of the residential units has been completed and handover of the SOHO and office blocks is ongoing. For the project's remaining commercial podium, 85.9% of the 27,000 sqm of retail lettable floor area launched has been leased as at 31 December 2020. Due to the impact of the Covid-19 pandemic, a number of tenants have been granted rent concessions for a certain time period.
The Emerald of the Orient project sold out all 854 saleable residential units and 137 saleable villas as at 31 December 2020. Handover of these units and villas has commenced from December 2020. Out of the 222 residential units and 31 villas that have to be kept for a minimum holding period of 5 years as per land tender conditions, 192 residential units and 25 villas have been reserved by interested buyers. The average selling price for these reserved residential units and villas are at a 8% and 21% premium to the saleable residential units and villas respectively.
With the last two residential blocks reaching "sold out" status on the day of its sales launch on 1 January 2021, The Pinnacle project has fully sold all eight blocks of 606 residential units. 226 SOHO units are expected to be launched for pre-sale in 2Q2021. The project is expected to be handed over in phases from 4Q2021.
Reflecting the same stellar sales performance of the Group's other Dongguan property development projects, the Skyline Garden project fully sold its first four residential apartment blocks, which comprise 830 out of 1,194 residential units at the project, on the first day of its sales launch on 31 December 2020. The last residential block is expected to be launched in 2Q2021 with buying interest likely to be similarly strong. The project also has seven blocks of 784 SOHO units and 4,400 sqm of commercial space which are required to be kept for a minimum holding period of 2 years as per land tender conditions.
On 29 June 2020, the Group, in a public land tender exercise, teamed up with, inter alia, two reputable state-owned enterprises – China Poly Group (the same joint venture partner of the Group's Skyline Garden project) and China State Railway Group, to win the bid to develop a Transit-Oriented Development in excess of 1 million sqm GFA in Humen, Dongguan.
The project encompasses a major transport hub which includes the Guangzhou-Hong Kong High-speed Railway Humen Station, Guangzhou-Shenzhen Intercity Railway Humen Station, Dongguan Metro Line 2 Humen Station and Dongguan Humen Bus Interchange. The Guangzhou-Hong Kong High-speed Railway is directly linked to Beijing in the north via Guangzhou, and Kowloon, Hong Kong in the south via Shenzhen.
Due to the scale of the project, development has been planned over 4 phases. Phase 1 development, which is further divided into 2 sub-phases, has started. Phase 1 development comprises, amongst others, approximately 299,500 sqm or 100% of the residential GFA and approximately 210,000 sqm or more than 50% of the SOHO GFA. The first of the sub-phases comprises approximately 162,000 sqm of residential GFA, 57,700 sqm of SOHO GFA and 11,800 of commercial and ancillary GFA. Pre-sale launches will commence from 2H2021.
Capitalising on the growth and property demand momentum in Dongguan, which is one of the key cities in the GBA region, in January 2021, the Group signed a cooperation agreement in relation to, among others, the acquisition of an 18% equity stake in a local holding company ("HoldCo") and the provision of an interest free secured property financing loan of RMB500 million to HoldCo.
HoldCo has a 100% economic interest in a real estate developer which has the rights to redevelop a plot of land in Fenggang, Dongguan with a site area of about 33,800 sqm, into a predominantly residential project with saleable residential GFA of approximately 157,500 sqm (97%) and saleable commercial GFA of approximately 4,800 sqm (3%), subject to the successful resettlement of existing inhabitants on the land and the obtaining of re-zoning approval.
In line with the Group's plan to expand its footprint in the GBA, in February 2021, the Group entered into a conditional sale and purchase agreement to acquire a Hong Kong-incorporated company which wholly owns a largely residential property development company in Panyu, Guangzhou ("Panyu ProjectCo"), in which it will own an effective interest of 95% on completion. The transaction is conditional upon, among other things, the seller group obtaining the necessary shareholders' approvals. The condition in relation to such shareholders' approvals is expected to be satisfied given that the majority shareholders of the seller group have provided irrevocable undertakings to vote in favour of the transaction.
Panyu is located in the geographic centre of the GBA. It is well-known as a sea transportation hub and is one of the four largest railway passenger transportation hubs in China. The project site is situated close to the city centre and is easily accessible to several schools, medical facilities, places of interest and intercity train services (under construction).
In 2012 and 2015, Panyu ProjectCo developed Phase 1 and Phase 2 of a project named "Le Papillon" which have been substantially sold. The Group will continue with the sale of the remaining units in Phase 1 and Phase 2 and, after the finalisation of some design modifications, the development of Phase 3. Phase 3 has a land area of approximately 95,771 sqm with a saleable GFA of 162,959 sqm of which residential GFA is approximately 159,925 sqm (98%) and commercial GFA is approximately 3,034 sqm (2%). Pre-sales for Phase 3 is expected to be launched in 4Q2021.
The SOHO loft units of Plot F of the Millennium Waterfront project were 80.3% sold as at 31 December 2020. Plot F comprises 15 floors of 807 SOHO loft units and 5 floors of over 25,000 sqm of saleable retail space, and is expected to be completed and handed over from March 2021.
For the remaining carpark lots at Plots A to D of the Millennium Waterfront project, the Group sold a total of 3,252 carpark lots to a bulk buyer in FY2020.
In October 2020, the Group stated that it was approached by an independent third party relating to its interest in the Chengdu Millennium Waterfront project, including Plot E, the last development plot of the project. To-date, no definitive agreement has been reached with such independent third party and discussions are ongoing. The Company is in concurrent discussions with other third parties which have expressed similar interest. There is no assurance that such discussions will result in a definitive agreement or transaction. The Group will make further announcements as appropriate when there are any material updates or developments on this matter.
In July 2020, after a successful international design competition, the winning architect finalised the development design details and the Stage 2 Development Application was submitted in early March 2021. Construction is expected to commence in 2022.
In March 2020, the Group obtained an irrevocable building permit to redevelop and increase the net lettable floor area of the Dreeftoren Amsterdam office property by approximately 78% and to develop a new residential tower adjacent to the office property. Given the uncertain economic outlook brought about by the Covid-19 pandemic, the Group will continue to monitor market demand and construction cost before entering into any commitment in relation to the residential and office redevelopment project.
The Group's property holding segment, in particular its hospitality property holding business, was adversely affected by the Covid-19 pandemic and the tightening measures on travel and gatherings. This segment recorded a 42% and 70% drop in revenue and gross profit to S$41.7 million and S$9.1 million respectively in FY2020. The decrease was due mainly to lower European hotel profit resulting from the impact of the Covid-19 pandemic and the closure of the Group's hotels for a part of FY2020.
Overall occupancy of the Group's European operating hotels decreased significantly in FY2020. Reeling from a weak 1H2020, the Group saw some positive signs in 3Q2020 as travel restrictions started to ease and the summer holidays approached. However, occupancy dived again in 4Q2020 due to both a drop in leisure demand post the summer holidays as well as the tightening of measures by the various governments to control the pandemic situation due to the resurgence of Covid-19 cases. The Group's European operating hotels suffered a LBITDA of €1.1 million for FY2020 (FY2019: EBITDA of €17.8 million) after taking into account an estimated €8.4 million in government subsidies.
Fortunately, the Group's Dutch office income increased by 24.0% to S$30.0 million for FY2020 (FY2019: S$24.2 million). The growth was driven mainly by the full year higher income contribution from the Oliphant Amsterdam office building and the appreciation of € against S$.
The Bilderberg Hotel Portfolio, comprising 11 owned hotels, managed to achieve a small EBITDA of €0.7 million in FY2020 (FY2019: €11.2 million) against the difficult Covid-19 backdrop, as a result of various cost management initiatives and €6.0 million in Dutch government subsidies. Demand for city hotels was low, with the regional hotels performing marginally better due to support by the occasional weekend leisure business. The hotel portfolio managed to achieve a 35.5% occupancy for FY2020 (FY2019: 70.3%).
As a result of the Covid-19 related lockdown tightening measures, the Hilton Rotterdam recorded a lower room occupancy of 26.4% (FY2019: 73.9%). Despite this significant negative impact, the hotel managed to minimise its LBITDA to €1.0 million (FY2019: EBITDA of €3.7 million) after taking into account the Dutch government subsidy of €1.1 million.
The demand for the Hampton by Hilton was also weak. The operations of the Crowne Plaza hotel, which commenced on 2 June 2020, were substantially suspended in mid-September 2020 to reduce overheads. After taking into account the Dutch government subsidy of €0.4 million, the hotels recorded a LBITDA of €0.5 million for FY2020, although the Hampton by Hilton managed to achieve a nominal EBITDA for FY2020.
Despite the Covid-19 backdrop, the hotel managed to minimise LBITDA for FY2020 to €0.3 million (FY2019: EBITDA of €2.0 million) due mainly to the strong leisure demand during the summer holidays and the subsidies received from the German government of €0.9 million.
In March 2020, the lessee of the hotel, MHP, unilaterally closed the hotel and did not pay rent for April 2020, alleging, among others, the negative impact of the Covid-19 pandemic on the hospitality sector as grounds for such closure and non-payment. MHP also obtained a preliminary injunction to prevent the Group from drawing on a first demand guarantee for the rent for April 2020 and the Group commenced legal proceedings to set aside the preliminary injunction. In September 2020, a favourable court ruling was obtained by the Group and the preliminary injunction was set aside. The lessor received approximately €1.9 million (approximately S$3.0 million) in overdue rental payments for the period from April 2020 to September 2020, including penalty interest computed at 8.12% per annum.
The owner and lessor of the Le Méridien Frankfurt hotel subsequently reached an amicable agreement with MHP to terminate the lease with effect from 31 January 2021. The operations of the hotel, which continues to operate under the name "Le Méridien Frankfurt", have been taken over by a new lessee which is partly owned by the same shareholders of the lessor. The hotel will be managed by EVENT Hotels Group, which is also the hotel manager and minority shareholder of the Group's 12 Bilderberg hotels in the Netherlands and Germany.
The Crowne Plaza Chengdu Wenjiang Hotel and Holiday Inn Express Chengdu Wenjiang Hotspring Hotel performed reasonably well against the Covid-19 backdrop. The hotels recorded an EBITDA of RMB7.9 million for FY2020 (FY2019: RMB10.0 million), mainly contributed by the strong 4Q2020 performance driven by stringent cost saving initiatives which resulted in a 47% increase in EBITDA to RMB6.6 million (4Q2019: RMB4.5 million) notwithstanding lower revenue for the quarter.
The Group has a 90% equity interest in Dongguan East Sun Limited ("East Sun") and Dongguan Wan Li Group Limited which own the East Sun Portfolio and the Wanli Portfolio respectively. The East Sun Portfolio and the Wanli Portfolio comprise a number of outdated commercial and industrial properties in Dongguan which were acquired in March 2017 and January 2018 for RMB260 million and RMB206 million respectively. In October 2018, one of the industrial properties in the Wanli Portfolio was disposed for RMB128.0 million, a 166% premium over its allocated cost of RMB48.0 million. In January 2020, an agreement was signed to divest a 51% controlling equity interest in Dongguan Wan Li Group Limited valuing the remaining Wanli Portfolio at RMB320 million, which is an approximately 100% premium over its allocated cost. A RMB50 million non-refundable deposit has been received and the remaining consideration is expected to be paid by late 2021 or early 2022. The new investor will take the lead in the re-zoning exercise for the Wanli Portfolio. The positive outlook of the Dongguan property market augurs well for some of these properties in the East Sun Portfolio and Wanli Portfolio which are located in certain districts with good redevelopment potential. East Sun is applying to re-zone an industrial property in the East Sun Portfolio to residential use. In relation to another industrial property owned by East Sun, it is in the process of setting up a joint venture with an owner of an adjacent property and a prospective tenant to jointly develop the 2 properties into a higher density modern industrial complex. East Sun has completed the demolition of the existing outdated building structure on its site in preparation of the re-zoning application. Thereafter, the joint venture will have a quota to re-zone another industrial property in the same district in Dongguan to residential use.
The Group's property financing arm was the standout performer of the year, with a higher average PRC property financing loan book of RMB2.4 billion for FY2020 compared to RMB2.2 billion in FY2019. The Group registered revenue and gross profit amounting to S$105.2 million and S$97.9 million respectively in FY2020, a 20.3% and 22.8% increase respectively over FY2019. The increase was due mainly to the loan restructuring income arising from the refinancing of the FSMC loans and the establishment fee in relation to the A$370 million construction facility to fund the redevelopment of the City Tattersalls Club in Sydney.
In connection with the economic difficulties resulting from the Covid-19 pandemic, the Group granted a short term deferral of interest payments to a borrower with a RMB580 million loan and another borrower group with two cross collateralised loans amounting to RMB330 million.
The RMB580 million loan is secured on a Guangzhou city hotel with a 44% loan-to-value ratio ("LTV"). The borrower was allowed to defer 50% of the monthly interest payments for a few months from 2Q2020 on the condition that the borrower contributes additional equity to a bank account jointly controlled by the borrower and the Group. The deferred interest will be due from April 2021.
The borrower group with two cross collateralised loans amounting to RMB330 million has been in arrears for a month's interest for 8 consecutive months since March 2020. In November 2020, the Group commenced legal action in the Shanghai court to recover the outstanding loan principal and interest. The loans are secured on, among others, a residential villa and a 5-floor retail mall in Shanghai with a combined LTV of 53.4%. In view of the positive outcome of the legal actions in respect of the 2 previous loans defaulted in December 2015 and January 2016, the Group is optimistic about the recovery exercise of the RMB330 million defaulted loans. Concurrently with the legal proceedings, the Group is also in discussions with the borrower group to explore alternative settlement solutions.
Subsequent to 31 December 2020, the Group disbursed a RMB900 million secured loan in relation to a development land in Tangxia, Dongguan in February 2021. The Group will seek to grow its PRC property financing loan book prudently.
For the European property financing loans, despite the difficult hospitality operating conditions, the 33%-owned FSMC group, which owns 95% of the Dutch Bilderberg hotel portfolio, has been able to service the interest on the loan owed to the Group in FY2020. However, FSMC may exercise its right to defer interest payment during FY2021 if the hospitality trading remains weak due to the multiple lockdowns in Europe and the traditionally weak winter season.
During this challenging time, the Group is heartened by the Corporate Social Responsibility ("CSR") activities organised by the Hilton Rotterdam team ("Team").
To thank hospital staff for their hard work and sacrifice, children of employees of the Hilton Rotterdam created heart drawings that were incorporated onto lunch boxes for 150 nurses of the Rotterdam Hospital. The lunch boxes were sponsored by one of our suppliers and prepared by the Hilton Rotterdam's kitchen team.
During the reopening of the primary schools after the summer break, the Team obtained volume discounts from one of our suppliers for disinfectant sprays for 150 schools in Rotterdam.
In December 2020, Hilton Rotterdam employees baked pepernoten (festive Dutch cookies) for occupants of the Ronald McDonald house in Rotterdam, which provides free accommodation that enables parents to stay with their mostly long term hospitalised children.
Employees also engaged in other acts of goodwill to the community, such as donating used clothes and bottles of soap to the homeless via organisations like the Dutch Salvation Army and sending Christmas cards to 100 solitary elderly.
Due to the Covid-19 pandemic restrictions and tightening measures, the Crowne Plaza Chengdu Wenjiang Hotel and Holiday Inn Express Chengdu Wenjiang Hotspring Hotel CSR teams were unable to participate in any CSR activities.
The Group will continue to support programs that bring communities together, have a socially and environmentally positive impact, or build and foster business-to-community relationships.
Notwithstanding the various challenges arising from the Covid-19 pandemic, the Board is pleased with the good pre-sale performance achieved by the property development segment and the growth in the property financing segment's loan book. The non-hospitality related property holding segment is also stable with a good recurrent income base. We stay mindful of the delicate balance between building sustainable growth and value for our shareholders and prudent operations. As the rollout of the vaccinations to the worldwide population gathers momentum, business activities across all sectors are expected to pick up. The Board will review its business strategy on an ongoing basis to ensure that it remains relevant in the post Covid-19 new normal.
One of the Group's operational priorities is in ensuring the health and safety of our customers and staff at all our properties. As such, actions have been taken to put in place appropriate measures to address this.
The Group is backed by a strong balance sheet, substantial unutilised committed credit facilities and potential equity infusion from the exercise of outstanding warrants. Notwithstanding this, the Group remains ready to further tap into the debt and equity markets to further strengthen itself to capitalise on any new business opportunities when they arise.
On behalf of the Board, I would like to thank our shareholders, customers, business associates, bankers and partners for their unwavering and continued support in light of the ongoing uncertainties and wish them well in health and in our joint effort to tackle the Covid-19 pandemic. I would also like to thank my fellow Directors for their shared vision, wisdom, experience and counsel and also to the management team and staff for their hard work, dedication and commitment in their efforts to safeguard the Group's interest and contribute to the Group's growth for our shareholders, especially under the difficult working conditions during the circuit breaker/lockdown periods. We hope for a better 2021 for the world at large and a safer environment ahead.
Ho Han Leong Calvin
10 March 2021