PREPARED FOR THE CHALLENGES AHEAD Annual Report 2018 Shui On Land - - PDF document

Annual Report 2018

Shui On Land Limited

PREPARED FOR THE CHALLENGES AHEAD

STOCK CODE 272

A LEADING COMMERCIAL FOCUSED PROPERTY DEVELOPER, OWNER AND ASSET MANAGER IN CHINA

Established in 2004 and listed on The Stock Exchange of Hong Kong (Stock Code: 272) in October 2006, Shui On Land Limited is the Shui On Group’s flagship property development company in the Chinese

• Mainland. Headquartered in Shanghai, Shui On Land has established a solid foundation in the Chinese

Mainland and has a proven track record in developing mixed-use, sustainable communities. Shui On Land develops, owns and manages high-quality residential, office, retail, entertainment and cultural properties in the Chinese Mainland. Shui On Land applies its hallmark approach of master- planning to all projects to ensure that developments are fully consistent with government objectives in economic development and urban planning while simultaneously incorporating local historical and cultural characteristics into our designs and planning. Manifesting the “Total Community” concept, our projects provide a unique environment enabling life enrichment of “Live-Work-Play”. Shui On Land’s landbank stood at 8.5 million sq.m. (6.8 million sq.m. of leasable and saleable GFA, and 1.7 million sq.m. of clubhouses, car parking spaces and other facilities). Its nine projects, in various stages

• f development, are all situated in prime locations within the key cities of Shanghai, Wuhan, Chongqing

and Foshan.

Prepared for the Challenges Ahead

Our prudent approach over the past three years has placed us in an excellent situation, buttressed by a strong financial position which should enable us to weather heightened global market volatility and China’s slowing economy. Underpinned by a portfolio of high-quality commercial properties in Shanghai and other major cities in China, its well- established brand and management expertise, the Group will transform itself into a leading commercial focused property developer, owner and asset manager. We will remain constantly alert to both challenges and opportunities for expansion that arise.

Asset Light Strategy Asset Management & Development Initiatives Strategic Partnerships Investment Platform

OUR COMMITMENT TO

INVESTORS

We are committed to providing attractive and sustainable returns for our investors based on a well-planned, long- term growth trajectory and strategic direction.

CUSTOMERS

The expectations of our customers are always at the forefront of our thinking and planning, enabling us to provide high quality and add value to all our projects.

COMMUNITY

We continually look for innovative ways to build and contribute to the community.

We sustain our vision by integrating quality into all of

• ur operations and aspiring to world-class standards
• f excellence in management, planning, execution

and corporate governance.

VISION

To be a leading commercial focused property developer, owner and asset manager in China Innovation • Quality • Excellence

BRAND PROMISE SHUI ON SPIRIT

Integrity • Dedication • Innovation • Excellence

ENVIRONMENT

As an experienced and socially responsible property developer, Shui On Land considers respect for the environment to be a key ingredient for the long-term development of the communities in which we are involved.

EMPLOYEES

Shui On Land believes that care for our employees and for the development of their talents is crucial to the long-term success of the Group.

CONTENTS

4 Financial Highlights 6 Achievement Highlights 8 Chairman’s Statement 13 Market Updates and Project Profiles 32 Business Review 42 Landbank 44 Financial Review 50 Market Outlook 52 Corporate Governance Report 66 Risk Management Report 68 Corporate Social Responsibilities 105 Biographies of Directors and Senior Management 111 Directors’ Report 125 Independent Auditor’s Report 132 Consolidated Statement of Profit or Loss 133 Consolidated Statement of Profit or Loss and Other Comprehensive Income 134 Consolidated Statement of Financial Position 136 Consolidated Statement of Changes in Equity 138 Consolidated Statement of Cash Flows 140 Notes to the Consolidated Financial Statements 255 Financial Summary 256 Corporate Information

LANDBANK as of 31 December 2018

GFA BY USAGE

GFA BY CITY

OPERATING RESULTS for the year ended 31 December

FINANCIAL POSITION as of 31 December

FINANCIAL HIGHLIGHTS

Shui On Land Limited

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CONTRACTED PROPERTY SALES & OTHER ASSET DISPOSAL

REVENUE RENTAL AND RELATED INCOME GROSS PROFIT GROSS PROFIT MARGIN

PROFIT ATTRIBUTABLE TO SHAREHOLDERS BASIC EARNINGS PER SHARE SHAREHOLDERS’ EQUITY PER SHARE DIVIDEND PER SHARE

TOTAL ASSETS NET GEARING RATIO TOTAL CASH AND BANK DEPOSITS

THE GROUP’S 2017 ANNUAL REPORT WON MULTIPLE AWARDS FROM PROFESSIONAL BODIES, INCLUDING:

In March, Foshan Lingnan Tiandi Lots 2 and 3, a commercial and residential complex, obtained a 1-star certification by the Chinese Green Building Evaluation Label. In July, the Group won the “Best Corporate Social Responsibility” award by the Southern Weekly; in the same month, the Group was recognised as one of “China’s Top 10 Green Property Developers in Operation in 2018” by Standard Ranking. In December, the Group was conferred the “Best Practice Award” in the China Social Responsibility Rankings 2018 by China Business News; the Group received an Award of Excellence and an Award for Outstanding Contribution to Reform and Innovation in the “40th Anniversary of China’s Reform – Multinational Companies in Shanghai”

• rganised by Shanghai Daily;

the Group was recognised as one of the Top 30 Most Competitive Green Developers and one of the Top 10 Most Competitive Green Commercial Real Estate Developers both in 2018 on the China Green Building Top Rankings compiled jointly by the China Real Estate Business, CIHAF Organising Committee, and China Green Building Industry Development Alliance.

ACHIEVEMENT HIGHLIGHTS

DURING THE YEAR, THE GROUP RECEIVED PROFESSIONAL CERTIFICATIONS AND AWARDS FOR SUSTAINABLE DEVELOPMENT FROM INDUSTRY ORGANISATIONS, INCLUDING:

Nine awards conferred by the 2018 International ARC Awards: – Gold Award (Traditional Annual Report: Real Estate Integrated Development & Investment) – Gold Award (Financial Data: Real Estate Development/SVC) – Gold Award (Photography: Real Estate Development/SVC) – Silver Award (Photography: Real Estate Integrated Development & Investment) – Silver Award (Written Text: Real Estate Development/SVC) – Silver Award (Interior Design: Real Estate Development/SVC) – Bronze Award (Printing and Production: Real Estate Integrated Development & Investment) – Bronze Award (Printing and Production: Real Estate Development/SVC) – Bronze Award (Cover Photo/Design: Real Estate Development/SVC) Shui On Land Limited

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GROUP SUBSIDIARIES AND PROJECTS March

Optics Valley Innovation Tiandi jointly developed by the Group and CITIC Limited was launched.

July

The Group succeeded in bidding jointly with China Pacific Life Insurance Co., Ltd. and Shanghai Yongye Enterprise (Group) Co., Ltd. for the development rights of three land lots (Lots 123, 124, 132) in Huangpu District in Shanghai to develop a world-class commercial and office complex, as part of a project integrating commercial, office and residential developments with the Group’s existing properties in the Taipingqiao Project.

• 1. China Xintiandi received one silver award for innovative

retailing concepts and 4 silver awards for marketing as the biggest winner of marketing accolades at the award ceremony organised by ICSC China Shopping Centres & Retailers.

• 2. Feng Cheng Property Management received multiple

honours in the year, including being named as a Shanghai Property Management Integrity Commitment Class-AA Enterprise.

• 3. The Taipingqiao project has received a variety of
• awards. The Lakeville Luxe received Residential High-rise

Architecture China Award in the 2017-2018 Asia Pacific Property Awards, and was named “the Residential High- rise Architecture China” by the RICS Awards 2018 Winner.

• 4. The Gallery of Rui Hong Xin Cheng was conferred Asia

Property Awards – Best CONDO Development (China) and Asia Property Awards (China) – BEST CONDO Development at the Asia Property Awards.

• 5. THE HUB was recognised as one of “Shanghai’s Art and

Business Cooperative Commercial Enterprises” in 2018 by the Shanghai Municipal Commission of Commerce.

• 6. The Knowledge and Innovation Community (KIC) won

various awards in the year, including being named as an “Innovation and Development Model Zone in Shanghai’s Service Industry” by the Shanghai Municipal Development & Reform Commission for supporting the functional development of the KIC project.

• 7. InnoSpace, an innovative startup platform under the

Group, received various honours in the year. It was awarded the “2017-2018 Best Investment Award” by Crowd Innovation Space Association Yangpu District.

• 8. Wuhan Tiandi was recognised as an Excellent Enterprise

for Social Responsibility and for Innovative Development in 2016-2017 by the Wuhan Association of Foreign-invested Enterprises.

• 9. Chongqing Tiandi received an award as one of “Top

10 Most Beautiful Commercial Streets in Chongqing” conferred by the Chongqing Broadcasting Group.

• 10. Foshan Lingnan Tiandi received various awards including

the “Outstanding Contribution and Caring Award – Foshan Real Estate Industry” conferred by the Foshan Real Estate Association.

August

Group Chairman Mr. Vincent Lo was awarded the “Lifetime Achievement Award for Hong Kong People in Shanghai during 40 Years of Reform and Opening Up” by the Shanghai Hong Kong Association.

November

Group Chairman Mr. Vincent Lo received the “Outstanding Contribution Award for Foreign- invested Companies in Shanghai during 40 Years

• f Reform and Opening Up” by the Shanghai

Association of Foreign Investment. Annual Report 2018

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Our success in growing rental income depends on our strong portfolio of investment properties capable of generating rising, recurrent income, our continual investment in our brand and our relentless attempt to innovate. The portfolio is the cornerstone of the Group’s future development.

CHAIRMAN’S STATEMENT

“ “

Shui On Land Limited

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Against a backdrop of heightened political and economic uncertainties, and despite trade tensions with the U.S. slowing China’s GDP growth to 6.6%, the Group delivered commendable results in 2018. We, achieved higher profits, together with new partners, won the bid for an important new commercial development at Taipingqiao (“TPQ”) in

• Shanghai. The formation of Core-Plus Office Investment

Platform with partners ended the year on a high note. These achievements are the result of the sustained execution

• f our forward-thinking Asset Light Strategy, which was

initiated three years ago in response to expected changes in the business environment. The strategy is beginning to pay

• ff and the resultant strong financial position of the Group

makes us well placed to take advantage of the opportunities expected to arise during the unfortunate but inevitable coming downturn.

FINANCIAL HIGHLIGHTS

2018 revenue increased by 35% to RMB24,841 million. General property sales accounted for RMB7,093 million, while other asset disposals accounted for RMB15,038 million. Rental and related income contributed RMB2,016 million during the year, as well as RMB694 million arising from hotel, construction, asset management fee income and other activities. Backed by the higher revenue, profit for the year grew to RMB2,686 million in 2018, compared to RMB2,324 million in 2017. Accordingly, profit attributable to shareholders rose 14% to RMB1,906 million in 2018, from RMB1,669 million a year ago. The Group’s net gearing ratio was 40% as at 31 December 2018, representing a decrease of 11 percentage points from 51% as at 31 December 2017. Cash and bank deposits remained healthy at RMB15,392 million. The Group’s solid balance sheet should enable it to weather any market volatility that may arise.

ROBUST RESIDENTIAL AND INVESTMENT PROPERTY BUSINESSES

The range of restrictions on China’s residential property market remained throughout 2018. Notwithstanding these headwinds, the Group’s residential sales went well, with the full-year contracted residential property sales reaching RMB14.12 billion, an increase of 63%. Total contracted sales including general property sales, other assets disposal and commercial property sales for the year amounted to RMB22.279 billion. At Lakeville Luxe in Shanghai, all 118 units sold out in one day. Similarly, at La Riva II in Wuhan and Rui Hong Xin Cheng·The Gallery in Shanghai, all units launched were subscribed in a single day. This testifies to the strong brand reputation we enjoy and our ability to create the kind

• f high-quality developments sought after by China’s rising

middle and upper class. Our investment properties achieved an 8% increase in rental and related income to RMB2,016 million for the year. Including the income generated from the Rui Hong Xin Cheng (“RHXC”) commercial partnership portfolio which is now accounted as joint venture income, total rental and related income increased by 18% to RMB2,200 million. Our success in growing rental income depends on our strong portfolio of investment properties capable of generating rising, recurrent income, our continual investment in our brand and our relentless attempt to innovate. The portfolio is the cornerstone

• f the Group’s future development.

To keep enhancing the value of these assets, we are creating new products to cater to the market’s needs and strengthen

• ur competitiveness. Over the years, the original Xintiandi

brand has managed to stay at the heart of Shanghai’s retail and leisure experience by always leading and responding to the latest trends and changes. Xintiandi has gone from strength to strength with its new proposition of “Social Renaissance”, creating social destinations where people “meet, grow and engage”. Annual Report 2018

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CHAIRMAN’S STATEMENT

By the close of the year, we made a significant move

Our partnerships with major Chinese enterprises including Pacific Life, China Life and CITIC demonstrate that we are a valuable proposition to both the private sector and government organisations engaged in the planning of new communities, as they seek to acquire advanced international

• expertise. The current global situation prompts many

cities to revitalise and reposition themselves to enhance competitiveness and our expertise is helpful to them. Our track record shows that we do not just construct buildings, but we actually work with the government on what a city needs, then master-plan the project to cater to those needs with the ultimate aim of creating value for the community. We are being approached by more and more municipal governments, who want to work with us to energise and revitalise their cities. We also continued to leverage our commercial asset management expertise to enhance third-party assets. The two commercial projects in Nanjing, INNO Zhujiang Lu and Nanjing Bai Zi Ting, are successful test cases of pure asset light

• perating projects.

By the close of the year, we made a significant move to

• ptimise our ability to grasp market opportunities through

the formation of Core-Plus Office Investment Platform with Manulife Investors and China Life Trustees Limited. In line with

• ther Asset Light Strategy initiatives, we are taking a stake

in the platform along with other partners and will assume the manager role. The platform will seek investments in primarily office properties in Shanghai and other tier one cities in China, such as Beijing, Shenzhen and Guangzhou, with a targeted total capital commitment of USD1 billion. With the significant capital raised from global financial investors, this platform will create value and expand our commercial property portfolio together with long-term partners. This will further enhance our position as a market leader in Shanghai commercial property portfolio, provide us with stable, recurrent management income from diverse revenue sources, while opening a new avenue in the investment arena. Annual Report 2018

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CHAIRMAN’S STATEMENT

OUTLOOK

We remain very cautious as regards the immediate future and the medium-term outlook in view of the worsening geopolitical and economic situation around the world. The trade “war” between the U.S. and China is unlikely to be settled soon and it will have a major impact on the Chinese economy, as well as globally. We have seen most institutions lowering their economic growth forecasts, and, without a doubt, many problems may emerge going forward. The coming downturn may be even more severe than that of 2008 due to a higher level of debt among corporates around the world, plus the fact that the low interest rate environment in the past decade has inflated global asset prices to their peak. In fact, the real estate market in China has been in a downturn since late last year. Prices and sales volumes started to drop considerably in the second and third tier cities, although the top tier cities such as Shanghai, underpinned by high demands, have proven resilient. This being the case, we are going to maintain the same prudent approach we have pursued in business over the past three years. I believe our stakeholders are beginning to appreciate this approach and how it has put us in an excellent shape to face the likely downturn. Over the past 20 years we have invested in a large number of high-quality commercial properties in Shanghai and other major cities in China, which form the basis of the Group’s further development. The development of such commercial assets requires significant low-cost long-term capital, and our Asset Light Strategy has significantly reduced financing costs through realising some

• f our assets’ value, while deepening our cooperation with

various sources of capital in recent years. We are now fully prepared to make purchases when the right

• pportunities arise. In identifying investment opportunities, we

will use the principle of “urban screening”, selecting the most dynamic core cities in China that are suitable for multi-project development and premium commercial asset investment. In this, we will be helped by the strong brand reputation we have nurtured over the years. The “Xintiandi” brand has given Shui On Land a first-mover advantage in the transformation of

• ld cities and in urban renewal capabilities. We will continue

to invest in our brand, and bring further innovation to the market, which will earn us access to the huge urban renewal

• pportunity in China’s core cities in the years ahead.

To make sure we are well-placed to seize the opportunities as they emerge, we are also strengthening our human resources, so that we have the right talents to handle projects creatively and efficiently. We intend to do a lot more with the Shui On Academy set up to help train and develop our “people capital”.

THANK YOU

My heartfelt thanks go to my fellow Board members, our management and employees, as well as business partners, for their support throughout the year. Now, more than ever before in recent years, we see many challenges ahead. Given the deteriorating global business environment, we need to maintain the Group’s prudent approach, strengthen our balance sheet further and deepen

• ur relationship with partners. The bottom line is that we have

a good strategy in place that is starting to pay off, and we are poised to capture asset acquisition opportunities at attractive prices when they arise.

VINCENT H. S. LO

Chairman Hong Kong, 20 March 2019 Shui On Land Limited

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MARKET UPDATES AND

PROJECT PROFILES

The Group engages principally in large-scale mixed-use city-core development projects based on comprehensive master plans in four

• f China’s most rapidly growing cities, with a lifestyle theme of

focusing on “live, work and play”. The projects are characterised by the redevelopment and transformation of existing neighbourhoods and communities into new city landmarks. As at 31 December 2018, the Group has a total GFA of 8.5 million square metres across nine projects at varying development stages.

events

1,000

Organised over

1,603

Total number of shops increased to

Total Landbank

8.5

million square metres

127million

Total customer traffic in 2018 reached