What’s Up? Wilmar/PPB

Wilmar/PPB

What’s Up? … dated Jan 2011

The market did not take the news of Wilmar Intl Ltd’s venture into real estate development in China too kindly in Dec 2010 … sell down of its share price.

The negative reaction is normal and happens when you deviate from your core business.

On Dec 21, 2010, Wilmar Intl announced that its subsidiary had entered into a master JV with Kerry Properties Ltd and Shangri-La China Ltd to establish one or more JV companies for real estate development in Yingkou City in China .

Wilmar says the shareholdings of Wilmar, Kerry Properties ( China ) and Shangri-La China in the JV is 35:40:25.

The partners formed a master JV agreement after their first successful joint bid for three sites in Bayuquan for a cash consideration of rm110 million. The project sites, with a total gross area of 200000 sq m, are designated for residential, commercial and hotel use.

Total investment in the project is about RMB2.6 billion, which works out to RMB889.2 million for Wilmar’s 35% stake.

Wilmar says the rationale for the venture is to tap into growing demand for quality residential, commercial and hotel property in China ’s second and third tier cities that are expected to experience strong growth in the future.

Wilamr also announced that the JV was successful in its bid for six property sites in Laobian district, also in Yingkou city for RMB1.3 billion. The project entails total investment of RMB7.5 billion.

JP Morgan says the deviation from its core business may attract conglomerate discount. As the group expects to invest in more property projects in the future under the JV, more capital will be reallocated to property investments instead of going into the agriculture business. This may lead to a lowering of the PER that investors are willing to accord the stock.

For plantation companies like IOI Corp and Genting Plantation Bhd, property development is a major contributor to group income but township developments are seen as a natural extension of the plantation business.

Nevertheless, the risks related to Wilamr’s property project are very much contained, with limited downside. With operations in 30 Chinese cities and having constructed more than 200 factories thee, Wilmar is familiar with the local property and construction scene.

While Wilmar’s maiden venture into property development, it will only take on projects in second and third tire cities where it has already has a business presence. Moreover, while prices in first tier cities have gone up, mostly due to speculation, there is genuine demand in the second and third tier cities.

They will be the next wave of cities going through similar growth seen in the first tier cities. The focus on second and third tier cities is a positive attribute for the JV.

At this point, the property projects’ contribution to Wilmar’s bottom line is still unclear, but its US$500 million commitment for the projects is relatively small compared with the US$3 billion it will be pouring into its agribusiness.

Other worries about the impact of cooking oil price controls in China , while soybean remain high.