Interim Results

RNS Number : 9111X

China Real Estate Opportunities PLC

24 August 2009

 



25 August 2009

CHINA REAL ESTATE OPPORTUNITIES PLC

Interim RESULTS FOR THE SIX MONTHS ENDED

 30 jUNE 2009

China Real Estate Opportunities plc ('CREO' or the 'Company'), is an AIM-listed company established to acquire investment and development properties in China. 

Highlights

• CREO portfolio was valued at CNY9.47 billion (GBP£835.9 million), down 6.2% in CNY terms for the 6 months to 30 June 2009.  
   
•  The investment property portfolio, represented by City Centre, Central Plaza and Treasury Building declined only 1.2% on an aggregated basis in CNY terms.
   
• This has resulted in a 9% year-on-year uplift in the European Public Real Estate net asset value per share ('EPRA NAV per share') from £9.74 as at 30 June 2008 to £10.62 as at 30 June 2009, and a decline of 20% for the six month period since 31 December 2008. Three quarters of the 20% decline is the result of the strength in sterling during the period.
  
  
• Rental income was stable in local currency in the period despite lower average occupancy across the portfolio as the Company continues to achieve average rental uplifts of up to 16% on a square metre basis. 
  
  
• Since the period end, credit approval has been received for a £26.6 million five year loan with the Industrial and Commercial Bank of China (ICBC) for the refinancing of Treasury Building.
  
  
• CREO's effective 5% minority stake in the City Centre 5 Development was successfully disposed of for CNY95 million (GBP£8.6 million), representing an 8.6% premium to valuation as at 31 December 2008. 

Ray Horney, Chairman of CREO, commented:

'The first half of 2009 has been a significant period for the Company. The Board is pleased with the progress achieved, particularly through its strategic focus on strong asset management in the face of an increasingly competitive environment. Recent advances made in relation to financing are also very encouraging and CREO is well positioned to take advantage of further improvement in overall market conditions.'

CREO plc Ray Horney, Chairman  Tel: + 44 (0)1273 775 225	Treasury Holdings China Richard David, Managing Director Tel: [phone]
Sarah Moriarty CREO Investor Relations  Tel: [phone]
Matrix Corporate Capital LLP Paul Fincham, Jonathan Becher, Robert Naylor Tel: + 44 (0)20 3206 7000	Davy Des Carville Tel: + 353 1 679 6363
Bankside Consultants (CREO PR) Simon Rothschild, Oliver Winters   Tel: + 44 (0)20 7367 8888	Murray Consultants (CREO PR) Ed Micheau Tel: + 353 1 498 0300

  Chairman's Statement

Introduction

I am pleased to report on the activities of your Company during the first six months of 2009. 

The Chinese market has been widely recognised as one of the best performing economies globally over the past 12 months and it is clear that the CNY4 trillion (GBP£353 billion) stimulus package implemented in November of 2008 has laid strong foundations for a long term resurgence in domestic demand to underpin a strong recovery.

First half GDP growth was recorded at 7.1%, supporting many analyst predictions that China will meet its full year GDP growth target of 8%. CREO will continue to benefit from this turn-around with estimates that some CNY800 billion (GBP£70 billion) has flowed into the real estate sector in additional liquidity in the first half of 2009.

In tandem with the stimulus package, which has been predominately aimed at infrastructure, health and education, the Chinese government has also ensured that there has been a more robust banking sector in place to underwrite commercial growth across the economy as part of its strategy to return to a strong economic position. 

This programme has achieved startling results with bank lending reaching CNY7.7 trillion (GBP£679 billion) for the half year compared to full year lending in 2008 of CNY4.9 trillion (GBP£432 billion). Moreover, it is particularly noteworthy given the strong gains in the first half of the year that policymakers have pledged to maintain an accommodative monetary and fiscal policy to underpin the economic growth, particularly driven by domestic demand.

As to the property sector, the residential market has been the main beneficiary of the recent economic upturn and increased liquidity and is being further assisted by a significant reduction in taxes and fees and suspension of the policy introduced in 2007 restricting the number of residential properties individuals could own.

Shorter-term challenges remain in the Shanghai and Beijing office sectors, which are being impacted by the twin pressures of increasing supply and declining demand, particularly from international tenants. The retail property market remains buoyant given the strong response from the Chinese consumer.  

During the period and despite short-term challenges, the Company has delivered a strong performance as reflected in the independent valuation process undertaken by CB Richard Ellis as at 30 June 2009. 

I am pleased to report that despite a significant decline in the commercial property sector in most global markets, the CREO portfolio was valued at CNY9.47 billion (GBP£835.9 million), declining only 6.2% in CNY terms for the 6 months to 30 June 2009. More significantly however, the stabilised component of the portfolio represented by City Centre, Central Plaza and Treasury Building declined only 1.2% on an aggregated basis in CNY terms. The majority of the reduction in the portfolio value was recorded in the development assets, reflecting the uncertainty of timing and risk associated with vacant land and the subsequent development process in the current environment.

It is worth noting however, that although the development assets have contributed disproportionately to the overall reduction in the portfolio value as reported at 30 June 2009, CREO successfully disposed of its interest in the City Centre Development site (CC5) in June 2009 at an 8.6% premium to the December 2008 valuation. 

Whilst on an annual basis the CNY has appreciated against the pound by 16.9%, it has retreated from its December 2008 highs and has recorded a 13.6% depreciation against the pound for the six months to June 2009. Due to this movement, the 30 June 2009 aggregate gross value of the portfolio in sterling was £835.9 million. This represents an increase of 10% year on year but a decrease of 17% in the six months to 30 June 2009, after adjusting the June and December 2008 aggregate portfolio value for the disposal of CC5 during the current reporting period. 

As at 30 June 2009, bank borrowings amounted to £303 million (30 June 2008: £253 million; 31 December 2008: £344 million), as the majority of CREO's debt is denominated in US dollars which have fluctuated against sterling extensively within the last 12 months. As at 30 June 2009, gearing was 46% on the investment portfolio and 36% on the total portfolio. 

Cash holdings as at the reporting date equated to £54 million.

The movements outlined above have resulted in a 9% year-on-year uplift in the EPRA NAV per share from £9.74 as at 30 June 2008 to £10.62 as at 30 June 2009, and a decline of 20% for the six month period since 31 December 2008.

A number of important milestones have been achieved during the period or immediately following the half year end:

• Credit approval has been received for a multi-currency five year loan facility equivalent to £26.6 million with the Industrial and Commercial Bank of China (ICBC) in order to refinance the Treasury Building. This is significantly ahead of the facility's original maturity date of March 2010. The new facility represents a £2 million increase over the current loan of EUR18.8 million and CNY97 million (£24.5 million). In addition, the refinance:
• • will release additional liquidity of £1.5 million from existing cash reserves committed to the lender under the current loan agreement that is not required under the new loan
  • significantly reduces the average cost of funds from the current level of 6.9% per annum to 5.8% per annum
  • provides a high level of confidence that further refinancings due in October 2010 and July 2011 can be completed.

• The completion of the June 2009 disposal of CREO's effective 5% minority stake in the City Centre 5 Development, the luxury retail and office development project in Shanghai, to Sociedade de Turismo e Diversoes de Macau SA ('STDM'), for CNY95 million (GBP£8.6 million). This represents an 8.6% premium to the latest published valuation in local currency as at 31 December 2008. The successful execution of the disposal of this minority position at a premium to valuation, particularly in current market conditions, highlights both the strength and quality of the portfolio. 

• Following a review of the investment advisory agreement, between the Company and the Investment Manager, Treasury Holdings China Limited, amendments were made to the terms of the Investment Management agreement, which will eliminate from any future performance fee calculation (i) any increase in the value of CNY against Sterling; and (ii) any increase in net asset value per share arising from the Company repurchasing its shares. These changes are effective from 1 January 2009. The payment of a performance fee remains subject to a high water mark which in future will be determined by reference to the Company's net assets expressed in CNY but the high water mark established on 31 December 2008 will apply both in CNY and Sterling. 

Investment portfolio

As set out in the 2008 Annual Report, the focus for the Company in 2009 is to continue to deliver a strong performance at the asset level. This has been reflected in the relatively strong occupancy of 85% across the portfolio, albeit down from 92% in December 2008, in the face of market-wide increases in vacancy levels. Importantly, the Company has still delivered sustained gross rental income in the period, by driving growth in the average per square metre rental rates through proactive management of the tenant mix across the portfolio.

Whilst the current average occupancy of the CREO portfolio of 85% represents a very strong position in the market, CREO has not been unaffected by an increase in the Shanghai office vacancy rate which now stands at 13.6% as at June 2009 from 3.6% just a year earlier. This has created a highly competitive environment producing a lower rental expectation on behalf of tenants and the re-introduction of tenant incentives in the form of rent-free periods and rebates to assist with tenant fit-out costs, which directly impacts net rent received. 

Despite this highly competitive environment which has been further exacerbated by additional supply entering the market, gross rental income was stable year on year in local currency for the six months to 30 June 2009, whilst increasing by 33% over the first half of 2008 to £15.9 million after converting to Sterling. Given the competitive environment highlighted above and lower occupancy rates across the portfolio, we are particularly pleased with this performance, which has been driven by the successful execution of the Company's strategy. Substantial average rental uplifts of up to 16% have been achieved on a per square metre basis, which highlights the strong focus on tenant mix and the superior asset management offering of the Company. The table below highlights the rental increases achieved on a square metre basis in relation to both new leases and lease renewals. 

(CNY avge/sqm rent)	June	June	% Increase
	2008	2009
City Centre Office	4.57	5.27	15%
City Centre Retail	5.62	6.24	11%
Central Plaza	5.52	6.41	16%
Treasury Building	6.18	6.19	0%

Occupancy in the retail portfolio remains particularly strong at over 97%, as the retail sector has continued to perform strongly. In relation to the office sector, occupancy fell across the portfolio, but most particularly at City Centre, which is down from 99% one year ago to 80% at the end of the current period due primarily to 4 large manufacturing tenants, collectively equating to 10% of the building lettable area, vacating to take up occupancy at newly completed purpose built premises, typically in business parks, to house their combined manufacturing and administrative operations. 

However, in contrast, it is also worth highlighting that letters of intent have been executed with Prudential Insurance and Metlife Insurance for a total of 4,500 square metres under two separate leases in the Central Plaza building, which will bring its office occupancy to over 90% in Q4 of 2009 (80% reported in December 2008).  

Development Portfolio

CREO has also made good progress in relation to its development and refurbishment programmes during the period.

In Central Plaza, the office tower public area renovations were completed in December 2008. Detailed design plans for the interior refurbishment of the retail podium and front and rear entrances are now complete. This design includes new public toilet facilities, reconfiguration of retail units and the necessary upgrading of common corridors and lobbies. Construction works are targeted to begin in November this year. In addition, the proposed façade refurbishment design has successfully attained planning permission and works are now awaiting Construction Permit approval with construction expected to begin later this year. 

The refurbishment of the ground floor lobbies of the City Centre (CC1) office towers and toilet facilities of the retail facility has also been completed. Otherwise, detailed design and tenant discussions are underway as part of the refurbishment and reconfiguration of the retail component of City Centre ahead of its intended amalgamation with the City Centre Extension (CC3) upon its intended completion in 2012. 

The concept masterplan for the City Centre Extension has now been prepared and is being submitted to the District Planning Bureau for final feedback and approval in August 2009, whilst discussions with prospective tenants for this forthcoming retail development have been initiated. 

Negotiations continue with Government regulators regarding the Tangdao Bay masterplan, while the Company is also reviewing a more strategic development-phasing programme in light of market conditions. 

Financial Review

Gross rental income amounted to £15.9 million in the six months to 30 June 2009, representing an increase of 33% over the first half of 2008, emphasising the Company's strategic focus on asset management which has maintained gross rental income, in CNY terms, at a similar level to that of 12 months ago despite the deterioration in the office leasing environment in Shanghai. The substantial increase in GBP terms reflects the 27% appreciation of the CNY over Sterling on an annual basis. Administration expenses amounted to £10 million in the six months to 30 June 2009, compared to £26 million in the same period in the prior year, with the primary difference being a £15 million provision as at June 2008 for the performance fee calculated as at that date due to Treasury Holdings under the management agreement.

The valuation loss on investment property of £28 million taken to the profit and loss account was offset by net financial income driven by the movement of the US dollar against Sterling in the first six months of the year which led to net foreign exchange gains mainly arising from interest-bearing loans denominated in US dollars. This resulted in an after tax loss of £2.4 million for the six months to 30 June 2009. 

The investment property and properties under development portfolio as presented in the accounts fell by 15% since 31 December 2008 to £780 million. The portfolio valuations fell by 6.2% after capitalised costs in local currency since December 2008 and this was exacerbated by the appreciation of sterling over the same time period.

As at 30 June 2009, bank borrowings amounted to £303 million (31 December 2008: £344 million) resulting in gearing of 46% on the investment portfolio and 36% on the total CREO portfolio. 

Board Changes

In June, the Board was pleased to announce the appointment of Richard David to the Board. Richard is Managing Director of Treasury Holdings China Limited and is based in Shanghai. He has worked in the real estate industry since 1981 and been based in China since 1999. He joined Treasury Holdings China Limited in August 2007 having previously been Head of China Real Estate for Macquarie Bank Limited of Australia. I welcome Richard to the Board. The Directors also announced that Mr Robert Tincknell, a non-executive Director of the Company, had resigned from the Board to take up a Directorship with Real Estate Opportunities plc ('REO'). Mr Tincknell was previously based in Shanghai and held the position of Managing Director of Treasury Holdings China Limited until early 2008 when he returned to the UK to take up the position of Managing Director of Treasury Holdings UK, assuming operational responsibility for the UK activities of REO. I would like to thank Robert for his contribution to the Board and to wish him well in his new position.

Outlook

The first half of 2009 has been a significant period for the Company. The Board is pleased with the progress achieved, particularly through its strategic focus on strong asset management in the face of an increasingly competitive environment. Recent advances made in relation to financing are also very encouraging and CREO is well positioned to take advantage of any further improvement in overall market conditions.

  Principal risks and uncertainties

for the remaining six months of the year

The principal risks and uncertainties that face the business for the remainder of the current financial year include the following: economy, financial sector, future cash flows and political and regulatory environment.

Economy: Although the Chinese market has been one of the best performing economies over the last 12 months and strong foundations have been laid to underpin a strong recovery, the international macro environment continues to be very difficult. As a direct consequence of this, lower tenant demand and defaults from international tenants pose a risk to the Group through lower cash inflows in the near term. Failure to re-let investment properties would also have another adverse impact on property valuations. However, CREO has a well diversified tenant base. The weakness in demand may also impact CREO's development assets and agreeing new leases for current developments, including developments near completion. 

Financial sector: As highlighted in the Chairman's statement, many international lenders have withdrawn from the Chinese market in the past 18 months. All of CREO's bank loans are currently with international lenders. In contrast, local and regional banks have increased lending substantially in the period and the Company has developed relationships with a number of local banks in advance of any of its facilities becoming due. Credit approval for a 5 year loan facility to refinance the Treasury Building was received in July 2009, which has given the Company confidence about its ability to refinance its other bank loans due in 2010 and 2011. 

Liquidity: A review of the Group's business activities is set out in the Chairman's statement. In order to satisfy themselves regarding future trading, forecast cash requirements and the projected sources of cash for the business, the Directors have made enquiries about the assumptions used in making the cash flow projections for the coming 12 months. Specifically:

(a)    Existing banking relationships remain strong and we are currently operating 
         within the covenant guidelines

(b)    Although the world property markets are displaying reduced valuations and this 
         is likely to affect the Chinese market, it would require a substantial decline to 
         trigger pressure points with banking covenants or financing arrangements

(c)    Certain non-core assets can be sold to provide greater security regarding the 
         forecast cash position and the assumptions on realizable value are reasonable 

Political & Regulatory Environment: One of the most significant risks to the CREO business relates to the political and regulatory environment in China. Historically the Chinese authorities have used the banking sector through loan quotas to slow economic activity and whilst the reverse is occurring currently, this could change in the future. However, we believe that the Company's low loan to value ratios provide flexibility within its financing structure.

DIRECTORS RESPONSIBILITY STATEMENT

We confirm to the best of our knowledge:

(a)    the condensed set of financial statements has been prepared in accordance 
         with International Accounting Standard 34 'Interim Financial Reporting'; and

(b)    the interim management report includes a fair review of the information 
         required by Sections DTR 4.2.7R and DTR 4.2.8R of the Disclosure and 
         Transparency Rules of the United Kingdom's Financial Services Authority.

By order of the Board

Ray Horney

Chairman

  China Real Estate Opportunities plc

Consolidated statement of financial position

as at 30 June 2009

		30 June 09	31 Dec 08
		£’000	£’000
	Note	(Unaudited)	(Restated)
Assets
Non-current assets
Investment properties	6	663,889	763,558
Properties under development	7	115,761	149,797
Property, plant and equipment		690	731
		780,340	914,086
Other non-current assets
Investment in joint venture	8	32,096	40,482
Deferred tax assets	9	1,415	1,136
		33,511	41,618
Current assets
Financial assets available-for-sale		14,173	22,860
Trade and other receivables		5,880	9,255
Restricted cash		14,269	18,356
Cash and cash equivalents		39,739	66,640
		74,061	117,111
Total assets		887,912	1,072,815
Liabilities
Non-current liabilities
Interest-bearing loans and borrowings	10	278,535	344,080
Deferred tax liabilities	9	125,484	153,158
		404,019	497,238

 

 

  China Real Estate Opportunities plc

Consolidated statement of financial position 

as at 30 June 2009

		30 June 09	31 Dec 08
		£’000	£’000
	Note	(Unaudited)	(Restated)
Current liabilities
Income tax payable		-	214
Trade and other payables		57,772	90,102
Interest-bearing loans and borrowings	10	24,584	-
		82,356	90,316
Total liabilities		486,375	587,554
Net assets		401,537	485,261
Equity
Stated capital		260,953	248,016
Reserves		159,959	253,766
Accumulated losses		(19,375)	(16,521)
Total equity attributable to shareholders
of the Company		401,537	485,261
Net asset value per share:
Basic	12	£8.11	£10.17
Diluted	12	£7.97	£9.94
Diluted EPRA	12	£10.62	£13.24

 

 

  China Real Estate Opportunities plc

Consolidated income statement

for the six months ended 30 June 2009

		2009	2008
		£’000	£’000
	Note	(Unaudited)	(Restated)
Gross rental income		15,876	11,977
Net rental and related income	3	15,152	11,682
Valuation (loss)/ gains on investment properties
and properties under development	6,7	(27,859)	48,546
Other income		497	-
Gain on disposal of investments		2,936	-
Administrative expenses		(9,642)	(26,093)
Net operating (loss)/ profit
before net financing costs		(18,916)	34,135
Financial income		32,677	5,932
Financial expenses		(16,901)	(10,458)
Net financing income / (expense)		15,776	(4,526)
Share of the (loss) / profit of joint venture	8	(3,917)	7,351
(Loss)/ profit before tax		(7,057)	36,960
Income tax credit / (expense)	4	4,646	(14,457)
(Loss)/profit for the period		(2,411)	22,503
Attributable to:
Equity holders of the Company		(2,411)	22,503
(Loss)/ profit for the period		(2,411)	22,503
Earnings per share:
Basic (loss)/ earnings per share	5	(£0.05)	£0.44
Diluted (loss)/ earnings per share	5	N/A	£0.44

 

 

  China Real Estate Opportunities plc

Consolidated statement of comprehensive income

for the six months ended 30 June 2009

		2009	2008
		£’000	£’000
	Note	(Unaudited)	(Restated)
(Loss)/ profit for the period		(2,411)	22,503
Other comprehensive income
Currency translation differences	11(b)	(80,208)	29,319
Revaluation of financial assets available-for-sale		(774)	-
Total comprehensive income for the period		(83,393)	51,822
Attributable to:
Equity holders of the Company		(83,393)	51,822

 

 

China Real Estate Opportunities plc

Consolidated statement of changes in equity

for the six months ended 30 June 2009 

						Retained earnings/ (accumulated losses)
	Stated capital account	Translation reserve	Share option reserve	Fair value reserve	PRC statutory reserve
							Total
	£’000	£’000	£’000	£’000	£’000	£’000	£’000
						(Restated)
Balance at 1 January 2008	250,858	10,888	5,407	-	-	64,156	331,309
Changes in equity for the six months ended 30 June 2008
Total comprehensive income for the period	-	29,319	-	-	-	22,503	51,822
Transfer	-	(316)	-	-	716	(400)	-
Equity settled share-based transactions	-	-	1,624	-	-	-	1,624
Share options exercised	659	-	(586)	-	-	-	73
Balance at 30 June 2008 and 1 July 2008	251,517	39,891	6,445	-	716	86,259	384,828
Changes in equity for the six months ended 31 December 2008
Total comprehensive income for the period	-	192,105	-	383	-	(102,780)	89,708
Issue of new shares	3,521	-	-	-	-	-	3,521
Purchase of own shares	(7,175)	-	-	-	-	-	(7,175)
Equity settled share-based transactions	-	-	14,362	-	-	-	14,362
Share options exercised	153	-	(136)	-	-	-	17
Balance at 31 December 2008
and 1 January 2009	248,016	231,996	20,671	383	716	(16,521)	485,261
Changes in equity for the six months ended 30 June 2009
Total comprehensive income for the period	-	(80,208)	-	(774)	-	(2,411)	(83,393)
Transfer	-	-	-	-	443	(443)	-
Issue of new shares	13,791	-	(13,791)	-	-	-	-
Purchase of own shares	(922)	-	-	-	-	-	(922)
Equity settled share-based transactions	-	-	584	-	-	-	584
Share options exercised	68	-	(61)	-	-	-	7
Balance at 30 June 2009	260,953	151,788	7,403	(391)	1,159	(19,375)	401,537

 

 

 

 

China Real Estate Opportunities plc

Consolidated statement of cash flows

for the six months ended 30 June 2009 

	2009	2008
	£’000	£’000
	(Unaudited)	(Unaudited)
Cash used in operations	(12,831)	(153)
Income tax paid	(694)	(8,253)
Net cash used in operating activities	(13,525)	(8,406)
Net cash from investing activities	12,199	861
Net cash used in financing actives	(21,184)	(8,348)
Net decrease in cash and cash equivalents	(22,510)	(15,893)
Cash and cash equivalents at 1 January	66,640	79,210
Effect of exchange rate fluctuations on cash held	(4,391)	-
Cash and cash equivalents at 30 June	39,739	63,317

 

The effect of exchange rate fluctuations on cash held in June 2009 mainly arose from cash and cash equivalents held by the Group denominated in US Dollars (USD), Chinese Yuan (RMB), Hong Kong Dollars (HKD) and Euro (EUR) as a result of the appreciation of Pound Sterling (GBP) against those currencies.

China Real Estate Opportunities plc

Notes to the Unaudited Interim Financial Report

for the six months ended 30 June 2009

China Real Estate Opportunities plc ('the Company') is domiciled in Jersey. The address of the Company's registered office is Whiteley Chambers, Don Street, St Helier, Jersey. 

The Company's interim financial report for the six months ended 30 June 2009 comprises the Company and its subsidiaries ('the Group'), and the Group's interests in a jointly controlled entity.

1.      Basis of preparation

The interim financial report has been prepared in accordance with International Accounting Standard (IAS) 34, 'Interim financial reporting', promulgated by the International Accounting Standards Board (IASB), and contains condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant for an understanding of the changes in financial position and performance of the Group since the 2008 annual financial statements. The interim financial report does not include all of the information required for a full set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2008. 

The interim financial report has been prepared in accordance with the same accounting policies adopted in the 2008 annual financial statements, except for the accounting policy changes that are expected to be reflected in the 2009 annual financial statements. Details of these changes in accounting policies are set out in Note 2.

The preparation of an interim financial report in conformity with IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year-to-date basis. Actual results may differ from these estimates.

The interim financial report for the six months ended 30 June 2009 is unaudited, but has been reviewed by the Company's audit committee and approved for issue by the board of directors on 24 August 2009. The interim report has been reviewed by KPMG in accordance with International Standard on Review Engagements 2410, 'Review of interim financial information performed by the independent auditor of the entity' issued by the International Federation of Accountants.

The financial information relating to the financial year ended 31 December 2008 included in the interim financial report as previously reported information does not constitute the Company's statutory financial statements for that financial year but is derived from those financial statements. The statutory financial statements for the year ended 31 December 2008 are available from the Company's registered office. The auditors expressed an unqualified opinion on those financial statements in their report dated 18 March 2009.

The interim financial report is presented in pounds sterling, rounded to the nearest thousand. It is prepared on the historical cost basis except for the following assets and liabilities, which are stated at fair value: derivative financial instruments, financial assets available-for-sale, investment properties and properties under development.

As at 30 June 2009, the Group has a net current liability of GBP8.3 million. As at the date of this report, the Group has secured approval from a bank for a five-year multi-currency loan facility equivalent to GBP26.6 million. The facility will refinance existing facilities totaling GBP24.6 million as at 30 June 2009, which expire in March 2010. In addition, the Company's major creditor, Treasury Holdings China Limited (THCL), has agreed not to request that the Company immediately settle the remaining outstanding balance of performance fee for 2008, which totaled GBP22 million as at 30 June 2009, and to accept settlement of this GBP22 million debt over a phased period of more than twelve months when the Company has the financial resources to settle. As a result of the foregoing, the interim financial report has been prepared on a going concern basis.  

2.      Changes in accounting policies 

The IASB has issued one new IFRS, a number of amendments to IFRS and new interpretations that are firstly effective for the current accounting period of the Group and the Company. Of these, the following are relevant to the Group's financial statements:

• IFRS 8, Operating segments
• IAS 1 (revised 2007), Presentation of financial statements
• Improvements to IFRSs (2008)
• Amendments to IFRS 27, Consolidation and separate financial statements-cost of an investment in a subsidiary, jointly controlled entity or associate 
• Amendments to IFRS 7, Financial instruments: Disclosures-improving disclosures about financial instruments
• IAS 23 (revised 2007), Borrowing costs
• Amendments to IFRS 2, Share-based payments-vesting conditions and cancellations
• IFRIC 15, Agreements for the construction of real estate
• IFRIC 16, Hedges of a net investment in a foreign operation

The amendments to IAS 23 and IFRS 2 and interpretations IFRIC 15 and IFRIC 16 have had no material impact on the Group's financial statements as the amendments and interpretations were consistent with policies already adopted by the Group. In addition, the amendments to IFRS 7 do not contain any additional disclosure requirements specifically applicable to the interim financial report. The impact of the remainder of these developments in the interim financial report is as follows:

(a)    Accounting for properties under development

'Improvements to IFRSs (2008)' amends IAS 40 'Investment property'. According to the amendment, investment property which is under construction will be carried at fair value at the earlier of when the fair value first becomes reliably measurable and the date of completion of the property. Any gain or loss will be recognised in profit or loss, consistent with the policy adopted for all other investment properties carried at fair value. This amendment resulted in changes in the Group's accounting policies regarding the accounting treatment for properties under development. Previously, such properties were carried at fair value, with valuation gains and losses recorded in the revaluation reserve in the equity and the profit and loss respectively. The changes in accounting policy are applied when the fair value of the properties under development first becomes reliably measurable, which is from the first period they are presented in the financial statements. The corresponding figures for the previous period or period-end have been restated. The change in accounting policy had the following impact on the financial statements:

	2009	2008
	£’000	£’000
Income statement for the six months ended 30 June
(Decrease)/increase of valuation gains
on investment properties	(18,417)	13,931
(Decrease)/increase of share of profit from joint venture	(3,085)	7,988
Decrease/(increase) of income tax expenses	4,605	(3,483)
	(16,897)	18,436
Statement of comprehensive income
for the six months ended 30 June
Increase/(decrease) of revaluation reserve
of properties under development	18,417	(13,931)
(Decrease)/increase on revaluation reserve for tax effect arising from revaluation of properties under development	(4,605)	3,483
Decrease/(increase) of revaluation reserve in property
in joint venture net of tax	3,085	(7,988)
	16,897	(18,436)
Statement of financial position at 30 June 2009/ 31 December 2008
Decrease of reserve	(25,768)	(42,665)
Increase of retained earnings	25,768	42,665
(Decrease)/increase of basic earnings per share	(0.35)	0.36
Increase of dilutive earnings per share	N/A	0.36
Increase of EPRA earnings per share	-	-

 

(b)    Determination and presentation of operating segments

IFRS 8 ' Operating Segments' requires segment disclosure to be based on the way that the Group's chief operating decision maker regards and manages the Group, with the amounts reported for each reportable segment being the measures reported to the Group's chief operating decision maker for the purposes of assessing segment performance and making decisions about operating matters. This contrasts with the presentation of segment information in prior years, which was based on a disaggregation of the Group's financial statements into segments based on related services and on geographical areas. The adoption of IFRS 8 has resulted in the presentation of segment information in a manner that is more consistent with internal reporting provided to the Group's most senior executive management, and has resulted in additional reportable segments being identified and presented segment information in accordance with IFRS 8. Additional explanation has been included in the interim financial report which explains the basis of preparation of the information. Corresponding amounts have also been provided on a basis consistent with the revised segment information.

(c)    Presentation of the financial statements 

As a result of the adoption of IAS 1 'Presentation of Financial Statements' (2007), details of changes in equity during the period arising from transactions with equity shareholders in their capacity as such have been presented separately from all other income and expenses in a revised consolidated statement of changes in equity. All other items of income and expenses are presented in the consolidated income statement if they are recognised as part of profit or loss for the period, or otherwise in a new primary statement, the consolidated statement of comprehensive income. The new format for the consolidated statement of comprehensive income and consolidated statement of changes in equity has been adopted in this interim financial report and corresponding amounts have been restated to conform to the new presentation. This change in presentation has no effect on reported profit or loss, total income and expense or net assets for period presented.

(d)    Accounting for dividends from subsidiaries, associates and jointly controlled entities

The amendments to IAS 27 have removed the requirement that dividends out of pre-acquisition profits should be recognised as a reduction in the carrying amount of the investment in the investee, rather than as income. As a result, as from 1 January 2009 all dividends receivable from subsidiaries, associates and jointly controlled entities, whether out of pre- or post-acquisition profits, will be recognised in the Company's profit or loss and the carrying amount of the investment in the investee will not be reduced unless that carrying amount is assessed to be impaired as a result of the investee declaring the dividend. In such cases, in addition to recognising dividend income in profit or loss, the Company recognises an impairment loss. In accordance with the transitional provisions in the amendment, this new policy will be applied prospectively to any dividends receivable in the current of future periods and previous periods have not been restated.

 3.    Segment reporting

The Group's portfolio consists of high-quality, strategically located properties in the People's Republic of China (PRC). On first-time adoption of IFRS 8, operating segments, and in conformity with the way information is reported internally to the Group's most senior executive management for the purpose of resource allocation and performance assessment, the Group has identified the following two reportable segments:

1)    Investment properties: This segment owns office and retail properties which generate recurring rental income and are able to gain capital appreciation in the long term. Currently, the Group's investment property portfolio is located entirely in Shanghai.

2)    Properties under development: This segment includes mixed-use office and retail facilities, which upon completion will strengthen the current stabilised portfolio with future rental income as well as capital appreciation. Currently, the Group's properties under development are located in Shanghai and Beijing. 

(a)    Segment results, assets and liabilities

 

	Investment properties		Properties under development		Total
	2009	2008	2009	2008	2009	2008
	£’000	£’000	£’000	£’000	£’000	£’000
Reportable segment net rental and related income
	15,152	11,682	-	-	15,152	11,682
Reportable segment valuation (loss)/ gain	(9,434)	34,615	(18,425)	13,931	(27,859)	48,546
Reportable segment (loss)/profit	(4,416)	43,872	(23,041)	13,931	(27,457)	57,803
Reportable segment assets	705,128	816,850	119,205	154,115	824,333	970,965
Reportable segment liabilities	305,691	357,653	14,613	29,182	320,304	386,835

 

The Group's senior executive management monitors the results, assets and liabilities attributable to each reportable segment on the following basis:

Segment assets include all tangible, intangible and current assets. Segment liabilities include trade creditors, accruals, bank borrowings and deferred tax liabilities.

Revenue and expenses are allocated to the reportable segments with reference to sales generated by segments and the expenses incurred by those segments. 

Segment profit is profit before tax of those segments

(b)    Reconciliation of reportable segment revenues, profit or loss, assets and liabilities

	Six months ended 30 June
Revenue	2009	2008
	£’000	£’000
Reportable segment net revenue	15,152	11,682
Consolidation net revenue	15,152	11,682
	Six months ended 30 June
Profit	2009	2008
	£’000	£’000
Reportable segment (loss)/ profit	(27,457)	57,803
Share of (loss)/ profit of joint ventures	(3,917)	7,351
Management fee	(5,111)	(20,750)
Exchange gains/ (losses)	31,065	(758)
Elimination of intercompany loan interests	3,856	1,773
Unallocated head office and corporate expenses	(5,493)	(8,459)
Consolidated (loss)/ profit before taxation	(7,057)	36,960
	At 30 June	At 31 December
Assets	2009	2008
	£’000	£’000
Reportable segment assets	824,332	970,965
Investment in joint venture	32,096	40,482
Financial assets available-for-sale	7,030	14,741
Unallocated head office and corporate assets	24,454	46,627
Consolidated total assets	887,912	1,072,815
	At 30 June	At 31 December
Liabilities	2009	2008
	£’000	£’000
Reportable segment liabilities	320,304	386,835
Elimination on intercompany loans	(66,883)	(81,027)
Offshore bank loans	201,382	228,443
Financial derivatives	10,995	15,539
Unallocated head office and corporate liabilities	20,577	37,764
Consolidated total liabilities	486,375	587,554

4.    Income tax (credit) / expense 

	Six months ended 30 June
	2009	2008
	£’000	£’000
Current tax - PRC Corporate Income Tax	20	658
Current tax – Hong Kong Withholding Tax	459	193
Deferred taxation	(5,125)	13,606
Total	(4,646)	14,457

In accordance with a change in the Income Tax (Jersey) Law 1961, the income tax rate for companies in Jersey was reduced from 20 percent to 0 percent with effect from 3 June 2008. Exempt company status for all new companies was abolished. The Company's 2008 exempt company status remained in place until 31 December 2008. On 1 January 2009 the Company moved to a 0 percent rate of income tax and accordingly income, other than Jersey source income (excluding bank deposit interest), is taxed at 0 percent.

With effect from 6 May 2008, a 3 percent Goods and Services Tax (GST) was introduced under the Goods and Services Tax (Jersey) Law 2007. The Company may apply for an exemption under the Goods and Services Tax (International Service Entities) (Jersey) Regulations 2008 on payment of an annual fee of GBP100. The Company has been granted international service entity status for the year 2009.

Pursuant to the PRC tax rules and regulations, the Group's PRC subsidiaries are subject to PRC income tax at a rate of 25 percent.

5.    Earnings per share

(a)      Basic earnings per share 

The calculation of the basic earnings per share is based on the profit attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding during the period ended 30 June 2009.  

(b)      Diluted earnings per share 

The diluted earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding and, when dilutive, adjusted for the effect of all potentially dilutive share options.

(c)      EPRA diluted earnings per share 

The EPRA diluted earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding and is adjusted for the effect of all potentially dilutive share options and other performance adjusting factors recommended by the European Public Real Estate Association (EPRA). The EPRA earnings exclude investment properties and properties under development revaluations, movements in the fair value of financial instruments and their related tax consequences.

The detailed calculation of the earnings per share is listed below:  

	Six months ended 30 June
	2009	2008
	£’000	£’000
(Loss)/ profit attributable to ordinary shareholders	(2,411)	22,503
i)Basic earnings per share
Weighted average number of ordinary shares for the period (basic)	48,253,101	50,720,919
Basic (loss)/ earnings per share	(0.05)	0.44
ii)Diluted earnings per share
Weighted average number of ordinary shares (basic)	N/A	50,720,919
Effect of share options in issue	N/A	752,593
Weighted average number of ordinary shares for the period (diluted)	N/A	51,473,512
Diluted earnings per share	N/A	0.44
iii)Diluted EPRA earnings per share
(Loss)/ profit attributable to ordinary
shareholders (diluted)	(2,411)	22,503
Revaluation movement on investment properties and properties under development	27,859	(48,546)
Revaluation of property held in joint ventures, net of tax	3,085	(7,988)
Movement in fair value of financial    instruments	(383)	(969)
Deferred tax	(4,582)	13,531
	23,568	(21,469)
Weighted average number of ordinary shares for the period (diluted)	48,748,605	51,473,512
Diluted EPRA earnings/ (loss) per share	0.48	(0.42)

6.    Investment properties

	2009	2008
	£’000	£’000
Balance at 1 January	763,558	497,133
Additions	599	184
Foreign currency adjustments	(90,834)	38,072
Fair value adjustments	(9,434)	34,615
Balance at 30 June	663,889	570,004

At 30 June 2009 the investment properties and properties under development (Note 7) were revalued at fair value. The valuations were undertaken by an independent international valuation firm, CB Richard Ellis, and were carried out in compliance with the Royal Institute of Chartered Surveyors Practice Standards. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations are prepared by considering the aggregate of the net annual rents receivable from the properties and, where relevant, associated costs. The rental yields applied in the valuations of the office and retail properties in the PRC were estimated to be in the range of 5.75-6.25 percent per annum.

The revaluation loss of GBP9 million has been taken to the consolidated income statement for the period.

All the investment properties are rented out under operating leases.

As at 30 June 2009 investment properties with a total carrying value of GBP664 million were pledged as collateral for the Group's borrowings (Note 10).

7.    Properties under development

	2009	2008
	£’000	£’000
Balance at 1 January	149,797	87,280
Additions	585	3,342
Foreign currency adjustments	(16,196)	6,929
Fair value adjustments	(18,425)	13,931
Balance at 30 June	115,761	111,482

At 30 June 2009 the properties under development were revalued at fair value. The valuations were undertaken by the independent international valuation firm CB Richard Ellis (Note 6).

With the adoption of the amendment to IAS 40 'Investment property' described in Note 2 (a), the changes in the fair value of the properties under development were taken to profit or loss.  

8.    Investment in joint venture

Joint venture	Country	Ownership
		2009
		%
Qingdao Shangshi CREO Real
Estate Company Limited	People’s Republic of China	50

Movement in investment in joint venture

	2009	2008
	£’000	£’000
		(Restated)
Balance at 1 January	40,482	21,504
Share of (loss) / profit of joint venture	(3,917)	7,351
Foreign currency movement	(4,469)	1,775
Balance at 30 June	32,096	30,630

The property of the joint venture was revalued at fair value at 30 June 2009. The valuations were undertaken by independent international valuation firm CB Richard Ellis. With the adoption of the amendment to IAS 40 'Investment property' described in Note 2 (a), the changes in the fair value of the properties under development held by the joint venture were taken to profit or loss.  

9.    Deferred tax assets and liabilities 

	Assets	Liabilities
	30 Jun 09	30 Jun 09
	£’000	£’000
Pre-operating expenses	50	-
Fair value change in investment properties and properties under development	203	125,484
Fair value change in financial derivatives	303	-
Deductible tax loss	859	-
Deferred tax assets/ liabilities	1,415	125,484

The PRC income tax rate of 25 percent would be charged if the Group decided to realise its investment properties and properties under development at the period end valuations through the sale of the underlying assets after the period end. Apart from the deferred tax liability arising on revaluation gains, there are two deferred tax assets that relate to derivatives and losses carried forward within the individual PRC entities.

Deferred tax liabilities

	2009	2008
	£’000	£’000
Balance at 1 January	153,158	92,835
Realisation/ recognition of deferred tax liabilities	(4,663)	13,507
Foreign currency adjustments	(23,011)	7,377
Balance at 30 June	125,484	113,719

Deferred tax assets

	2009	2008
	£’000	£’000
Balance at 1 January	1,136	254
Realisation / recognition of deferred tax assets	462	48
Foreign currency adjustments	(183)	1
Balance at 30 June	1,415	303

 10.    Interest-bearing loans and borrowings

No loans were repaid or refinanced in the six-month period ended 30 June 2009. The maturity dates of the existing loans remain unchanged. Bank loans of GBP24.6 million will mature in March 2010.

The secured bank loans borrowed within the PRC as at 30 June 2009 were secured by the Group's investment properties with a total carrying amount of GBP664 million (Note 6). The secured bank loans borrowed outside of the PRC as at 30 June 2009 were secured by the equity interests of certain subsidiaries of the Company. 

11.    Capital and reserves

        a)    Stated capital account   

               The authorised share capital of the Company is unlimited. The issued share capital of the 
               Company at 30 June 2009 was 49,536,004 ordinary shares of no par value. 

        Ordinary share capital in thousands of shares

Shares as at 31 December 2008	47,703
Share buyback	(440)
Options exercised	9
Issue of new shares	2,264
On issue at 30 June 2009 – fully paid	49,536

         (i)    Purchase of own shares 

      During the interim period, the Company repurchased its own shares on The Alternative 
      Investment Market of the London Stock Exchange as follows: 

Month/year	Number of shares	Price paid per	Aggregate price
	repurchased	share	paid
		£	£’000
January 2009	100,000	2.05	205
January 2009	340,000	2.11	717
			922

        (ii)    Options exercised

      There were 8,800 options exercised in the six months period ended 30 June 2009 at an exercise 
      price of GBP0.85. 

       (iii)    Issue of new shares

      In April 2009, 2,264,166 new ordinary shares of no par value were issued to THCL, being the equity 
      component of the performance fee for the year ended 31 December 2008.

       (b)    Translation reserve

	Six months ended 30 June
	2009	2008
	£’000	£’000
Change of translation reserve during the period	(70,431)	29,319
Realisation adjustments for amounts transferred to profit or loss:
- liquidation of subsidiaries	(9,777)	-
Net movement in the translation reserve
during the period recognised in other
comprehensive income	(80,208)	29,319

12.    Net asset value per share

The net asset value (NAV) per share as at 30 June 2009 and 31 December 2008 were as follows: 

	30 Jun 09	31 Dec 08
	£‘000	£‘000
Net assets attributable to ordinary shareholders	401,537	485,261
Proceeds from exercise of share options	10,066	10,615
Adjusted net assets	411,603	495,876
i)Basic net asset value per share
Number of ordinary shares in issue	49,536,004	47,703,038
Basic net asset value per share	£8.11	£10.17
ii)Diluted net asset value per share
Number of ordinary shares in issue	49,536,004	47,703,038
Effect of share options in issue	2,087,000	2,177,800
Number of ordinary shares in issue (diluted)	51,623,004	49,880,838
Diluted net asset value per share	£7.97	£9.94
iii)Diluted EPRA net asset value per share
Adjusted net assets as above (diluted)	411,603	495,876
Fair value of financial instruments	11,565	12,120
Deferred tax	124,978	152,501
Diluted EPRA net assets	548,146	660,497
Number of ordinary shares in issue (diluted)	51,623,004	49,880,838
Diluted EPRA net asset value per share	£10.62	£13.24

The dilution effect for June 2009 above assumes 775,000 options at the strike price of GBP0.85, 847,000 options at a strike price of GBP7.56, 30,000 options at a strike price of GBP8.065 and 435,000 options at a strike price of GBP6.35 are exercised.

The EPRA NAV per share excludes the mark to market of financial instruments which are economically effective hedges and deferred taxation on revaluations on properties and properties under development and financial instruments, and is calculated on a fully diluted basis.  

13.    Capital commitments

Construction and refurbishment

The Group entered into contracts to develop or refurbish the properties under development and the investment properties respectively. At 30 June 2009, the commitment under those contacts amounted to GBP2.7 million (at 31 December 2008: GBP3.0 million). 

Qingdao Shangshi CREO Real Estate Company Limited 

In connection with its joint venture company, Qingdao Shangshi CREO Real Estate Company Limited, the Company has agreed together with the joint venture partner to increase the total share capital from RMB500 million to RMB1.1 billion.  

14.    Related parties

In accordance with agreements with THCL and Treasury Holdings detailed in the 2007 Annual Financial Statements, the Company incurred/accrued the following fees in the six months ended 30 June 2009: 

(a)    Investment advisory agreement with THCL

In June 2009, the following amendments to the terms of that agreement have been agreed. These changes will eliminate from any future performance fee calculation (i) any increase or decrease in the value of RMB against GBP; and (ii) any increase in net asset value per share arising from the Company repurchasing its shares. For the purposes of calculating any future entitlement to performance fees: 

i)    the European Public Real Estate Association (EPRA) net asset value at the end of each financial period will be expressed in RMB. The payment of a performance fee remains subject to a high water mark which will initially be determined by reference to the Company's net assets as at 31 December 2008 expressed in RMB at the exchange rate prevailing on that date

ii)    if the Company repurchases its own shares during any relevant period, the EPRA net asset value per share at the end of that period will be adjusted to eliminate the impact of the share repurchases on net asset value per share. 

At the same time as agreeing the above, the board of directors has taken the opportunity to engage THCL, as investment manager, to the contract for a further two years so that, except in certain specified circumstances, the earliest date on which notice may be given will be July 2012. 

According to the revised investment advisory agreement, for the six months ended 30 June 2009, the following services fees were incurred:  

i)    Development management fees of GBP1.2 million; and 

ii)    Investment management fees of GBP0.4 million. 

There is no performance fee incurred for the six-month period ended 30 June 2009. 

(b)    Property management agreement with Treasury Holdings (Shanghai) Property 
        Management Co., Limited

For the six months ended 30 June 2009, GBP3.4 million was incurred in property management fees. 

(c)    Accounting services agreement with Treasury Holdings

Fees of GBP100,000 in accounting services fees were incurred during the period and are payable to Treasury Holdings in accordance with the accounting services agreement dated 25 June 2007 pursuant to which Treasury Holdings provides certain accounting administrative services to the Group for an annual fee of GBP200,000 per annum. 

15.    Comparative figures 

As a result of the application of IAS 1 'Presentation of Financial Statements' (2007), and IFRS 8 'Operating segments', certain comparative figures have been adjusted to confirm to the current period's presentation and to provide comparative amounts in respect of items disclosed for the first time in 2009. Further details of these developments are disclosed in Note 2.

 

END

 

 

IR SEIFLLSUSESA