It is with great pleasure that I present to you the results of First Sponsor Group Limited for FY2016. The Group has continued to grow and build upon its strengths to achieve yet another record-breaking year with a net profit of S$113.1 million. In conjunction with the exceptional performance, the Board is recommending a final tax-exempt (one-tier) ordinary dividend of 1.00 Singapore cent per share, adding up to a total dividend for FY2016 of 2.00 Singapore cents per share which represents a 17.6% increase from FY2015. The Board aims to maintain the 2.00 cents per share total dividend payout in FY2016 and will work towards a steady growth when appropriate, subject to the successful implementation of the Group's business strategy and prevailing market conditions.
Global turbulence over the past year has brought about much economic volatility and uncertainty to the market conditions in the PRC. In view of this, the Group has continued its expansion into the Netherlands to further diversify our business risk. Our FY2016 financial performance reflects the Group's financial resilience and our ability to navigate through challenging times. The Group is well positioned to capitalise on the right opportunities as and when they arise. We look forward to another promising year of sustained growth and profitability.
The Group has achieved another record-breaking year with revenue and net profit of S$189.7 million (FY2015: S$215.0 million) and S$113.1 million (FY2015: S$67.4 million) respectively. This outstanding performance is largely due to the gain on dilution of the Group's interest in the Star of East River Project in Dongguan. The capital gain realised from this partial divestment has enabled the Group to recoup its entire cash capital previously invested with a surplus cash return of approximately S$23.2 million and a remaining 30% equity stake in the project. The Group will work closely with Vanke to realise the full potential of this project for the benefit of all investors.
The Group ended FY2016 with a strong balance sheet as reflected by a gearing ratio of 0.08 times. Total shareholders' funds increased to S$1.0 billion, a 13.7% annualised compounded growth since the Company's initial public offering in July 2014. In view of the recent RMB exchange rate volatility, we have assessed the use of hedging instruments to manage our RMB exposure. However, the cost of entering into such hedging arrangements is currently fairly expensive. We will actively monitor our foreign exchange exposure and take appropriate actions when necessary. As of 31 December 2016, the Group has a cumulative translation gain of S$53.9 million.
The property development segment saw a slight decline in revenue of approximately 2.0% to S$162.1 million in FY2016. Gross profit decreased by approximately 55.0% to S$20.8 million in FY2016. The significant reduction in gross profit is due mainly to a one-off non-cash cost of S$18.8 million caused by the re-allocation of all costs relating to car parks of the Millennium Waterfront Project to their respective residential and commercial units.
All the non-core Dutch properties bought as part of a portfolio acquisition in November 2015 have been disposed in the course of FY2016 achieving an attributable gain of S$11.5 million.
Millennium Waterfront Project, Chengdu, PRC
Despite the various measures to cool the PRC property market, the Millennium Waterfront Project recorded healthy sales performance in FY2016 with 1,486 residential units sold, an almost 50% increase over the 994 units sold in FY2015. This was achieved on a gross sales value of RMB1,125.6 million in FY2016 compared to RMB515.6 million in FY2015. As at the date of this report, the Group has sold a further 879 residential units, with approximately 1,154 unsold residential units in the Millennium Waterfront Project.
Property development profit recognition in FY2016 was largely driven by the continuing handover of residential and commercial units in Plot C. The development of Plot A is progressing as scheduled and handover is expected to commence from March 2017. Plot A will be the primary profit driver on the property development front in FY2017.
"The Terraced Tower", Boompjes 55 and 57 Project, Rotterdam, The Netherlands
Through its 33% owned FSMC, the Group has secured the sale for 75% of the residential units by signing a sales and purchase agreement with CBRE Global Investors. In addition, FSMC retains the right to sell the remaining 25% to individuals at a higher price within twelve months from delivery of the residential units, failing which CBRE Global Investors has agreed to purchase the remaining unsold units at a pre-determined price. With this, the project is substantially de-risked with financing secured via the forward funding sale. Construction is expected to commence on schedule in FY2017 and delivery is expected to be in FY2019. This project marks the Group's first foray into property development in the Netherlands.
Dreeftoren and Oliphant Redevelopment Projects, Amsterdam Southeast, The Netherlands
During FY2016, the Group acquired two commercial office towers located in Amsterdam Southeast, namely the Dreeftoren and Oliphant. Both properties are in close proximity to each other and have been earmarked for redevelopment through a capital expenditure program to maximise rental potential. Furthermore, the Group is exploring the possibility of adding residential apartments for sale on both sites. Amsterdam Southeast is ranked the number 2 office location in the Netherlands for 2016 by Jones Lang LaSalle. These development projects, together with the nearby hotels at the Arena Towers acquired in 2015, would build up a strong business presence for the Group in Amsterdam Southeast.
The Group's property holding business segment continues to show improvement and growth in FY2016 mainly arising from the acquisitions made in the Netherlands. Revenue has grown by 34.0% to S$18.9 million in FY2016. This improvement was attributable to a full year contribution in FY2016 from Zuiderhof I and Arena Towers, which were acquired in February 2015 and June 2015 respectively.
On the PRC property holding business front, the Crowne Plaza Chengdu Wenjiang Hotel and Holiday Inn Express Chengdu Wenjiang Hotspring Hotel had their soft opening on 28 December 2016. These hotels, which are part of the Millennium Waterfront Project, have an aggregate of 608 rooms and are significant additions to the property holding business of the Group.
The Dutch property portfolio of the Group is geographically spread across the Netherlands in key cities including Amsterdam, Rotterdam and The Hague. The Dutch leasing properties, with a lettable floor area of 92,293 sq m, occupancy of 90% and a weighted average lease term of approximately 9.0 years as at 31 December 2016, have a net property income in excess of S$24.0 million per annum.
The PRC property holding portfolio for FY2016 has grown substantially with the addition of the two hotels in Wenjiang. The Crowne Plaza Chengdu Wenjiang Hotel features a large banqueting function room which can seat up to 1,000 people. Since its soft opening, many corporates and individuals have held events such as annual dinners and weddings banquets in the hotel. The Holiday Inn Express Chengdu Wenjiang Hotspring Hotel is a limited service hotel that caters to the budget conscious travellers. The hot spring facilities are set to commence operations in late 2017 which will further complement the hotels.
While M Hotel Chengdu has seen continued improvement in its performance, due to the hotel oversupply situation in Chengdu, the Group has made an impairment charge of S$10.3 million in FY2016. The Group will further evaluate its options with regard to this property in light of the changing market conditions so as to maximise shareholders' value.
The Group started FY2016 with challenges from defaulted loans amounting to RMB640.0 million in aggregate. The non-recognition of interest income from such defaulted loans until the successful foreclosure of the underlying loan collaterals has resulted in a 75.4% decrease in revenue contribution from the property financing business segment to S$8.7 million in FY2016. In spite of these challenges, the Group has managed to obtain positive court rulings for all the problematic loans. There is currently only one defaulted loan which is still subject to appeal by the Group. The Group is also pleased to report that it has recovered RMB89.5 million of loan principal and associated interest income in March 2017 with the successful auctions of the mortgaged properties relating to a RMB70.0 million defaulted loan in late 2016. As the Group holds the first legal mortgage to the properties pledged as loan collaterals, coupled with the fact that the loan-to-value ratios are relatively conservative, we remain confident of the full recovery of our defaulted loan principals and the associated default interest. As at 31 December 2016, cumulative unrecognised interest in respect of the loans in default amounted to S$26.7 million.
The Group has engaged in several corporate social responsibility activities throughout the year. The efforts this year were predominantly spearheaded by the team from M Hotel Chengdu organising a "charity sale" for the Children Cancer society. They also organised a "New or Used" clothes donation campaign which saw staff donating over 800 pieces of clothes and visited the "Home for the Aged" at Fangcao Community where the Group has also donated some amenities.
2017 is likely to be another challenging year for businesses in general. Nonetheless, the Group remains ready to capture any good opportunities with its robust balance sheet. The Group will also continue to be on the lookout for growth opportunities in the Netherlands, PRC and other regions.
We owe our success to all our stakeholders and would like to thank them for working alongside with us to ride through a challenging year. We wish to express our utmost appreciation to our shareholders, customers and business partners for their strong and continuous support. On the same note, we also want to acknowledge the dedication and hard work of the Board members, management team and staff in the past year. I would also like to personally thank Mr Aloysius Lee and Mr Basil Hwang who have just retired from the Board recently. They have provided insightful knowledge and added tremendous value during their tenure. Furthermore, on behalf of the Board, I would also like to welcome Mr Tan Kian Seng and Mr Desmond Wee on board. Together, we look forward to another promising year of sustained growth and steady performance.
Ho Han Leong Calvin
10 March 2017