Wilmar International has entered into a master JV agreement with Kerry Properties Ltd and Shangri-la Asia for real estate development, operation, sale, leasing, property management and hotel development, operation and management in Bayuquan, Yingkou City in China’s Liaoning Province. The JV parties have successfully bid for three sites totaling 200k square metres in Bayuguan for USD36m. The total project cost is estimated at USD386m, of which Wilmar’s portion is USD134m by virtue of the group’s 35% stake in the venture.
We are negative on Wilmar’s entry into the property market. The investment amount of USD134m is small relative to the size of Wilmar’s balance sheet, which boasts of shareholders funds of USD11.5bn, and we have no doubt about the eventual profitability of the project given Kerry Properties and Shangri-la’s knowledge of the property market. Nevertheless, the entry into the real estate business represents Wilmar’s first ever deviation from its core agribusiness. In the past several years, all of Wilmar’s expansions have been in related businesses such as sugar, rice, flour and mineral water, which leverage on its vast distribution network. We fear this foray into property could mark the start of Wilmar’s loss of business focus and corporate discipline, and do not think that this venture will be well received by the market. We are maintaining our Buy call, however, as we view Wilmar as being inexpensive at 13.5x CY11 earnings.