17 Mar 2009 07:00
17 March 2009
Speymill Macau Property Company plc
("Speymill Macau" or the "Company")
Annual Results for the Year Ended 31 December 2008
Speymill Macau Property Company plc (MCAU.L), the Macau focused property investment company listed on AIM, announces preliminary results for the year ended 31 December 2008.
Highlights of the year
| Balance sheet | 31 Dec 2008 | 31 Dec 2007 |
| Net assets (US$’000) | 127,448 | 183,593 |
| Net assets per share (US$) | 1.09 | 1.41 |
| Headline* net assets (US$’000) | 133,899 | 189,212 |
| Headline* net assets per share (US$) | 1.15 | 1.46 |
| Total assets (US$’000) | 328,498 | 209,049 |
| Property assets (US$’000) | 288,455 | 114,584 |
*Excluding provision for deferred taxation and accrual of Manager's performance fees.
| Income statement | 31 Dec 2008 | 31 Dec 2007 |
| Gross rental income | 2,550 | - |
| Valuation (losses)/gains (US$’000) | (43,348) | 46,912 |
| (Loss)/profit after tax (US$’000) | (46,327) | 40,675 |
| Basic (losses)/earnings per share (US cents per share) | (37.45) | 37.45 |
| Diluted (losses)/earnings per share (US cents per share) | (37.45) | 37.31 |
Business highlights
Realisation of proceeds equivalent to US$79m from the sale of the Company's purchase rights in Lot U resulting in a gross return of 125% on invested capital
The Company has taken advantage of its diversified strategy to invest in more stable sectors including the more affordable end of the residential market and the higher end commercial property sector
The net placing proceeds have now been fully invested following the acquisition of properties amounting to US$290m during the year, including:
The AIA Tower is being actively managed. Since acquisition seven leases have been reviewed or renewed and two new leases have been signed at an average premium of 28% to previous rent levels
Total property valuation, as at 31 December 2008, was US$288.5m (HK$2.2bn) representing a value of US$396 (HK$3,071) per sq. ft. The valuation gives an implied leverage of 65%, including future payables on 'Lorcha'
The Company's debt structure has exposure to only one financial covenant on the AIA Tower financing which currently shows a loan to value of 53%, comfortably within the covenant
All mortgage debt is structured non-recourse to the Company with no cross-default provisions or covenants. There are no further financial covenants on the remaining debt
Cash and cash equivalents of US$30.5m (US$0.26 per share) as at 31 December 2008, representing sufficient liquidity to meet cash demands until at least June 2010
The Company is adopting a defensive strategy in order to preserve capital and ensure a comfortable level of liquidity
| Speymill Property Group (Far East) Limited (Adviser) | Speymill Property Group Limited (Manager) |
| Thomas Sipos | Nigel Caine, CFO Funds |
| +852 2514 6104 | +44 1624 640 860 |
| Smith & Williamson Corporate Finance Limited (Nomad) | Fairfax I.S. PLC (Brokers) |
| Azhic Basirov | James King |
| Siobhan Sergeant | Andrew Cox |
| +44 20 7131 4000 | +44 20 7598 5368 |
| Tavistock Communications Limited | |
| (Media & Investor Relations) | |
| Jeremy Carey | |
| Simon Hudson | |
| Gemma Bradley | |
| +44 20 7920 3150 |
Chairman's statement
It is my pleasure to report the results of Speymill Macau Property Company plc for the year ended 31 December 2008. During the year the Company continued to make significant progress in realising its strategy of investing in real estate opportunities in Macau with the potential to deliver attractive property level returns. It has also benefitted from receiving the proceeds from the sale of one of its major investments, known as Lot U, the gain on which was recognised in the previous accounting period, and has invested in five further properties during the year, with the result that the proceeds raised by the Company to date are now fully invested.
Clearly, the economic environment has changed materially since our interim results were published in September 2008. The continued deterioration in primary capital markets caused by the global debt crisis has had a severe impact on the wider economy, leading to downward pressures on asset values. This is reflected in a reduction in the asset valuation of 13% during the year.
In response to the current economic climate the Company is adopting a defensive strategy in order to preserve capital and ensure a prudent level of liquidity. We believe we have retained a strong enough cash position that more than meets our liquidity needs until at least June 2010.
Our debt structure is carefully monitored and the Company has exposure to only one financial covenant which is on the financing obtained for the purchase of the AIA Tower. This asset shows a loan to value of 53%, as at 31 December 2008, that is comfortably within the covenant levels. All mortgage debt is structured non-recourse to the Company with no cross-default provisions. There are no further financial covenants on the remaining debt. The Company also has no exposure to any hedging instruments or other derivatives.
Results
Our results must be viewed in the context of the Company's recent investment programme. Following the realisation of Lot U during February 2008 and the withdrawal, at the end of the 2007 financial year, from the forward funding arrangement known as Bel Lago, the 2008 financial year has been one of intense investment activity for the Company. The inevitable consequence of the timing of these investments is that they have not yet translated into financial performance.
As at 31 December 2008, the Company's NAV per share was US$1.09, down 22.7% year on year (31 December 2007: US$1.41). The principal driver for the reduction was the property valuation loss recognised in the year, offset by the positive effect of the share buy-back. The impact on NAV of the valuation decrease is greater than the fall in valuation due to the impact of gearing.
The Company made a net loss on its investment property portfolio of US$43.3m (31 December 2007: net gain US$46.9m). The losses have been incurred across the portfolio but the quality of the investments remains sound and we are confident that the inherent value of the assets will be reflected in the medium to long-term. The Company's loss after tax was US$46.3m (31 December 2007: profit of US$40.7m), representing a loss per share of 37.5 cents (31 December 2007: profit of 37.5 cents).
Investment update
During the year the Company was delighted to announce its acquisition of the AIA Tower in a deal worth US$153.8m (HK$1.2bn) that provides exposure to Macau's commercial office market and takes advantage of the more resilient demand for grade-A office space. This represents a very attractive investment opportunity for the Company in a landmark property.
During the year, the Company also invested US$41.2m (HK$324m) in relation to a forward funding contract that requires an aggregate investment of US$133.4m (HK$1.04bn), including acquisition costs, to acquire 259 units in a high-end residential waterfront development, known as "Lorcha". It also announced that, following the signing of a joint venture agreement with a Macau-based boutique property advisory and asset management firm, it would be taking the majority stake in a newly formed subsidiary investment vehicle that will focus on the repositioning of existing properties at the more affordable end of the Macau residential market. The Company's capital commitment under the joint venture agreement is US$8.4m (HK$65.1m). The venture has already invested in three properties costing US$4.5m (HK$34.9m), excluding acquisition costs, during the year.
Share price
As mentioned in my previous reports, it is unfortunate that, given the current turmoil in primary capital markets caused by the global debt crisis, the Company's share price does not adequately reflect its current NAV nor its growth potential. Companies with a connection to the property market have been badly affected by market sentiment. For Speymill Macau, as for certain other well-performing companies operating in the property sector, the market sentiment appears to be particularly unjustified given that the Company is well capitalised and continues to demonstrate sound fundamentals in a sector that has performed strongly and does not appear to be as badly affected by the general trends that impact upon the global property markets.
The Board believes in the Company's ability to generate further shareholder value through full investment and considers that this should be reflected in its share price in the medium to long-term. The Company bought-back 13,178,419 shares during the year at an average price of US$0.76 in a move that was accretive to the net asset value per share. No further share buy-backs are anticipated in the immediate future in-line with our strategy of preserving capital and maintaining liquidity.
During the year the Manager, its employees considered to be key personnel, and closely related individuals increased their investment in the Company to 2,893,418 shares as of 31 December 2008.
Dividend
The Board has decided not to declare a dividend this year. This is in accordance with the policy set out in the Company's admission document which stated that the directors would achieve an appropriate balance between reinvesting capital for future growth in accordance with the Company's investment strategy and paying dividends to shareholders.
In-line with the prudent policies adopted by the Board of retaining capital and ensuring adequate liquidity within the Company this dividend policy will be reviewed periodically.
Outlook
Macau's economic condition has softened significantly on the back of repeated travel restrictions imposed on Chinese visitors and the global financial crisis. From 1 October 2008, the number of permissible visits to Macau per Guangzhou resident was limited to one every three months. However, gaming revenues and visitor numbers for 2008 were both up year-on-year; 31% and 11% respectively.
The medium to long-term outlook for Macau remains promising in light of Macau's strategy and proposal to diversify its economic structure and from the economic benefits expected to arise from planned infrastructure projects. One such project is the construction of the Hong Kong-Zhuhai-Macao Bridge. This project has been confirmed and the design stage is expected to commence towards the end of 2009.
Property prices remain under pressure, although the higher quality grade-A office buildings are expected to show more resilience to weakening demand and should continue to outperform second-tier buildings.
Following the acquisition of the AIA Tower, Speymill Macau has positioned itself to take advantage of grade-A office space. Furthermore the Company is well positioned within the high-end residential market and, with its new joint venture, the affordable end of the residential and commercial markets. We believe that this diversified strategy helps ensure the potential for maximum medium to long-term growth in shareholder value.
Larry Kearns
Chairman
16 March 2009
Report of the Manager and the Investment Adviser
Strategically well positioned
Whilst Macau property values have suffered downward pressure due to the ongoing turbulence in global financial markets, we believe that the current market dislocation reflected in year-end valuations will be rectified in the medium to long-term, and the inherent value of the Company's well diversified portfolio will be recognised. We are seeking to extract full value from our investments through an active asset management programme which is already well underway.
We will focus on maintaining a diversified portfolio of assets and review opportunities that present attractive potential returns for shareholders. We continue to favour Grade-A offices as there is still an undersupply of quality office space in Macau. We are also starting to see attractive opportunities in the residential market as prices have seen a significant correction on the back of the current economic climate.
Any future opportunities will be reviewed in line with our objectives of prudent capital management and ensuring a comfortable level of liquidity. The Company has maintained a strong cash position that more than meets its liquidity needs until at least mid-2010.
Market overview
The Macau economy
The growth in Macau's economy has shown signs of decelerating but is expected to continue to grow due to its close relationship with China. The Economic and Financial Secretary for Macau estimated that the GDP for Macau in 2008 will reach US$21.5 billion, a rise of 12% compared to 2007. The growth forecast for 2008 for Macau compares favourably to China's own GDP growth recorded for 2008 of 9%, as reported by the National Bureau of Statistics of China.
Macau's monetary stability remains extremely robust despite the current turbulence affecting financial markets worldwide. The local government remains debt-free and posted a budget surplus of US$238 million (MOP$ 1.91 billion) as at November 2008, according to the Monetary Authority of Macau. A surplus is also projected for 2009 despite a significant increase in public expenditure to help boost the economy. The 1 month base interest rate and Macau interbank offer rate spread is currently at an historically low level reflecting the low cost of borrowing and illustrating satisfactory liquidity levels amongst regional banks.
As of June 2008 the population in Macau stood at 551,900, as stated by the Macau Statistics and Census Service. It has projected that the population will grow by an average of 4.1% per year between 2006 to 2031, by which time it expects that the city will have 829,300 residents. According to the South China Morning Post, Macau is the most densely populated place in the world with a population density of 18,900 per sq km of land. Hong Kong was ranked in 3rd place with a population density of 6,736 per sq km of land. In a bid to ease its land shortage, Macau is seeking central government approval to reclaim five areas from the sea and add 5 sq km to its current land area of 29.2 sq km.
Gaming
Gaming revenue continues to be the key economic driver in the region and the Gaming, Inspection and Coordination Bureau reported gross gambling revenues of US$13.7 billion for 2008, up 31% on the previous year. Actual gaming revenue generated was 9 times more than the Government initially expected according to government officials and Macau remains the world's largest gambling destination in terms of revenue. According to the Lusa news agency, Macau gaming revenue was MOP$7.9 billion in February 2009, 15.5% lower than during February 2008. But this result is still 13% higher than the average monthly gaming revenue for 2007.
Adding to the gaming capacity Melco Crown Entertainment Limited's integrated entertainment resort, 'The City of Dreams', is set to open later this year opposite The Venetian on the Cotai Strip. It will provide almost 420,000 sq ft of gaming space, 550 gaming tables and 1,500 slot machines, a 2,000 seat theatre, over 2,200 hotel rooms and finally 175,000 sq ft of retail space.
Visitor statistics
According to the Statistics and Census Service ('DSEC'), there were 30 million tourist arrivals to Macau during 2008, an increase of 11% on the previous year, with the majority (approximately 58%) coming from the Chinese mainland. Whilst visitor numbers for 2009 are expected to slow, tourist spending is expected to remain fairly stable.
In June 2008 China imposed visa restrictions on mainland Chinese visitors to Macau with the aim of targeting the capital outflow to the only gaming city in China and to stabilise growth in order to allow infrastructure and regulations to catch up with the booming economy. Recent reports have suggested that the authorities in Hong Kong, Macau and Guangdong have agreed, in principle, to ease visa restrictions by extending the one-year multiple visit visas held by Shenzhen residents to all of Guangdong. The proposals are still to be ratified by the Beijing government.
Infrastructure and capital projects
There has been a significant slowdown in private fixed asset projects, resulting in rising lay-offs of foreign workers and downward pressure on the local economy. Nevertheless, the local government is planning 93 infrastructure projects in 2009, which will generate approximately 9,000 jobs for construction workers. Key projects include the construction of the Hong Kong - Zhuhai - Macau Bridge, which should commence by the end of 2009, along with the construction of the Macau Light Rail System. In addition Melco Crown Entertainment Limited has recently announced the recruitment of more than 7,000 staff for its 'City of Dreams' project.
Central Government initiatives
The State Council of the Peoples Republic of China revealed that the Central Government will introduce nine measures to support Macau in six areas, namely finance, infrastructure, economic integration with Guangdong, SME, the service industry and the safe supply of daily necessities. These measures should assist Macau significantly and better equip the region in confronting the impacts of the global financial turmoil as well as facilitating its sustainable development in the future. It is also expected that further policy measures and initiatives will be announced when the new Chief Executive of Macau takes office later this year.
Residential and office property market
The total number of building units transacted fell by 33% year-on-year from 32,250 in 2007 to 21,516 in 2008. Sector specific data for residential, retail, office and industrial show units transacted in 2008 fell 37%, 35%, 54% and 27% respectively.
Capital values for high-end residential and mass market properties dropped by 21% and 26% respectively year-on-year according to a recent report published by Jones Lang LaSalle. It suggested the contraction of financial markets, reluctance of banks to lend, rising unemployment and shrinking personal wealth have combined to exert downward pressure on price levels. But the latest official figures released show that the average transaction price of residential units rose by 12.5% year-on-year in 2008.
On the supply side, a total of 4,121 residential units are scheduled for completion in 2009 (75% of which are pre-sold), the most in a decade and a significant increase from the 2,389 units that were completed in 2008. However, indications show that developers are postponing the completion of developments and the start of new projects in order to deal with the potential overhang of units coming to the market at the same time. In addition the protracted government planning process is also delaying the launch of new developments. The significant layoffs on the Cotai Strip, and the implementation of new foreign labour policies, will also further trim the numbers of expatriates and local workers, the main drivers of the rental market. Rental values for high-end residential properties have dropped by 15.4% in 2008 while mass market rental values have fallen by 17.4%. Consequently, investment and construction activity have also slowed.
In anticipation of increased economic challenges this year, the local government has announced a number of financial incentives aimed at stimulating the local economy. The Legislative Assembly of Macau has unanimously accepted the general outline of the government-drafted bill to set up a progressive property transaction stamp duty rate, starting from 1% up to 3% depending on the transacted amount. They have launched a series of new measures to help support the property market in Macau.
These measures include a 4% subsidy scheme on properties of up to US$375,000 for first-time home buyers who are permanent residents of Macau. Other initiatives include the waiving of stamp duty and a capital guarantee scheme, provided that the first-time buyer makes at least a 10% down payment for the purchase, and that the mortgage loan guaranteed by the government does not exceed 20% of the property's purchase price. Despite the effects of the global credit crisis, local Macau banks are considered well capitalised, and with adequate capacity to write new business. The asset profile of local banks remains robust and the overall liquidity in the economy is consistent with historical levels.
The office market was very active during the first half of 2008 with office buildings being filled at a rapid pace. Capital and rental values of office space have inevitably been affected by the global financial crisis, but the impact has been modest; a 3% and 5% drop respectively. Grade-A buildings such as the Bank of China building, the FIT Centre, and the AIA Tower should show more resilience to the economic downturn and market shrinkage during the coming year, owing to a limited supply of quality office spaces in Macau, and the low rental value difference between grade-A and second tier office buildings.
Business overview
The Company has now completed its initial investment programme, diversifying across multiple sectors, and is actively managing the portfolio to enhance value and deliver satisfactory returns for Shareholders.
The current portfolio is examined in detail below:
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| Property | Sector | Type | Strategy | Status | Acquisition Price (US$m)# | Valuation as of 31 Dec 08 (US$m) | Valuation as of 31 Dec 08 (US$ per sq ft GFA) | Valuation Increase/ (Reduction) |
| Realised investments | ||||||||
| Lot U | Residential | Luxury | Forward funding agreement | Sold | 116.22 | 160.27* | 396 | 37.9% |
| Investments held on 31 December 2008 |
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| AIA Tower | Office / Retail | Grade-A | Hold and Let | Operating | 153.80 | 148.40 | 398 | (3.5%) |
| 'Lorcha' | Residential | High End | Forward funding agreement | Under construction | 131.80 | 106.50 | 394** | (19.2%) |
| Nam Van Peninsula | Residential | High End | Refurbish and Let | Marketing | 28.80 | 29.70 | 415 | 3.1% |
| 'Pink Palace' | Commercial / Residential | Mid Market | Refurbish and Let | Under refurbishment | 2.10 | 1.80 | 344 | (14.3%) |
| Houston Court | Commercial / Residential | Entry Market | Refurbish and Let | Under refurbishment | 2.30 | 1.95 | 264 | (15.2%) |
| Ribas 5B | Residential | Entry Market | Hold and Let | Marketing | 0.14 | 0.15 | 269 | 7.1% |
| Total |
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| 318.94 | 288.50 | 396 | (9.5%) |
* Sale value of property - sold in February 2008
** The per sq ft value for 'Lorcha' is based on the provisional estimated area. The exact figure will only be known when building is completed and the final measurements have been taken.
# The acquisition price stated excludes acquisition costs
Valuation
The Company's portfolio was valued at US$288.5m, as of 31 December 2008, translating into US$396 (HK$3,071) per sq ft. The reduction in value represents a loss of 13.1% for the year and 9.5% relative to the purchase price of the properties. Although a disappointing result, this still compares favourably to the property investment market as a whole. Furthermore, it validates our strategy to diversify the portfolio by selling out of luxury residential and investing in more affordable high-end housing, and in particular high quality offices. The investment in 'Lorcha' accounted for the single largest contribution to the fall in the Company's NAV due to its relatively high implied leverage. In addition a significant mark-down was made to the valuation of the Nam Van Peninsula units to reflect the relatively large size of the apartments as well as the higher than expected refurbishment costs.
An independent property valuation of all of the Company's properties as at 31 December 2008 was carried out by Jones Lang LaSalle in accordance with the standards published by the Hong Kong Institute of Surveyors and the Royal Institute of Chartered Surveyors in the United Kingdom. The fair value adjustment of these properties is stated on page 32 (Note 10) of this report.
Lot U
On 4 February 2008, the Company announced that it had agreed terms for the sale of its contractual interest in Lot U, which it acquired in December 2006. The gross sale proceeds of US$79m generated a gross profit of US$44m and a gross return on the Company's invested equity of 125%.
Through the forward funding arrangement with the developer of Lot U the contracted acquisition price after completion was US$116.5m, made up of an initial funding deposit of US$35m with the balance to be paid in stage payments. As at the date of disposal only the initial funding had been paid by the Company and, following the sale, the Company had no further funding obligations relating to this investment. The Company never acquired any direct property rights in Lot U, which is in line with the original intention to monetise its forward funding arrangement prior to completion.
However in determining the sale proceeds, the asset value attributed to the underlying property was US$160m, representing an increase relative to contracted acquisition price of 38%, which compares favourably to the overall performance of the Macau residential property market since investment. The sale realised a net IRR of 80% (2.2x capital multiple) on the Company's invested capital based on a holding period of 17 months.
The sale of its purchase rights in the Lot U development enabled the Company to realise a substantial return for its shareholders at a minimal cost.
AIA Tower
On 5 September 2008, the Company acquired a 100% interest in a grade-A office block, AIA Tower. The 22-storey commercial office building is located at the heart of the Central Business District close to financial institutions, multinational corporations and world-class hotels. It has 372,730 sq ft (34,630 sq m) of gross floor area, of which 292,335 sq ft (27,160 sq m) is grade-A office space and 80,396 sq ft (7,470 sq m) is designated for retail, as well as 186 car parking spaces. As of 31 December 2008 the overall occupancy rate for the building was 86.5% and contracted occupancy rates for the office and retail space were 92% and 66% respectively. As of 31 December 2008 the contracted monthly rental income for office and retail was HK$4.7m, translating into an annualised contracted rental yield of 4.9%.
During the period, seven leases were reviewed or renewed at an average effective rental of HK$16.7 per sq ft, representing a reversion premium of 28%. Similarly two new lettings have also been agreed with an average effective rental of HK$16.7 per sq ft representing a premium of 28% to the average rent in the building. In addition, early surrenders have been negotiated with tenants with poor payment history and large arrears.
It should also be noted that average Macau prime grade-A office rents per sq ft are currently around 20% higher than the in-place average per sq ft office rental currently achieved in the property. Given a typical 3-year renewal cycle, this should offer further reversionary potential for the property.
In order to finance the acquisition of the property the Company has put in place a HK$600m (US$77m), 30 month term loan facility with Banco Weng Hang. The facility attracts annual interest of 1.85% over the 3 month Hong Kong Inter Bank Offered Rate ('HIBOR'). The mortgage loan is subject to a 70% loan to value covenant and as at 31 December 2008 the asset showed a loan to value of 53%, comfortably within the covenant level. We are currently reviewing the possibility of switching from the existing 'floating' rate interest exposure to a fixed rate for the remainder of the loan term.
The acquisition was facilitated by purchasing the corporate structure which holds the property and within that there was an historical deferred tax liability of US$7.6m based on previous valuation uplifts. Deferred tax is required to be calculated under IFRS on unrealised gains that would crystallise were the property to be sold at the current market valuation. Movements between periods are reflected in the profit and loss account even though they remain as non-cash items unless materialised. We believe that this charge would never crystallise as any exit would most likely involve the sale of the corporate structure rather than the individual property.
The AIA Tower is one of only a few grade-A office buildings in Macau. With no new offices expected to be built in the medium-term due to the current planning environment, occupancy in such buildings has risen by 12.5% annually and rents have grown by an average of 17% per annum over the last three years according to Jones Lang LaSalle reports.
Capital values for grade-A properties situated in Hong Kong Central were approximately HK$21,000 per sq ft as of December 2008, according to capitalised values posted by the Rating and Valuation Department that, in comparison with the AIA Tower currently valued at HK$3,085 per sq ft, demonstrates the significant upside potential for office investments in Macau. Moreover, average Macau grade-A office rents, currently at around HK$15 per sq ft per month, compare favourably with average Hong Kong Central grade-A prime office rents at around HK$147 per sq ft per month, as of December 2008, according to Knight Frank.
The Company will continue to actively asset manage the properties in order to unlock further value added potential, for example, by the repositioning and leasing of retail areas on the podium levels of the property. In addition, various other capital projects are ongoing to maintain and enhance the building's specification, including required remedial works, new chiller plants, implementation of energy saving measures and green initiatives, car park improvements and main entrance enhancement, as well as retail podium circulation improvements. In addition, an extensive lift upgrade was recently successfully completed.
'Lorcha' (R. Do Almirante Sergio No. 94 - 120.)
Following on from the success of the investment in Lot U, the Company has invested in a further forward funding arrangement in order to acquire 259 high-end residential units in two towers (out of a total of 581 units). The development is situated at Rua Do Almirante Sergio No.94-120, in Macau Peninsula between the Inner Harbour and Sai Van Lake areas and near the famous Portuguese restaurant, Lorcha.
The developer is Ho Chun, a local Macau developer which started developing real estate in the late 1970s and is well recognised, having developed more than 100 buildings in Macau.
The investment offers the Company exposure to the attractive high-end residential market in Macau. The forward funding element is 30% of the purchase price and is equivalent to US$39.5m (HK$308m) or US$41m (HK$324m) including associated costs.
The key attraction of this investment is that the units are small and affordable, but in a high-end and aspirational development very well located only minutes from the old historic and business centres of Macau Peninsula. With a small average size of 1,032 sq ft, the units offer an affordable alternative for local residents upgrading, expatriates and international buyers. Furthermore, the Lorcha investment is expected to benefit from the recently introduced government housing subsidy and also from the expected reintroduction of the investment residency scheme.
Even though the project is still subject to the formal government gazetting process, the developer has all the relevant permits in place and construction is well underway, with the superstructure currently 40 stories above ground. Completion is scheduled towards the end of the second quarter of 2010.
Due to the softened demand for Macau property from international investors it is currently unlikely that we will be able to monetise the Company's investment in Lorcha prior to the completion of the development. As a result we are expecting the Company to take possession of the units after the occupancy permit has been obtained by the developer following the expected completion at the end of the second quarter of 2010. We will initiate bank discussions regarding the debt financing of the US$93m take-out payment after formal gazetting of the development has been achieved. Banks have recently committed to similar debt financing arrangements for properties with significantly higher valuations than this development.
Nam Van Peninsula
In March 2007, the Company entered into an agreement to purchase 24 residential units in shell condition, ranging in size from approximately 2,600 and 3,200 sq ft, plus 10 car parking spaces, in a recently completed residential development. The development is in a prime location overlooking Nam Van Lake at Baia da Praia Grande on the Macau Peninsula.
The Company completed the acquisition of the Nam Van Peninsula units on 15 June 2007. The total acquisition price was US$28.8m (HK$225m). To finance the acquisition, the Company has put in place a US$19.2m (HK$150m) term loan with Seng Hang Bank representing 67% of the purchase price. The interest on the loan is 2% per annum over the 3 month HIBOR. The loan is amortised in 5 semi-annual instalments with the first principal repayment of HK$11.2m made on 16 July 2008, reducing the outstanding loan principal to HK$138.8m. Further amortisation of HK$26.2m is scheduled for 2009. This loan does not have any cash flow or LTV covenants attached to it, and as at 31 December 2008, the average loan to value of the Nam Van Peninsula units was 60%.
The units will be repositioned and fitted out to a very high standard for rental or sale. Together with the renowned Hong Kong architects KplusK, the Company has created a very high specification product in terms of design and fit out which has yet to be offered in Macau. Three show flats have already been completed and an additional five apartments are currently being finalised.
Marketing brochures have been produced and general feedback from brokers and other interested parties have been positive. In addition, the first letting of one of the KplusK show flats has been completed with a gross rental of HK$37,000 per month or HK$11.5 per sq ft representing a yield on cost of 3.5%. The letting has been secured at a relatively high absolute rental for Macau.
Rafael
Speymill Macau has taken an 87% stake in a newly formed subsidiary company, Rafael (Macau) Limitada ('Rafael') following a joint venture agreement with a Macau-based boutique property advisory and asset management firm. Our partner has a focussed approach and a good track record of finding, repositioning and renting-out properties at attractive yields or disposing of them at premium valuations.
The venture will aim to acquire and reposition mainly existing residential and commercial properties in the older, historical parts of Macau. The arrangement represents an interesting development in the activities of Speymill Macau and offers it an opportunity to invest in the more affordable end of the residential and commercial markets. The objective is to build a portfolio of income producing assets and invest in areas subject to regeneration and solid capital value growth. But opportunistic trading of properties might occur if attractive returns can be crystallised. Our partner will oversee the property investments made and provide ongoing professional asset and property management services. Speymill Macau will maintain full control of Rafael by holding both 87% of the voting rights and also the majority of seats on its board.
Speymill Macau has invested US$8.4m (HK$65.1m) in Rafael and its partner has invested US$1.34m (HK$10.4m) alongside, by way of the contribution of a property known as the 'Pink Palace'. It is located in a prime position near the newly opened Ponte 16 casino.
Rafael has also acquired a two storey mixed residential and commercial building in a secluded area of Coloane village, known as 'Houston Court'. The residential space will be repositioned to offer affordable housing for workers in the Cotai Strip, with the commercial area let to good quality retailers or restaurants.
In addition Rafael has also acquired a residential unit in a 9 storey residential building near St Paul's Ruins, known as "Ribas 5B". The unit was purchased at a price of US$141,000 (HK$1.1m), an equivalent cost of HK$1,913 per sq ft. The unit comes fully furnished and has recently been let at HK$9,000 per month representing a 10% gross yield.
Summary
The impact of the deterioration in primary capital markets caused by the global debt crisis will continue to impact upon the Macau economy and make 2009 a challenging year for the region. However, government-led initiatives (both local and national), such as the Chinese economic stimulus package for the region, public infrastructure projects and property purchase incentives, should help bolster the economy and provide support to property values. The region's economy is still underpinned by compelling demographic and economic factors that will provide a solid platform for future growth when market sentiment improves.
The Company will monitor investment opportunities and seek to exploit market dislocations, whilst actively managing a diversified portfolio and ensuring a comfortable level of liquidity.
Nigel Caine
For the Manager
Speymill Property Group Limited
Thomas Sipos
For the Investment Adviser
Speymill Property Group (Far East) Limited
16 March 2009
Consolidated income statement
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| For the year Ended 31 December 2008 | For the period from 31 October 2006 (date of incorporation) to 31 December 2007 |
| US$'000 | US$'000 | |
| Rent and related income Direct expenses | 2,550 (1,252) | - - |
| Net rent and related income | 1,298 | - |
| Valuation (losses) / gains on investment property | (43,348) | 46,912 |
| Manager's fees | 3,668 | 3,013 |
| Incentive fees | - | 5,011 |
| Audit and professional fees | 464 | 116 |
| Impairment of goodwill | 1,599 | - |
| Other expenses | 1,264 | 1,455 |
| Administrative and other expenses | 6,995 | 9,595 |
| Net operating (loss) / profit before net financing income | (49,045) | 37,317 |
| Financial income | 1,879 | 3,966 |
| Financial expenses | (1,080) | - |
| Net financial income | 799 | 3,966 |
| (Loss) / profit before tax | (48,246) | 41,283 |
| Deferred tax income/(expense) | 1,739 | (608) |
| (Loss) / profit for the year / period | (46,507) | 40,675 |
| Equity holders of the Company | (46,327) | 40,675 |
| Minority interest | (180) | - |
| (46,507) | 40,675 | |
| Basic (loss) / earnings per share (cents per share) for (loss)/profit attributable to the equity holders of the Company during the year/period | (37.45) | 37.45 |
| Diluted (loss) / earnings per share (cents per share) ) for (loss)/profit attributable to the equity holders of the Company during the year/period | (37.45) | 37.31 |
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated and Company balance sheet
| Group At 31 December 2008 | Company At 31 December 2008 | Group At 31 December 2007 | Company At 31 December 2007 | |
| US$'000 | US$'000 | US$'000 | US$'000 | |
| Intangible assets | 6,451 | - | - | |
| Investment property | 288,455 | - | 114,584 | 77,955 |
| Plant and equipment | 877 | - | - | - |
| Total non-current assets | 295,783 | - | 114,584 | 77,955 |
| Trade and other receivables | 2,258 | 119 | 57,695 | 45 |
| Cash and cash equivalents | 30,457 | 16,908 | 36,770 | 35,259 |
| Intercompany balances | - | 110,935 | - | 71,762 |
| Total current assets | 32,715 | 127,962 | 94,465 | 107,066 |
| Total assets | 328,498 | 127,962 | 209,049 | 185,021 |
| Issued share capital | 11,682 | 11,682 | 13,000 | 13,000 |
| Share premium | 62,356 | 62,356 | 62,356 | 62,356 |
| Retained earnings | 51,653 | 51,756 | 108,023 | 103,805 |
| Other reserves | 1,654 | 1,654 | 336 | 336 |
| Foreign currency translation reserve | 103 | - | (122) | - |
| Equity attributable to equity holders of the parent | 127,448 | 127,448 | 183,593 | 179,497 |
| Minority Interest | 1,162 | - | - | - |
| Total equity | 128,610 | 127,448 | 183,593 | 179,497 |
| Interest-bearing loans and borrowings | 91,936 | - | 15,385 | - |
| Deferred income tax | 6,451 | - | 608 | - |
| Trade and other payables | 92,260 | - | - | - |
| Total non-current liabilities | 190,647 | - | 15,993 | - |
| Interest-bearing loans and borrowings | 3,387 | - | 3,846 | - |
| Trade and other payables | 5,854 | 514 | 5,617 | 5,524 |
| Total current liabilities | 9,241 | 514 | 9,463 | 5,524 |
| Total liabilities | 199,888 | 514 | 25,456 | 5,524 |
| Total equity & liabilities | 328,498 | 127,962 | 209,049 | 185,021 |
| Net Asset Value per parent company share | 1.09 | 1.09 | 1.41 | 1.26 |
The loss made by the Company for the year ended 31 December 2008 was US$42,006,000 (period ended 31 December 2007, profit: US$36,457,244).
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated statement of changes in equity
GROUP
| Share capital | Share premium | Retained earnings | Other reserves | Capital redemption reserve | Foreign currency translation reserves | Total parent equity | Minority Interest | Total equity 31 December | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Balance at 31 October 2006 | - | - | - | - | - | - | - | - | - |
| Shares issued in the period | 13,000 | 137,000 | - | - | - | - | 150,000 | - | 150,000 |
| Share issue expenses | - | (7,296) | - | 336 | - | - | (6,960) | - | (6,960) |
| Foreign exchange translation differences | - | - | - | - | - | (122) | (122) | - | (122) |
| Cancellation of share premium reserve | - | (67,348) | 67,348 | - | - | - | - | - | - |
| Retained earnings for the period | - | - | 40,675 | - | - | - | 40,675 | - | 40,675 |
| Balance at 31 December 2007 | 13,000 | 62,356 | 108,023 | 336 | - | (122) | 183,593 | - | 183,593 |
| Contribution from minority partner | - | - | - | - | - | - | - | 1,342 | 1,342 |
| Shares cancelled following market purchases/ transfer to capital redemption reserve | (1,318) | - | (10,043) | - | 1,318 | - | (10,043) | - | (10,043) |
| Foreign exchange translation differences | - | - | - | - | - | 225 | 225 | - | 225 |
| Retained earnings for the year | - | - | (46,327) | - | - | - | (46,327) | (180) | (46,507) |
| Balance at 31 December 2008 | 11,682 | 62,356 | 51,653 | 336 | 1,318 | 103 | 127,448 | 1,162 | 128,610 |
Other reserves represent the fair value of options granted to the broker on admission to trading on AIM (Note 8.2).
The accompanying notes form an integral part of these consolidated financial statements.
Company statement of changes in equity
| Share capital | Share premium | Retained earnings | Other reserves | Capital redemption reserve | Foreign currency translation reserves | Total equity 31 December | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Balance at 31 October 2006 | - | - | - | - | - | - | - |
| Shares issued in the period | 13,000 | 137,000 | - | - | - | - | 150,000 |
| Share issue expenses | - | (7,296) | - | 336 | - | - | (6,960) |
| Cancellation of share premium reserve | - | (67,348) | 67,348 | - | - | - | - |
| Retained earnings for the period | - | - | 36,457 | - | - | - | 36,457 |
| Balance at 31 December 2007 | 13,000 | 62,356 | 103,805 | 336 | - | - | 179,497 |
| Shares issued in the year | - | - | - | - | - | - | - |
| Share issue expenses | - | - | - | - | - | - | - |
| Shares cancelled following market purchases/ transfer to capital redemption reserve | (1,318) | - | (10,043) | - | 1,318 | - | (10,043) |
| Foreign exchange translation differences | - | - | - | - | - | - | - |
| Retained earnings for the year | - | - | (42,006) | - | - | - | (42,006) |
| Balance at 31 December 2008 | 11,682 | 62,356 | 51,756 | 336 | 1,318 | - | 127,448 |
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated cash flow statement
| For the year Ended 31 December 2008 | For the period from 31 October 2006 (date of incorporation) to 31 December 2007 | |
| US$'000 | US$'000 | |
| Operating activities | ||
| Group (loss)/profit before tax | (48,246) | 41,283 |
| Adjustments for: | ||
| Revaluation of investment property | 43,348 | (46,913) |
| Impairment of goodwill | 1,599 | - |
| Depreciation | 141 | - |
| Interest income | (1,879) | (3,966) |
| Interest expense | 1,040 | - |
| Operating loss before changes in working capital | (3,997) | (9,596) |
| (Decrease)/Increase in trade and other payables | (5,114) | 5,617 |
| Increase in trade and other receivables | (429) | (644) |
| Cash generated from/used in operations | (9,540) | (4,623) |
| Interest received | 1,879 | 3,966 |
| Interest paid | (1,040) | - |
| Cash flows used in operating activities | (8,701) | (657) |
| Investing activities | ||
| Acquisition of investment property | (141,489) | (67,793) |
| Sale of investment property | 78,116 | - |
| Acquisition of subsidiary | (74,690) | - |
| Creditor for acquisition of investment property | 92,260 | - |
| Purchase of fixed assets | (32) | - |
| Return of/(deposit paid) for property purchase | 57,051 | (57,051) |
| Cash flows used in investing activities | 11,216 | (124,844) |
| Financing activities | ||
| (Cost of shares purchased)/proceeds from the issue of ordinary share capital | (10,043) | 150,000 |
| Share issue expenses | - | (6,960) |
| Minority interest contribution to investment property | 1,342 | - |
| Secured bank loans | (543) | 19,231 |
| Cash flows (used in)/generated from financing activities | (9,244) | 162,271 |
| Net (decrease)/increase in cash and cash equivalents | (6,729) | 36,770 |
| Cash and cash equivalents at beginning of year / period | 36,770 | - |
| Difference on foreign exchange | 416 | - |
| Cash and cash equivalents at end of year / period | 30,457 | 36,770 |
The accompanying notes form an integral part of these consolidated financial statements.
Notes to the consolidated financial statements
1 The Company
Speymill Macau Property Company PLC (the "Company") was incorporated and registered in the Isle of Man under the Isle of Man Companies Acts 1931 to 2004 on 31 October 2006 as a public company with registered number 118202C.
Pursuant to an admission document dated 14 November 2006, there was an original placing of up to 80,000,000 Ordinary Shares at a price of US$1.00. Following the close of the placing on 17 November 2006, 80,000,000 Ordinary Shares were issued. The Ordinary Shares of the Company were admitted to trading on AIM, a market of the London Stock Exchange on 17 November 2006, when dealings also commenced.
On 9 May 2007, an announcement was made of a second placing of 50,000,000 Ordinary Shares at a price of US$1.40 per share Following the close of the placing a further 50,000,000 Ordinary Shares were issued at a placing price of US$1.40 per share. These Ordinary Shares were admitted to trading on AIM on the 11 May 2007.
On 8 October 2007, the share premium arising from the original placing of Ordinary Shares was cancelled and the amount of the share premium account transferred to distributable reserves.
The Company's agents and the Manager perform all significant functions. Accordingly, the Company itself has no employees.
Financial year end
The financial year end of the Company is 31 December in each year. The Company prepared its first set of financial statements for the period from incorporation on 31 October 2006 to 31 December 2007.
2 Segment Reporting
The Group has one segment focusing on achieving capital growth through investing in the property market in Macau.
3 Net financing income
| 31 December 2008 | For the period from 31 October 2006 (date of incorporation) to 31 December 2007 | |
| US$'000 | US$'000 | |
| Interest income on bank balances | 1,879 | 3,966 |
| Interest expense | (1,040) | - |
| Bank charges | (40) | - |
| Net financing income | 799 | 3,966 |
4 Net Asset Value per Share
The net asset value per share as at 31 December 2008 is US$1.09 based on 116,821,581 ordinary shares in issue as at that date (2007: US$1.41 on 130,000,000 shares).
5 Charges and fees
5.1 Nominated Adviser fees
As nominated adviser to the Company for the purposes of the AIM rules, the Nominated Adviser is entitled to receive an annual fee of £30,000 payable quarterly in advance.
Advisory fees payable to the Nominated Adviser for the year ended 31 December 2008 amounted to US$75,366 (2007: US$79,968).
5.2 Placing agent and broker fees
Under the terms of an option agreement dated 13 November 2006 and in consideration of the broker agreeing to act as broker and provide services under the Placing Agreement the broker was granted an option to acquire 1,600,000 shares at an option price of US$1.00 per share. The option exercise period is a period from the date of the option agreement to the fifth anniversary of admission to trading on AIM.
The option has been independently valued using a Black-Scholes model giving a fair value of US$336,000 which has been charged to Share Premium as a share issue expense.
As broker to the Company the Broker is entitled to receive an annual fee of £50,000, payable semi-annually in advance.
Broker fees payable for the year ended 31 December 2008 amounted to US$117,755 (period ended 31 December 2007: US$60,236).
5.3 Manager fees
Annual fees
The Manager receives a management fee of 2% per annum of the net asset value of the Company from Admission, payable monthly in arrears.
Management fees payable for the year ended 31 December 2008, amounted to US$3,668,063, (period ended 31 December 2007: US$3,012,118).
40% of the management fee is paid directly to the Property Adviser. The Manager is also responsible for paying fees to the Investment Adviser.
Performance fees
The Manager is entitled to a performance fee from the Company of an amount equal to 20 per cent. of the excess of the Net Asset Value per Ordinary Share (with dividends and other distributions added back and ignoring any accrued performance fee) as at the end of each performance fee period of the Company over the benchmark multiplied by the time weighted average number of Ordinary Shares in issue during that period. Such performance fee shall accrue on a Net Asset Value per Ordinary Share basis but shall only be paid out of realised profits.
For these purposes, the benchmark shall be equal to the Placing Price increased at a compound rate of 10 per cent. per annum or, where a performance fee has been paid, the net asset value per Ordinary Share (ignoring the effect of the relevant performance fee paid) which gave rise to the payment of the most recent performance fee increased at a rate of 10 per cent. per annum compound. On payment of the performance fee for the period ended 31 December 2007 the benchmark was reset to the Net Asset Value per Ordinary Share of US$1.41 at the commencement of the new period.
The first performance fee period commenced on the 17 November 2006 (the date on which the ordinary shares were admitted to trading on AIM) and terminated on 31 December 2007. Each subsequent performance fee period shall commence on 1 January and terminate on 31 December in the same calendar year.
If the Manager is entitled to a performance fee in respect of a performance fee period, the Company shall only be required to settle such liability to the Manager in respect of any performance fee accrued to the extent that, and only when and if, the Company has realised profit(s) from any investment(s) available for such payment. Any such fees shall be paid within 14 days of such realised profits becoming available.
Performance fees accrued for the year ended 31 December 2008 amounted to US$nil (period ended 31 December 2007: US$5,011,261).
5.4 Custodian fees
The Custodian is entitled to receive fees calculated as 3 basis points per annum of the value of the non-real estate assets held on behalf of the Company, subject to a minimum monthly fee of £750, payable quarterly in arrears together with other agreed transaction settlement charges.
Custodian fees payable for the year ended 31 December 2008 amounted to US$30,000, (period ended 31 December 2007: US$23,062).
5.5 Administrator and Registrar fees
The Administrator is entitled to receive a fee of 10 basis points per annum of the net assets of the Company between £0 and £100 million and 7.5 basis points of the net asset value of the Company in excess of £100 million, subject to a minimum monthly fee of £4,000, and a maximum monthly fee of £11,250 payable quarterly in arrears.
The Administrator assists in the preparation of the financial statements of the Company for which it receives a fee of £1,750 per set.
The Administrator provides general secretarial services to the Company for which it receives a minimum annual fee of £5,000.
The Administrator may utilise the services of a CREST accredited registrar for the purposes of settling share transactions through CREST. The cost of this service will be borne by the Company. It is anticipated that the cost will be in the region of £6,000 per annum subject to the number of CREST settled transactions undertaken.
The Administrator expects to review and, subject to written agreement between the Company and the Administrator, may amend the foregoing fees six months after Admission and annually thereafter.
Administration fees payable for the year ended 31 December 2008 amounted to US$207,987, (period ended 31 December 2007: US$199,035), secretarial fees US$10,664, (2007: US$12,820), financial statement preparation fees were US$17,162, (2007: US$7,599), and Crest fees US$3,318, (2007: US$15,689).
5.6 Audit fees and professional fees
Audit fees for the year ended 31 December 2008 amounted to US$230,332, (period ended 31 December 2007: US$67,742), with US$83,578 still due at 31 December 2008 (2007: US$40,000).
Professional fees for the year ended 31 December 2008 amounted to US$233,375, (period ended 31 December 2007: US$47,917).
5.7 Interests in the shares of the Company held by the Manager and key personnel
The Manager held 1,055,118 Ordinary Shares in the Company as at 31 December 2008 (31 December 2007: nil). The shares were acquired in order to satisfy the terms of the Investment Management Agreement following payment of the performance fee for the year ended 31 December 2007.
In addition, key employees of the Manager, or closely related parties of the Manager held 1,838,300 Ordinary Shares in the Company as at 31 December 2008 (31 December 2007: 20,300 Ordinary Shares).
6 Investment Property
| Group | Lot U | Nam Van | Lorcha | AIA | Other | 31 December 2008 | 31 December 2007 |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| At beginning of year | 77,956 | 36,628 | - | - | - | 114,584 | - |
| Additions | - | 3,323 | 133,456 | 153,846* | 4,710 | 295,335 | 67,672 |
| Disposal | (78,116) | - | - | - | - | (78,116) | - |
| Fair value adjustment | 160 | (10,274) | (26,910) | (5,459) | (865) | (43,348) | 46,912 |
| Balance at end of year | - | 29,677 | 106,546 | 148,387 | 3,845 | 288,455 | 114,584 |
*The AIA property was acquired on the purchase of Turbo Ventures Limited
The Group's investment properties as at 31 December 2008 were revalued at 31 December 2008 by independent professionally qualified valuers Jones Lang LaSalle, based on current prices in an active market.
During the year the Group made a payment of 30% of the final purchase price in order to acquire the "Lorcha" investment. The payment made is equivalent to US$39.5m (HK$308m) or US$41m (HK$324m), including acquisition costs. The value of this investment at 31 December 2008 is US$106.5m (HK$825.4m). The Company will pay a final stage payment plus estimated costs equivalent to US$93m (HK$720.8m) following completion of the project. This amount has been recorded as a non-current liability.
7 Trade and Other Receivables
| Group | Company | Group | Company | |
| 31 December 2008 | 31 December 2008 | 31 December 2007 | 31 December 2007 | |
| US$'000 | US$'000 | US$'000 | US$'000 | |
| Prepayments and other receivables | 2,258 | 119 | 644 | 45 |
| Deposits for purchase of property | - | - | 57,051 | - |
| Total | 2,258 | 119 | 57,695 | 45 |
8 Cash and Cash Equivalents
| Group 31 December 2008 | Company 31 December 2008 | Group 31 December 2007 | Company 31 December 2007 | |
| US$'000 | US$'000 | US$'000 | US$'000 | |
| Bank balances | 30,457 | 16,908 | 36,770 | 35,259 |
| Cash and cash equivalents | 30,457 | 16,908 | 36,770 | 35,259 |
9 Basic and diluted (loss)/earnings per share
Basic (loss)/earnings per share is calculated by dividing the (loss)/profit attributable to equity holders of the Group by the weighted-average number of ordinary shares in issue during the year.
| Basic | 31 December 2008 | 31 December 2007 |
| (Loss) / profit attributable to equity holders of the Group (US$'000) | (46,327) | 40,675 |
| Weighted average number of ordinary shares in issue (thousands) | 123,709 | 108,606 |
| Basic (loss) / earnings per share (cent per share) | (37.45) | 37.45 |
| Diluted | 31 December 2008 | 31 December 2007 |
| (Loss) / profit attributable to equity holders of the Group (US$'000) | (46,327) | 40,675 |
| Weighted average number of ordinary shares in issue (thousands) | 123,709 | 108,606 |
| Adjustment for Share options | - | 418 |
| Weighted-average number ordinary shares for diluted (loss)/earnings per share | 123,709 | 109,024 |
| Diluted (loss) / earnings per share (cent per share) | (37.45) | 37.31 |
The difference between basic and diluted weighted-average shares results from the assumption that dilutive share options were exercised.
10 Interest-Bearing Loans and Borrowings
This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings.
| 31 December 2008 | 31 December 2007 | |
| US$'000 | US$'000 | |
| Non-Current Liabilities | ||
| Secured bank loans | 91,936 | 15,385 |
| Current Liabilities | ||
| Secured bank loans | 3,387 | 3,846 |
The Group has a term loan facility of HK$ 600,000,000 with Banco Weng Hang SA which is secured by way of a first legal mortgage against the AIA Tower property in Macau. The loan is repayable at final maturity in March 2011. The loan bears 1.85% interest per annum over the 3 month Hong Kong Inter Bank Offered Rate (HIBOR).
The Group also has a term loan facility of HK$ 150,000,000 with Seng Heng Bank Limited in Macau which is secured by way of a first legal mortgage against the Nam Van Peninsular property in Macau. The loan is being repaid in 5 half-yearly instalments which commenced in July 2008. The loan bears 2% interest per annum over the 3 month Hong Kong Inter Bank Offered Rate (HIBOR). The first semi-annual repayment was made on 16 July 2008 amounting to HKD 11,250,000.
11 Trade and Other Payables
| Group 31 December 2008 | Company 31 December 2008 | Group 31 December 2007 | Company 31 December 2007 | |
| US$'000 | US$'000 | US$'000 | US$'000 | |
| Non-Current Liabilities | ||||
| Payable on acquisition of investment property | 92,260 | - | - | - |
| Current liabilities | ||||
| Performance fees (note 8.3) | - | - | 5,011 | 5,011 |
| Property taxes payable | 672 | - | - | - |
| Loan interest | - | - | 42 | 42 |
| Sundry creditors and accruals | 5,182 | 514 | 564 | 471 |
| 5,854 | 514 | 5,617 | 5,524 |
12 Acquisition of Subsidiaries
On 5 September 2008 the Group acquired 100% of the ordinary share capital of Turbo Ventures Ltd, which with its wholly owned subsidiary, Speymill Property I (Macau) Limitada, comprised an investment property group.
Details of net assets acquired and goodwill are as follows:
| US$'000 | ||
| Cash and cash equivalents | 7,570 | |
| Trade and other receivables | 1,178 | |
| Investment property | 153,846 | |
| Property, plant and equipment | 986 | |
| Accounts payable | (3,045) | |
| Tenant deposits | (2,272) | |
| Deferred income tax liabilities | (7,533) | |
| Bank loan | (76,520) | |
| Shareholder loan payable | (28,089) | |
| Fair value of net assets acquired | 46,121 | |
| Goodwill (note 2.12) | 8,050 | |
| Total purchase consideration | 54,171 | |
| Purchase consideration settled in cash | 54,171 | |
| Shareholder loan repaid | 28,089 | |
| Cash and cash equivalents in subsidiary acquired | (7,570) | |
| Cash outflow on acquisition | 74,690 |
13 Financial instruments
The Group's activities expose it to a variety of financial risks: market price risk, foreign exchange risk, credit risk, liquidity risk and cash flow interest rate risk.
All financial instruments are considered to be stated at amounts which approximate fair value.
Market price risk
The Company's strategy on the management of market price risk is driven by the Company's investment objective. The Company has been established to invest primarily in the high quality real estate market of Macau. The main objective of the Company is to provide Shareholders with an attractive overall return to be achieved primarily through long-term capital growth. The Company's market price risk is monitored by the Manager on a day to day basis and by the Directors at Board Meetings.
The Group is exposed to property price and property rental risk. The Group is not exposed to the market risk with respect to financial instruments as it does not hold any equity securities.
Foreign exchange risk
The Group's operations are conducted in jurisdictions which generate revenue, expenses, assets and liabilities in currencies other than the Hong Kong Dollar (the Functional Currency). As a result, the Group is subject to the effects of exchange rate fluctuations with respect to these currencies. The currency giving rise to this risk is primarily the US Dollar. The Hong Kong Monetary Authority operates a linked exchange rate system for the Hong Kong Dollar:US Dollar exchange rate and as a result the Group considers currency risk to be minimal.
The Group's policy is not to enter into any currency hedging transactions.
At the reporting date the Group had the following exposure:
| Currency | 31 December 2008 | 31 December 2007 | |
| % of Net Assets | % of Net Assets | ||
| Hong Kong Dollar | 100.00 | 83.9 | |
| US Dollar | 0.00 | 16.1 |
The following table sets out the Group's total exposure to foreign currency risk and the net exposure to foreign currencies of the monetary assets and liabilities:
| Monetary Assets US$'000 | Monetary Liabilities US$'000 | Net Exposure US$'000 |
| 31 December 2008 | |||
| Hong Kong Dollar | 32,244 | (192,923) | (160,679) |
| US Dollar | 471 | (514) | (43) |
| 32,715 | (193,437) | (160,722) |
| 31 December 2007 | |||
| Hong Kong Dollar | 59,161 | (19,231) | 39,930 |
| US Dollar | 35,304 | (5,617) | 29,687 |
| 94,465 | (24,848) | 69,617 |
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Group.
The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date. This relates also to financial assets carried at amortised cost, as they have a short term maturity.
At the reporting date, the Group's financial assets exposed to credit risk amounted to the following:
| 31 December 2008 | 31 December 2007 | |
| US$'000 | US$'000 | |
| Trade and other receivables | 2,258 | 57,695 |
| Cash at bank | 30,457 | 36,770 |
| 32,715 | 94,465 |
The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
The Group manages its credit risk by monitoring the creditworthiness of counterparties regularly. Cash transactions and balances are limited to high-credit-quality financial institutions. Trade and other receivables relate mostly to rental and related income and this is monitored by the active management of the properties. The Investment Manager and the Board of Directors do not expect any losses from non-performance by these counterparties.
Liquidity risk
The Group manages its liquidity risk by maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities.
The Group's liquidity position is monitored by the Manager and the Board of Directors.
Residual undiscounted contractual maturities of financial liabilities at 31 December 2008:
| Less than 1 month | 1-3 months | 3 months to 1 year | 1-5 years | Over 5 years | No stated maturity | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Financial liabilities | ||||||
| 2008 | ||||||
| Trade and other payables | 5,854 | - | - | 92,260 | - | - |
| Deferred taxation | - | - | - | - | - | 6,451 |
| Bank loan | - | 1,453 | 1,934 | 91,936 | - | - |
| 5,854 | 1,453 | 1,934 | 184,196 | - | 6,451 | |
| 2007 | ||||||
| Trade and other payables | 5,617 | - | - | - | - | - |
| Deferred taxation | - | - | - | - | - | 608 |
| Bank loan | - | - | 3,846 | 15,385 | - | - |
| 5,617 | - | 3,846 | 15,385 | - | 608 |
Interest rate risk
The majority of the Group's financial assets are non-interest-bearing. Cash held by the Group is invested at short-term market interest rates. The Group has two interest-bearing loans, with interest at variable rates. As a result, the Company is not exposed to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. However, it is exposed to interest rate cash flow risk.
The table below summarises the Group's exposure to interest rate risks at 31 December 2008. It includes the Groups' financial assets and liabilities at the earlier of contractual re-pricing or maturity date, measured by the carrying values of assets and liabilities:
| Less than 1month | 1-3 months | 3 months to 1 year | 1-5 years | Over 5 years | Non-interest bearing | Total | |
| 31 December 2008 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 |
| Financial Assets | |||||||
| Trade and other receivables | - | - | - | - | - | 2,258 | 2,258 |
| Cash | 30,457 | - | - | - | - | - | 30,457 |
| Total financial assets | 30,457 | - | - | - | - | 2,258 | 32,715 |
| Financial Liabilities | |||||||
| Trade and other payables | - | - | - | - | - | (98,114) | (98,114) |
| Deferred taxation | - | - | - | - | - | (6,451) | (6,451) |
| Bank loan | - | (1,453) | (1,934) | (91,936) | - | - | (95,323) |
| Total financial liabilities | - | (1,453) | (1,934) | (91,936) | - | (104,565) | (199,888) |
| Total interest rate sensitivity gap | 30,457 | (1,453) | (1,934) | (91,936) | - | ||
| 31 December 2007 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 |
| Financial Assets | |||||||
| Trade and other receivables | - | - | - | - | - | 57,695 | 57,695 |
| Cash | 36,770 | - | - | - | - | - | 36,770 |
| Total financial assets | 36,770 | - | - | - | - | 57,695 | 94,465 |
| Financial Liabilities | |||||||
| Trade and other payables | - | - | - | - | - | (5,617) | (5,617) |
| Deferred taxation | (608) | (608) | |||||
| Bank loan | (19,231) | - | - | - | - | - | (19,231) |
| Total financial liabilities | (19,231) | - | - | - | - | (6,225) | (25,456) |
| Total interest rate sensitivity gap | 17,539 | - | - | - | - | - |
At 31 December 2008, should the interest rates have increased/decreased by 100 basis points with all other variables remaining constant, the increase/decrease in interest (paid)/received for the period would amount to approximately (US$438,000)/ US$462,000 (2007: (US$112,000)/US$250,000).
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The above financial information does not constitute statutory accounts and the figures included above are based upon the audited accounts for the period ended 31 December 2008. The full audited accounts for the period ended 31 December 2008 will be sent to shareholders and will be available on the Company's website www.speymillmacau.com or from the Company's registered office at Third Floor, Britannia House, St George's Street, Douglas, Isle of Man IM1 1JE.