Interview: Sebastian Chen of Franshion Properties

On the first floor of the five-star May Fair Hotel in London’s West End, Sebastian Cheng of Franshion Properties is taking a lunchtime break.

The Hong Kong-based IRO is stopping in the UK capital for a two-day investor conference on the Asian banking, property and insurance sectors.

What brings you to London?

London is very important so I like to join a conference here on a regular basis. You sit in a hotel and you have many investors coming in – it is very efficient. Last year I joined another one in London hosted by Royal Bank of Scotland.

Is the demand from investors to meet you this year the same as last year?

I have been engaged in the Chinese property market since 1993 and doing IR in the sector for many years, so I know the ups and downs. I can see the past two years have not been so good.

Too many government policies have meant investors are scared, particularly those investors who are far away from China. When they are scared, they don’t buy at all.

Investors in this part of the world were underweight in China property until recently when they heard government policy was relaxing so they started buying again. Even so, the demand is not like two years ago when I came to London. That roadshow was very successful, in terms of the stock price and the people I met here.

Are the questions you are being asked by European investors today focused on policy?

Usually investors will end the meeting with the macro questions regarding government policy and the economy in China – whether we are bullish or bearish, any challenges in the future, potential risks, and so on. Investors who are familiar with our company tend to ask company-specific questions.

What’s the story you’re telling investors?

There are about 30 listed Chinese property firms in our sector, most of them home builders selling residential properties, but there are many austerity measures targeting residential property in China.

We are landlords and there are not too many landlords in our sector, maybe two or three. We own some core investment properties in some good locations in China, generating stable rental income.

We have many good commercial properties – icons in China, like the Jin Mao Tower in Shanghai. We also bought the land quite early on, mostly in good locations in central Beijing and Shanghai.

We’ve been in the market for building and owning property for 20 years, so we have the expertise. Now we are expanding to sell more properties and we sell very well. When you sell properties, your top-line growth and bottom-line growth are very impressive and you have strong cash flow.

That means you can build more investment property for more rental income in the future.

Today investors care about safety. They want to know what happens if you can’t sell property in the future, what happens if there are more government policies in future, and what happens if the bank won’t lend to you anymore. We have a strong balance sheet, high cash levels and no gearing.

Does state ownership help or hinder your firm?

Over the past several years, people have admitted that if you are a state-owned company you have some advantages. At the very least you can get cheaper money from banks; it’s not fair, but it is the case. Investors here and in the US understand this, and you see the stock price reflect this.  

Not all state-owned firms can perform, however. There are still some that have not been able to execute business for the past 10 or 20 years. That means you need to pick your stock: not just any state-owned company but a good state-owned company.

What is the current view on the government’s attitudes to property developers in mainland China?

We can’t say the government is anti-developers; it just wants to make sure property prices don’t go up too crazily. It wants to see prices growing at a healthy, sustainable rate. Without the austerity measures since 2004 the bubble would have already burst. With these measures, we can still say the sector is healthy.

What is competition like from Hong Kong property developers moving into the mainland?

Property can be quite a local business. It means that if you are a local company with local people, you can have better cost control and you know market tastes.

Hong Kong developers are a good size and have deep pockets, low gearing and money to buy, but they also need people. They don’t have local people, so recently we have seen Hong Kong developers trying to buy shares in local developers, trying to establish a platform in China so they can expand faster.

Are attitudes to IR in Hong Kong and China evolving?

It is improving now compared with three or four years ago. The disclosure is much better, there are more and more conferences in Hong Kong, and the IROs have to do more for investors. You join conferences and non-deal roadshows to meet investors as a must now but several years ago that was not the case.

It’s controversial but when you compare the Chinese property firms listed in Hong Kong, our IR activities or disclosure may be better than our Hong Kong counterparts. The Hong Kong developers are playing catch-up because we
are doing a better job.

That said, some companies in our sector still don’t care much about IR, which in the US and Europe is a very established profession, but not in Hong Kong or China. I see many people who don’t have the credibility or industry knowledge to do the job; they just need to make sure their boss is happy and that is it.

For me, you have to have a very open-minded boss. My CFO asked me to join Franshion and, at that time, I knew he was very open-minded.

He knows what happens outside state-owned companies in the capital markets, which allows me to do things for the good of the company. I joined Franshion for that reason and I can serve both my investors and my company, so everybody is happy.

How did you become involved in IR?

Back in 1993, I started my career working for property developers in China, marketing leasing and investment for several years. But I’m from Hong Kong and, as I already mentioned, property is quite local.

Not being mainland Chinese, local people would always enjoy an advantage over me, so I changed my career a little bit to become a qualified surveyor.  

Later on, I decided I should learn something more advanced from the West; property development in Hong Kong and China was too boring. I went to Europe for two years to take my MBA, and then I worked for some European property funds.

After that I came back to Hong Kong and it just so happened that I joined a blue chip company as IRO.

At that time, the company was quite small; this was 2005. I was lucky that the whole Chinese property sector was rerated in 2005. Before that, stock prices didn’t move: no matter what you did, they didn’t move.

When I joined that company the stock price was just over HK$1 ($0.13) and when I left in 2009 to join Franshion it was HK$18. For four consecutive years, the stock price was ranked number two in the sector.

Is IR a career for you now?

Yes, definitely. I like this job very much – and you can see I am very passionate.