EUR 850.00 For Business Accounts Only

Morningstar | Brand and Execution to Fuel Expansion, but Asset Light and Restructuring Heightens Uncertainty

While most Chinese developers focus on development properties, emphasizing short construction cycles and aggressive presales to achieve quick asset turnover, Joy City Property stands out as one that succeeded in developing and managing quality retail assets.The company’s flagship brand, Joy City, is regarded as a destination for 18- to 35-year-old consumers, providing extensive lifestyle brands, along with entertainment and dining options. Its portfolio has performed admirably, with two of its assets ranked in top 15 retail assets in China, measured by retail sales. The firm relies less on international luxury brands, which had traditionally been key tenants for Hong Kong operators in China. The firm’s positioning and brand make it an attractive partner to many smaller retailers, both internationally and domestically, looking to expand in China.In mid-2016, the company disposed a stake in its core assets to several institution investors, reducing its gearing from 63% to 30%. The company announced an ambitious expansion plan to grow to 20 assets by 2020 and 100 assets by 2030. The plan calls for several asset-light initiatives to manage capital expenditures and balance sheet. The company will set up joint ventures with institutional investors for large greenfield projects. It will also acquire majority stakes in existing assets, and then renovate and rebrand such assets under the Joy City brand. It will also acquire a minority stake and provide a management service contract for existing assets.The company’s expansion plan is sound. It has cooperated with large institutional investors on several greenfield projects before. Leveraging its well-known brand equity and management expertise, it received strong interest from owners of existing assets across many cities. But we expect long-term returns won't be as high, because excess return for commercial real estate projects is typically derived from undertaking development risk through greenfield or redevelopment. The corporate restructuring placed the company under the control of a highly indebted mid-size residential developer, which may present competing funding demand, slowing the company’s expansion plan.