There is big news in the field of mergers and acquisitions.

On Friday evening (November 22), Gree Real Estate (600185) disclosed a major asset restructuring draft, proposing to exchange 100% equity held in Shanghai Helian, Shanghai Baolian, Shanghai Tailian, Sanya Helian, and Chongqing Liangjiang, along with a loan of 0.5 billion yuan to Hengqin Financial Investment Group Co., Ltd., for a 51% equity stake in the duty-free group held by Haitou Company, with the valuation difference being supplemented in cash.

This means that Gree Real Estate aims to gradually exit the real estate business through this restructuring and inject duty-free business, becoming a publicly listed company centered on the duty-free business and focusing on the layout of the industry chain surrounding the CSI consumer 360 index.

The restructuring of Gree Real Estate has a long history; the original restructuring plan was for the listed company to purchase 100% of the equity of Zhuhai Duty-Free Group held by the Zhuhai State-owned Assets Supervision and Administration Commission and the Urban Construction Group through the issuance of stocks and payment in cash, while also planning to issue stocks to no more than 35 qualified specific objects to raise matching funds. This plan was approved at a temporary shareholders' meeting in April 2023.

However, at the board of directors meeting held in July 2024, it was decided to withdraw the original restructuring plan application and make significant adjustments to the restructuring plan, which was finally announced this past Friday.

This restructuring signifies a significant transformation of Gree Real Estate's business, having far-reaching impacts on the company. After all, the real estate industry is on a downward trend, while the profitability, cash flow, and development prospects of the duty-free business are relatively better.

In terms of stock price, from early September this year until now, Gree Real Estate's stock price has accumulated over 60% increase, and it has also continued to rise in recent days, with a more than 6% increase on November 22, stimulated by the restructuring news, making tomorrow's opening performance also worth looking forward to.

Image source: Prospectus

01

The real estate development has slowed down, and gree real estate has continued to report negative net income.

Public information shows that gree real estate is a conglomerate enterprise focused on real estate, csi consumer 360 index, and biomedical health industries, listed on the main board in shanghai in 2009, with its registered location in zhuhai, guangdong.

The controlling shareholder of gree real estate is hainan investment company, which is backed by the zhuhai state-owned asset supervision and administration commission, making the zhuhai state-owned asset supervision and administration commission the actual controller of gree real estate.

Shareholding control relationship of gree real estate, image source: Major asset swap and related transaction report (draft).

From the financial report data, from 2022 to the first half of 2024, over 80% of gree real estate's revenue comes from the real estate industry, and during the same period, the company's net income attributable to shareholders has shown a continuous loss.

Gree real estate's net income situation, image source: Choice.

In recent years, affected by factors such as slow economic growth, changes in population structure, gradual decline in urbanization speed, and weakening resident income expectations, the real estate industry has performed poorly.

According to data from the National Bureau of Statistics, in 2023, the drop in real estate development investment expanded from -5.7% to -9.6%, while the sales area and sales volume of commercial housing decreased by 8.5% and 6.5% year-on-year, respectively, with the industry overall maintaining a bottom fluctuation pattern.

Against this backdrop, some real estate companies, in order to promote project sales, are willing to sell at reduced prices, but many projects currently sold by real estate companies were acquired at high prices in previous years. The high cost of land acquisition leads to ongoing market downturns in the subsequent sales phase, resulting in worrying profitability for many real estate companies.

At present, many real estate companies are in a state of loss. In the first three quarters of this year, gree real estate, vanke, overseas Chinese town, cccg real estate corporation, china fortune land development, shenzhen centralcon investment holding, and other real estate companies have all been deeply stuck in losses.

Although the state has recently introduced a series of measures to boost market confidence, including lowering down payment ratios and mortgage rates, and 'loosening' purchase restrictions, these measures can somewhat invigorate the housing market and promote marginal improvements in the real estate industry, it is still difficult to completely reverse the decline of the real estate industry, as the golden era of the real estate industry has long passed.

In this restructuring, gree real estate plans to divest assets whose main revenue source is from real estate development business, covering a variety of product types including mid-to-high-end residences, office spaces, and commercial properties, primarily through self-development and sales.

For example, shanghai helian's main business is the development and construction of the pujiang haide residential project on plot 38-01 in the front beach of pudong new district, shanghai.

Shanghai baolian mainly focuses on the development and construction of the haide one residential project on plot 32-01 in the front beach of pudong new district, shanghai.

Shanghai tailian is primarily engaged in the development and construction of the park haide residential project on plot 10-05 in unit SJSB0003, sijing town, songjiang district, shanghai.

Sanya helian focuses on the development and construction of the sanya bay one project on phoenix coast unit plot in the sanya central business district.

Chongqing liangjiang focuses on the development and construction of the chongqing liangjiang headquarters park project.

As a real estate company that has continuously incurred losses for more than two years, gree real estate views the divestiture of its real estate business through restructuring as a pragmatic move. So what is the situation of the proposed tax-free group?

02

In the first half of this year, the duty-free group achieved a net income exceeding 0.4 billion.

The full name of the duty-free group is 'Zhuhai Duty-Free Enterprise Group Co., Ltd.', which primarily engages in the sales of duty-free commodities and is one of the earliest enterprises in the country to engage in the duty-free commodity business, with a history dating back to December 1981 with the establishment of Zhuhai Friendship Company’s duty-free store.

Similar to Gree Real Estate, the actual controller of the duty-free group is also the Zhuhai State-owned Assets Supervision and Administration Commission. It is worth mentioning that many recent merger and acquisition cases involve the consolidation of assets under the same actual controller, such as the recently popular Shuangcheng Pharmaceutical and Aura Semiconductors, H.B. Fuller and Fuller Hua, and Keyuan Pharmaceutical and Hongjitang.

The equity and property control relationships of the duty-free group, image source: major asset replacement and related transaction report (draft).

As of the date the report was signed, among the subsidiaries under the duty-free group, those that account for over 20% of the latest audited total assets, operating income, net assets, or sources of net income are Zhuhai Duty-Free International Co., Ltd. (referred to as 'Zhuhai Duty-Free International'). Zhuhai Duty-Free International is primarily engaged in import and export trade, wholesale and retail supply and services of duty-free commodities in Hong Kong, as well as cross-border e-commerce, warehousing logistics, and external investment.

In addition to Zhuhai Duty-Free International, the duty-free group also includes Zhuhai Duty-Free (Macau) Sole Proprietorship Limited, Zhuhai Duty-Free Group (Hainan) Duty-Free Commodity Co., Ltd., and Zhuhai Duty-Free Group (Zhuhai Hengqin) Commercial Co., Ltd. as holding subsidiaries.

Unlike Gree Real Estate, which is deeply in loss, the performance of the duty-free group has shown a growth trend in the past two years.

In 2022, 2023, and the first half of 2024, the duty-free group achieved revenue of approximately 1.638 billion yuan, 2.286 billion yuan, and 1.313 billion yuan, respectively, with corresponding net incomes of approximately 0.317 billion yuan, 0.667 billion yuan, and 0.438 billion yuan.

Profit and loss statement of the duty-free group, image source: Major Asset Replacement and Related Party Transaction Report (Draft).

After the restructuring, the duty-free group will become a holding subsidiary of the listed company, which will expand the duty-free business on the basis of existing business sectors.

At the same time, through industry integration and resource optimization, the capacity for sustainable development will be improved. On one hand, the duty-free business at Zhuhai Port will be stabilized, with plans to layout duty-free businesses in Zhuhai city, Hengqin, and hainan, expand duty-free businesses at airports and other ports nationwide, and realize a diversified and multi-format sales approach for duty-free commodities; on the other hand, leveraging the platform advantages of the listed company to enhance the expansion of mature businesses in the tourism retail supply chain, focusing on a layout centered around the csi consumer 360 index industry which includes duty-free, bonded, and taxed goods.

The duty-free industry refers to enterprises authorized by certain countries and regions to set up stores in their means of transport, ports, or cities for entry and exit travelers to purchase duty-free commodities, which is a branch of the tourism retail trade.

After years of development, large domestic and international duty-free operators have established relatively mature business models. If the market share of large domestic and international duty-free operators increases further in the future, and their bargaining power in the supply chain strengthens, their global price competition advantage for the duty-free commodities sold will continue to improve, intensifying competition in the duty-free industry market.

According to data from the Forward Industry Research Institute, the sales scale of China's duty-free market in 2022 was 36.531 billion yuan. Currently, the market concentration of China’s duty-free industry is relatively high, showing a situation where one is dominant while many are strong.

According to statistics, in 2022, the leading duty-free company, china tourism group duty free corporation, held a 71.3% market share, ranking first in the industry, followed by hainan duty free with a 9.3% market share, while zhuhai duty free, shenzhen duty free, and wangfujing group made it to the top five.

china tourism group duty free corporation is far ahead in core indicators such as the number of duty-free licenses, sales revenue, and the number of duty-free shops, while the duty-free conglomerates still have a significant gap compared to china tourism group duty free corporation in terms of market share.