Recor's property
17 May 1999

This is a sidepiece to today's main article, Recor Losses.

Recor's Property Problems

Recor held,  through 7 PRC 100% subsidiaries, 7 plots of vacant land in Jinqiao Industrial District, Qingxi, Dongguan with a total area of 420,189 sq.m.. According to the original statutory approvals, a total of $425m (in addition to the consideration for the grant of land use rights and development costs already incurred) was to be injected by the Group into these subsidiaries. 3 of these subsidiaries with a land cost of $30.1m were expected to be resold in the year ended 31-Mar-96, but PRC approval was not forthcoming for 2 such sales so the 3 lots were reclassified as "properties held for future development", as were the other 4 lots (held at $44.1m) which were previously planned for expansion of the Group's factory. 

On 8-Feb-96 a supplemental document was approved such that the development of the land should be completed by 30-Jun-01. If not, then the PRC authorities had the right to cancel the land use rights and take the land back.

On 5-Aug-96 the Group decided to cancel the registration of the PRC subsidiaries, removing the capital commitment of $425m, which was clearly beyond the means of the company, at some three times its net worth at that time. The preliminary approval for this cancellation entitled the Group to retain the 7 plots of land subject to certain conditions and the revised completion date for development was brought forward by 3 years to 30-Jun-98. We guess this shorter deadline was enough to change their mind, and on 5-Aug-97 Recor decided not to cancel the PRC registrations, and the PRC operating licenses were  issued.

Recor then had to submit a revised development plan by 30-Jun-98 and complete at least 25% of the development by 30-Jun-01.

Debt for Property

You will recall that the scheme of arrangement with RCRM's creditors excluded PRC creditors. One of these, known only as "Third Party A", was owed RMB11.4m by Recor as outstanding rental for a factory in Qingxi. So Party A accepted 2 of the vacant lots, independently valued at RMB30.5m at 31-Dec-97, in settlement of the debt. That was a discount of 62.6% to valuation. A letter of intent was signed on 20-Apr-98.

Another party (yes, Third Party B) was a supplier of cathode ray tubes for TV sets manufactured by Recor. They were owed RMB16.2m, so they purchased 4 of the vacant lots for RMB24.5m, a discount of 57.4% to the independent valuation of RMB57.6m at 31-Dec-97. They agreed to pay the balance (RMB8.3m) within one year from 20-Apr-98 in cathode ray tubes at market value. Who said barter trade was dead?

Party B said it might want the land which was transferred to Party A, so Party A granted Recor an option to buy it back at the same price within a year, so that they could then sell it to Party B. The remaining vacant lot was also under option to Party B for RMB7.0m, a 54% discount to the independent valuation of RMB15.2m at 31-Dec-97.

The transactions resulted in a $37.3m provision against carrying value in the 31-Mar-98 accounts.

Perhaps the lesson here is that valuations of PRC vacant land may be somewhat hypothetical, since if Recor had been able to sell the land at its valuation and then pay off its creditors, it would have been RMB60.4m better off. The bare land (held by PRC subsidiaries) was effectively encumbered with an obligation to develop it by the deadlines set out in the land use grants. It would seem that there were no "willing buyers" to do this. It is questionable what credence can be attached to valuations in such circumstances.

© Webb-site.com, 1999


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