ACCT11059 Steven Minehan 12081996

ASSIGNMENTSTAGE 1STEP 3MY FIRM – DYNAMIC HOLDINGS LIMITED (DYNAMIC GROUP)

Dynamic Holdings Limited. This firm which also goes by the name Dynamic Group is a premier property group in Mainland China that specializes in the development and

investment of up-market residential, commercial and retail projects.

https://www.dynamic.hk/eng/global/home.htm

ACCT11059 Steven Minehan 12081996

Sweet and Sour Chinese

This is my first impression of the company I’ve been nominated to get to know. A property development and investment firm based in Hong Kong, operating mostly in mainland China. Sweet and Sour. Not because it’s one of my favorite Chinese takeaway dishes, no. Sweet because I have an interest in the property market and have done for quite some time. Also I’ve spent considerable time in Hong Kong and the Shenzen province in China for work and I have seen firsthand the mind blowing level of property development going on there. However on the flip side to that, Sour because upon initially scanning Dynamic Holdings annual reports, half of it is in Chinese. This is understandable given the company is based in China, however given my level of expertise in reading annual reports and financial statements it may as well have all been in Chinese. Enter the little voices of self doubt and negativity. ‘What have I gotten myself into?’ Yes there it goes again. That universal go to phrase internally spoken by’ the dammed’ upon realizing you may have bitten off more than you can chew. Luckily for me I had found the video link by Dr Maria Tyler on moodle explaining how to enter the financial statements into excel. I found this a very helpful place for me to start and to help me understand the how, where and why of these reports. This definitely alleviated my initial concerns as I worked through these statements with a purpose and gaining some small victories along the way in the form of checks and balances. It does feel good when you get it right.

The Firm

Founded in 1992 and listed on the Hong Kong Stock Exchange at the same time, Dynamic Holdings Limited is a high-end property group with properties mostly in Mainland China. Specializing in the development and

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investment of up-market residential, commercial and retail projects, the group has placed an emphasis on having a strategic presence in rapidly growing regions such as Beijing, Shanghai and Shenzen. This is a snapshot of what their business is about and on their website. It goes on to outline their mission “Building with Vision”. A commitment they will adhere to in the up-market property development and investment arena in China. Reading through some of the major projects the Dynamic Group have bought online, it is plain to see their two showcase projects include Chaoyang Garden in Beijing and Eton Place in Shanghai. The award-winning Chaoyang garden is an “upmarket, all in one” complex including luxurious residential, commercial and office spaces. It has been architecturally designed to appeal to the recent beneficiaries of the region’s economic boom. With a contemporary shopping mall displaying some well known international brands.

Eton Place , Shanghai is located on alongside the Huangpu River next to the Lujiazui financial district in Pudong. As stated on their website, “This development is a high-quality office tower forming part of the five-star "Eton Hotel" complex giving unique access to complete business facilities, coupled with prime quality property management, Eton Place is one of the signature office towers in Pudong area with tenant portfolio of renowned multi-national corporations.”. Aside from these two major developments, the Dynamic Group has a diverse property portfolio comprised of other offices and shopping malls, car parks and many residential properties. Another feather in their cap is the Dynamic Cargo Centre. Situated in close proximity to the Tsuen Wan Container Terminals the facility features state of the art hoisting and gantry crane machinery. There actually isn’t a great deal of information available for Dynamic Holdings apart from their website and a few other small packets of information on Bloomberg and Reuters but everything I found points to the fact that they operate mostly through the development, rental, leasing and sales property markets and to a

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ACCT11059 Steven Minehan 12081996

lesser degree in the provision of financing and management consultancy services.

Annual Reports

As I start attempting to read Dynamic Holdings Limited annual reports, honestly, I really started to become lost. I skipped right through to the financial statements first and yes, I saw plenty of the accounting terms I had been learning about there on the paper in front of me, however in the context of it being in an actual report for an operational firm I found it overwhelming. Shortly after that was when I discovered Maria’s excel video. As I mentioned previously this made me feel like I was somewhat on my way to understanding what it is I’m actually looking at once I started to really focus in on the task at hand. It was a starting point, for sure but not enough for me to try to give my thoughts on what the firms key challenges and successes are. Not at this stage of my understanding. Then it dawned on me. Read the report. Now I know how this sounds but I guess I was guilty of jumping feet first into the fire so to speak and making a bee line right for the financial statements before I was ready. So, I read the report. The Chairman’s statement, the business review, financial review and the prospects. Once I got started on this, things just clicked. He just tells the story how it was for the previous year and directly beside each statistic or figure given, the previous year’s figures are right there beside it in brackets for easy comparison.

Looking across the last four years, my interpretation on the position of Dynamic Holdings is that for the most part, things have been moving along sideways. More or Less. There have been some ups and downs in their overall position. In my opinion these seem to be relatively minor fluctuations, but I am aware that shareholders might look at this differently. I noted that of the twelve board of directors, six of them have back grounds

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ACCT11059 Steven Minehan 12081996

in accounting or finance and three have an engineering back ground. Also, six of them are related. The Chairman, Mr. TAN Harry Chua is joined by his brother and four of his nephews on the board as Executive Directors. This may be a clue as to why they make a point of outlining their ‘board diversity’ policy. Smoke and mirrors? Who knows? It was something that caught my eye and while I may be more cynical than some it did raise an important question? Is this report relevant and in good faith? To answer this question, I read the auditor’s report. Deloitte are the Independent Auditors for Dynamic Holdings Annual reports, big company, solid reputation, good start. They state in their report

“In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 30 June 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“the HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance.”

They go on to list their basis for this opinion and how they adhere to a strict code of ethics when making these assessments. Sounds good but it’s all very ‘wordy and legal’ sounding. I guess it wasn’t until I read back through some of the older annual reports that I got what I felt was a real feel for how they describe what’s going on. Of course, the numbers don’t lie (well, Deloitte are telling me they don’t) but at this infant stage of my understanding when it comes to financial statements, I like to read the words the board are using to describe the state of affairs to help me gain perspective on the numbers. What I found was in describing a year that was not as profitable as the previous year the Chairman uses words such as ‘stable’ or ‘modest’ instead of ‘Oh boy we lost some money this year’. And not surprising when describing a good year, things are a bit more upbeat with a few more reports ‘solid’ and ‘strong’ being bandied around. However, reading in between the lines, as well as the auditor’s report and following the numbers I have an answer to my question. Are these statements relevant and in good faith? Yes, I believe they are.

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ACCT11059 Steven Minehan 12081996

Looking more closely at the comparison between 2017 and 2016 annual report, I discovered something that I found particularly interesting.

2017 revenue of HK$ 101, 762 (2016 HK$ 103,870) was down on the previous year

Direct costs were up HK$ 22, 062 (2016 HK$ 19,899) Gross profit Margin down 78% (2016 81%)

Yet despite yielding poorer results in these key areas, the report goes on to show a more positive financial position for 2017 over 2016.

2017 profit HK$ 116,678 (2016 HK$ 96,116) Comprehensive income 2017 HK$ 87, 955 (2016 HK$ -68, 565) Total Assets 2017 HK$2,450,954 (2016 HK$ 2,220,073) Share price 2017 HK$ 8.79 (2016 HK$ 8.48)

Why is this? The chairman states that the results were mainly attributable to the stable rental income of investment properties in Mainland China where the local currency is the Ren Min Bi (RMB). These assets are denominated in RMB. In addition to this ‘stable income’, the group reported other gain in the form of ‘imputed interest income’. A gain of HK$ 16,038 (2016 HK$ 6,266), keeping the currency exchange loss down to HK$2,422 (2016 HK$ 12,785). This is due to the currency fluctuation that the firm is exposed to when exchanging from RMB to HK$. This for me was a concept I found interesting that despite having a mediocre year of property rental income (a stable year, when in previous years with more profit it’s described as a solid year) the currency exchange set them in a better overall position. This situation is something I can relate to personally as my employer pays me in US$ and I too am at the mercy, to a certain extent, of price fluctuations between currencies when I exchange US$ to AUS$. The chairman signs off

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ACCT11059 Steven Minehan 12081996

on his statement by claiming Dynamic Holding Limited’s position in 2017 is sound and liquid. My analysis of this is: Things are good, but not great.

Challenges and Strategies

Some challenges being experienced by the firm come in the form of strong competition from online retailers and an increased supply of retail space. This is putting pressure on their retail rental department. Despite this, the firm seem to be relying on an expanding middle class with disposable income. They envision this will sustain the mid-range and mass market retailers. Also it states that they intend to maintain their high occupancy rate by proactively enhancing their leasing and marketing strategies, focusing on current consumer trends. I was unable to really nail it down further as to what these strategies might be, but this says to me they acknowledge the golden days of China boom are petering out. While there’s an oversupply of rental and living spaces and with the growing popularity of online shopping, in order to keep things ‘in the black’ they will have to be even more competitive and creative to fill those spaces. Another challenge described is a joint venture with Zhen Wah Harbour Enterprises Ltd. This is a piece of land in Shenzen that the company holds a 49% share in. This investment has entered into compulsory liquidation due to the expiry of its operational period and the Dynamic Group, with the help of their legal advisors, have filed for claims of debt owed by Zhen Wah to the Group. At the time of this report being published this claim was still un-resolved.

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Final Thoughts

I found this exercise of researching my firm a really valuable experience and one I would never have in million years done even to this level if not for studying this unit. It hasn’t come without its challenges, but overcoming these small obstacles is giving me more confidence in my ability to successfully complete this unit and build on what I’ve learnt during this initial look at an operational firm and its analyzing its annual reports.

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