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Title: "Fair Value of Investment Properties"
Date: "2020-03-30"
Categories:

• "log"

Today, on the 1st, I received a real-time trading tip to buy shares of New City Holdings, so I quickly checked it out. It turns out that the company released its 2019 annual report on Friday night. There is a unanimous positive sentiment from institutions regarding this annual report.

(Source: East Money)

Fortunately, I came across an article by Chu Shanjun with a different perspective on the "Real Net Profit of New City Holdings". In the article, Chu Shanjun points out that there is suspicion of profit manipulation due to the impact of changes in the fair value of investment properties.

Due to my limited knowledge in accounting, I am unable to determine the accuracy of this claim. However, I believe that having different opinions and discussions is worth noting in this log:

Investment properties can be measured using either the cost model or the fair value model. The former can be changed to the latter, but the reverse is not possible. Changes in fair value income will directly impact a company's operating profit. Currently, due to the difficulty in defining fair value, and the challenges it poses for auditors, many listed real estate companies choose the cost model. However, in the 2019 annual report on page 132, New City Holdings clearly states:

"The Group measures all investment properties at fair value, without depreciation or amortization. The fair value of investment properties is used to adjust their carrying amount on the balance sheet date, and the difference between fair value and the original carrying amount is recognized in the current period's profit or loss."

From this, we can see that in the consolidated income statement of New City Holdings' annual report (page 113), there is a profit increase of 2.647 billion, accounting for 15% of the total profit. Clearly, this is an audit result that has a significant impact on the profit. In the annual report, the company also openly points out this risk to investors. In the description of key audit matters (page 104), the audit firm lists the audit procedures related to the evaluation of fair value of investment properties.

Coincidentally, in the 2019 annual report of World Trade Co., Ltd. (600823.XSHG), the fair value changes in investment properties measured using the fair value model resulted in a loss of 1 billion, accounting for approximately 30% of the operating profit.

It must be emphasized that this article is not suggesting any suspicion of profit manipulation by New City Holdings (I also bought shares of New City Holdings). If the valuation model is reasonable and the audit is strict, then the profit of New City Holdings should be trustworthy. Companies have the right to choose either the cost model, such as Vanke and Yuexiu Development, or the fair value model, such as New City Holdings and World Trade Co., Ltd. The table below lists the listed real estate companies whose fair value changes account for more than 5% of their operating profit at the current point in time. The pubDate indicates the release date of the latest financial report. We can see that World Trade Co., Ltd., New City Holdings, and Yuexiu Development have all released their financial reports. According to the annual reports of these companies, both World Trade Co., Ltd. and New City Holdings measure their investment properties using the fair value model. The fair value changes (including investment properties, but not limited to investment properties, so the concepts should not be confused) of these two companies account for more than 15% of their profit. Yuexiu Development measures its investment properties using the cost model, and the fair value changes (mainly changes in the value of financial assets) also account for more than 15% of its profit.

The purpose of marking this article is to encourage everyone to pay more attention to the source of profit, rather than simply comparing metrics such as P/E ratio, P/B ratio, and gross profit margin (aren't the research reports from institutions a bit irresponsible?). For real estate companies that measure using fair value, we need to focus more on the changes in their investment properties and the value added by fair value. With the increase in property prices, it may affect the company's profit and net assets.

Trading Log#