Date: September 25, 2020
To the Board and Directors of Raffles Education Corporation Limited
Through Mr. Chew Hua Seng, Chairman and CEO via email
Questions on Raffles Education Corp’s (REC) proposed acquisition of 35.9% shareholding interest in Langfang Hezhong Real Estate Development Co. Ltd.
Dear Mr. Chew Hua Seng,
SIAS has reviewed the REC’s circular dated 8 September 2020. We have identified the following questions below which we would like you to address to shareholders at your earliest convenience.
These questions are also published on the SIAS website. We ask that you make your answers to the questions public by publishing the answers to the questions on SGX Net so that shareholders can make an informed decision for the EGM.
- Given that REC initially sold the land for commercial purposes and thus having no need for the use of the land for educational purposes, why does the company, after 6 years, want to acquire the target company? Is there any other situation, agreement or circumstance that would require Raffles Education Corp (REC) to essentially reverse the decision 6 years ago to sell the land?
- The target company was incorporated on 11 March 2014, and was noted that “no development of the Land has taken place as the Land has not been successfully converted from educational use to residential and mixed development use”.
Can the management explain (i) the events that may have transpired and resulted in this delay, and (ii) the actions taken by the management during this time?
- Under footnote 1 in Page 9 of the circular, the Land was intended for the development of education facilities to be used by the Group to provide education services. Yet, it is noted in pages 16-17 that the Group is looking to create revenue streams complementary to the Group’s existing businesses, e.g. providing education consulting and other education related services. This may be construed as a marked departure from the Group’s original intention.
- Can the management explain the rationale for this shift from the provision of “education services” to “education consulting and other education related services”? Has any studies been conducted to understand the feasibility of these services in Langfang – bearing in mind that the city may not entirely be likened to Tianjin?
- Furthermore, can the management expound on their intention of “developing a higher education institution”? Does this fall within the current strategies of the Company and/or Group?
- Implementation risks has and may continue to be a valid challenge to the Group as inferred from page 15 of the circular, which reads “the application to convert the Land to commercial and residential land titles, which is required before the Land may be developed for such uses, over the last six years had been stalled by numerous protracted challenges and has not been successful. As this point, it is uncertain whether and when the application to convert the Land to commercial and residential land titles will be approved.” While we note that a majority control over the Target may alleviate challenges seeking the Vendor’s approval for development projects, would there be any other implementation risks that the management foresees?
- For example, the government or city-state may revoke or not grant such business licenses to the Group as the land use rights are currently applicable “for education use/science and education uses” (page 42 of the circular).
- The pro forma financial statements illustrated on page 17 of the circular shows that the Proposed Acquisition is loss-making and dilutive to earnings.
- Would you help the shareholders understand the nature of the losses (S$1.689m) associated with the assets (e.g. depreciation of land, management costs), given our understanding that the assets have yet to be developed and non-operational at this point?
- In addition, development projects require both financial resources and time. Apart from the purchase consideration of RMB 254 million, how much more monies (and the sources of funding) is required for the development project?
- Also, how long does the management envisage the development to finish, and before the asset turns profitable?
- We understand that this Proposed Acquisition is an arm’s length, non-related party transaction between the Purchaser and Vendor. Arguably, the purchase consideration of RMB 254 million stands at a c.14% discount to appraised value of RMB 295,970,000 by JLL? Can the management explain how did the parties arrive at the aforementioned purchase consideration?
- Given the current outlook following the Covid-19 pandemic and the impact on REC’s financials, how can REC justify the acquisition in the current situation?
- Please restate are the long term plans for REC and detail how this acquisition fits into these plans? With Covid-19 having a long term effect on the way people work, live and play, has ERC taken into account the long term effects of Covid-19 into consideration, especially with respect to this proposed acquisition?
- Will the company and its directors, who are deemed as having an interest in proposing the acquisition, be abstaining from voting at the EGM?
In the interest of transparency and shareholders requiring the information to make informed decisions, please respond to the questions via SGX Net. In addition, it is necessary for REC to address these questions and other relevant questions from shareholders publicly.
To provide sufficient time for shareholders to send in their proxy forms with the relevant information, would it not be prudent to postpone the EGM until all questions have been addressed via SGX Net before the deadline for the receipt of proxy forms?
We look forward to receiving your responses.
President and CEO