New World Development Company Limited
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Risk Factors
D. Major Risk Factor on Subsidiaries
(continued)
New World China Land Limited (“NWCL”)
(continued)
5.
Property development companies in the PRC, including some of NWCL’s PRC subsidiaries, are subject to extensive
governmental regulation in most aspects of their operations, including those relating to the acquisition of land use
rights, resettlement and clearance of land, the approval of property development proposals and pre-sales. There can
be no assurance that these regulations will not change in the future in a manner which could adversely affect NWCL’s
business or results of operations. In addition, the PRC Government is presently strengthening its regulation and
control of the development of properties. While enforcement of these and other regulations are beneficial to the
entire property development industry, it is possible that certain individual regulations could adversely affect property
development companies, including NWCL. As regulations continue to develop, prevailing industry practices may not
comply with such regulations.
6.
The PRC Government has in the past imposed restrictions on foreign investments in the property sector to curtail the
overheating of the property sector by, among other things, increasing the capital and other requirements for
establishing foreign-invested real estate enterprises, tightening foreign exchange control and imposing restrictions on
purchases of properties in China by foreign persons. Such restriction may affect NWCL’s ability to make further
investments in NWCL’s PRC subsidiaries and as a result may limit its business growth and have a material adverse
effect on its business, financial condition and results of operations.
7.
The fiscal and other measures adopted by the PRC Government from time to time may limit NWCL’s flexibility and
ability to use bank loans to finance its property developments and therefore may require NWCL to maintain a
relatively high level of internally-sourced cash. In recent years, the PRC Government has tightened the requirements
in relations to grant of state-owned land used rights by way of tender, auction and listing for sale and raised the
minimum down payment of land premium several times up to 70% of the benchmark price of the locality where the
parcel of land is granted, and the bidding deposit at not less than 20% of the minimum land premium. Additionally, a
land grant contract is required to be entered into within 10 working days after a land grant deal is closed, and the
down payment of 50% of the land premium is to be paid within one month of the signing of the land grant contract,
with the remaining to be paid in full within one year of the date of the land grant contract in accordance with
provisions of such land grant contract, subject to limited exceptions. Such change of policy may constrain NWCL’s
cash otherwise available for additional land acquisitions and construction works.
8.
Under PRC tax laws and regulations, NWCL’s properties developed for sale are subject to LAT, which is collectible by
the local tax authorities. All income from the sale or transfer of state-owned land use rights, buildings and their
ancillary facilities in the PRC is subject to LAT at progressive rates ranging from 30% to 60% of the appreciation value
as defined by the relevant tax laws, with certain exemptions available for the sale of ordinary residential properties if
the appreciation does not exceed 20% of the total deductible items as defined in the relevant tax laws. Sales of
commercial properties are not eligible for such exemption. A minimum LAT prepayment rate ranging from 1% to 2% of
sale value required to be paid by developer upon sale and before the development project is completed and eligible
for tax audit for final settlement of LAT.
9.
Local provincial tax authorities can formulate their own implementation rules according to the Notice on the
Administration of the Settlement of Land Appreciation Tax of Property Development Enterprises and local situations
and there are uncertainties as to how they will enforce this notice. In the event that relevant tax authorities change
their requirements as to the amount or timing of payment of provisional LAT, NWCL’s cash flow may be materially and
adversely affected.
10. Effective from 1 May 2016, PRC government extended the value-added tax (“VAT”) reform pilot program to cover the
remaining sectors of real estate, construction, financial services and consumer services. 11% VAT rate is applied to
real estate industry, whereas the previous business tax rate was 5%, NWCL’s tax burden might increase.
11. A significant portion of NWCL’s operation is in the PRC and majority of NWCL’s income and expenditures were
transacted in Renminbi. Renminbi is not freely convertible. The PRC Government regulates the conversion between
Renminbi and foreign currency, and there is significant restriction on the remittance of Renminbi into and outside the
PRC. The value of Renminbi is subject to changes in PRC Government policies and to international economic and
political developments. Therefore there is no assurance that the exchange rate of Renminbi will remain stable against
foreign currencies in the market and fluctuations in exchange rates may adversely affect the value, translated into
Hong Kong dollars, of NWCL’s net assets, earnings and any declared dividends.