“Baby Beijing” to replace Modderfontein; Zendai investment sparks new 1600ha Chinese suburb in Jhb East

Tongaat Hulett led the way through its Moreland subsidiary, a property development business that turned old sugar cane lands into KZN’s most expensive real estate. History gave explosives and chemicals group AECI an abundance of land and for a while it looked set onto the same path. But that ended with last night’s sale of its Heartland property development operation and 1 600 hectares in Eastern Johannesburg rates to Hong Kong-listed Shanghai Zendai. AECI will receive a net R930m in cash with VAT of R130m to be paid to the SA Treasury. It is Zendai’s second international investment after the 2012 acquisition in New Zealand triggered by “domestic investors investing in property overseas.” So the R1bn announced last night is only the advance party of  a massive capital injection into the East of Johannesburg, expanding the already strong Chinese presence in nearby Cyrildene. – AH

Mark Dytor AECITo watch this CNBC Power Lunch video click here

ALEC HOGG:  Mark Dytor, Chief Executive of AECI is with us in the studio.  He says he’s had an interesting last 48 hours putting the deal together with Shanghai Zendai, to acquire 1600 hectares of land near Modderfontein.  You’ve had three SENS announcements, so it’s been over a period, we knew there was something going on.  You told us you that were selling this property, but where did you meet the people from Shanghai Zendai?

MARK DYTOR:  They were introduced to us over two years ago where they had some interest in investing in South Africa and it’s really been a way of courting each other over the last two years to get to this point.  They’ve always had an interest in investing in South Africa and looking outwards into Africa.  They’ve always been interested in that site and it keeps pulling them back.  The deal progressed in terms of ‘how much can we have?  There’s a small piece we like.’  We said ‘for our strategy we’re really looking for a bulk sale’ because we had many offers for small pieces of that land.  For us, in terms of our strategy – moving into explosives and chemicals – we felt that it was more appropriate if we could do a bulk deal.  The wait was worth all the discussions and negotiations that got us to this point. We’re extremely happy about it.

GUGULETHU MFUPHI:  You received a nice cash consideration from that deal.  What do you intend doing with it?

MARK DYTOR:  It’s R1.06bn.  Of course shareholders have been on the phone non-stop, asking us ‘when can we have this money?’  In terms of the transaction, we have until July next year to get the R1.1bn in, once we transfer the first half of the land across.  We’ve discussed it at board level.  We haven’t made any firm commitment to what we’re going to be doing with the cash, but in terms of our strategy, we have acquisitions in line that we could improve the profitability and returns of our shareholders.  There are discussions around share buy-back or even special dividends, so all those options are being considered.  It’s also relative to our gearing next year when we get the cash in.  We are geared about 30 percent, which is a little bit lower than where we’d like to be.  We’d like to gear ourselves because we’re looking for more opportunities to invest into Africa and into more specialty companies.  We have many ideas, but I think once the cash is in the bank then the final call will be made.

ALEC HOGG:  It’s a nice problem to have, but the other problem is that you still have 1300 hectares in the vicinity.

MARK DYTOR:  Yes, 1300 hectares is really the site that the Modderfontein site, the AEL on which the explosive site is operating.


ALEC HOGG:  So it’s buildings…

MARK DYTOR:  It’s buildings and infrastructure.  There’s an ammonium nitrate plant.  There’s ammonia storage.  However, there is still some land available, which we will be able to push into the market over the next couple of years.

ALEC HOGG:  Are you operating that factory?

MARK DYTOR:  Yes, we’re operating that factory.

ALEC HOGG:  Then it’s kind of; where you do your business from?  It’s not really a problem.

MARK DYTOR:  It’s not really a problem for us.  We do have other sites in Somerset West.  We have 720 hectares there just outside Somerset West.

AECI's share price has been on a tear in the last four years. The R1bn from Zendai won't hurt.
AECI’s share price has been on a tear in the last four years, almost doubling in 2013. R930m from Zendai won’t hurt.

GUGULETHU MFUPHI:  In KZN?

MARK DYTOR:  In KZN – in Umbongwintini, we also have some land available there, so over time we are looking to unbundle that.

ALEC HOGG:  Mark, the rehabilitation of those two sites: has that been an expensive process?

MARK DYTOR:  It’s been very expensive and of course, in this era in terms of chemicals, we have to be responsible and do the right thing.  We’ve been cleaning up those sites comprehensively for the last 20/25 years, and we make provision for that.  We probably have over R120m available to carry on cleaning up those sites.

ALEC HOGG:  Who checks that you’ve done it properly?

MARK DYTOR: Environmental Affairs does sign us off as well as the local government and the people who give us those sign-offs, so we’re being very responsible.  We’ve done a fantastic job and of course it’s the sins of the fathers that we’re now…but we’re responsible and we’ll continue to clean them up.

ALEC HOGG:  I hope the people in the area agree that you’ve done a fantastic job.  The thing that interested me here is that you operated very similarly to Tongaat in that Tongaat has a property development arm in Moreland and they’ve done fantastically well out of Moreland.  You have Heartland, but you don’t have Heartland anymore or presumably not because it looks as though the Chinese now own it.

MARK DYTOR:  In terms of our property strategy or in terms of top structures, we’ve never developed it forward.  All we’ve done is create services and bulk services and then sold that to companies that obviously put top structures on and developed it even further.  It’s been very difficult for us to make decent returns because we don’t enjoy the top end of putting up the top structures – retail stores, residential, and commercial.  We end up putting in electricity, water, and roads, which sucks up a whole lot of capital only to find that the margin you make out of that isn’t as profitable as if you were developing a top structure as well.

ALEC HOGG: Gugu, do you remember when Jack van der Merwe was here from Gautrain?  He was telling us about the siding at Modderfontein, and when you go to the airport, you see that siding.  Is that now going to be part of the Chinese operation?

MARK DYTOR:  Yes, it is on the Chinese land.  In order for the train to stop, you need to have some infrastructure around it and you need people.  You also need to build car parks, so there’s quite a big investment necessary.  You’re going to end up paying over R200m to put a station there and actually build a car park, which is going to be on the developer’s hands and on the Gautrain.  Therefore, there’s another lot of cash going out and you have to create the support and structures.  You need to have people living there, and you need to have roads coming in, so to me, the Chinese will do that.  They will develop that.  They have some great vision for that property and what they want to do.  They want to create another CBD and a finance centre.  They want to put up hotels and villages.

GUGULETHU MFUPHI:  In Modderfontein?

ALEC HOGG:  Change the name.

MARK DYTOR:  Who knows?  They are quite passionate about the land and the development and it means a lot.  Taking the property, it would probably take us 15 to 20 years if we continue at the rate we’re going.  With a real top structure developer now in, it’s probably going to bring that timeframe from 20 years down to ten years.  We’ve had a lot of research done that will probably create about 22 000 jobs in that area to build up those sites in what they want to do.  For the country, we’ve also worked out – in terms of rates and taxes in Modderfontein – there’s probably a billion rand that’s going to come to local governments and infrastructures.

GUGULETHU MFUPHI:  Maybe Baby Beijing – I think that should be the name of the new town.  Mark, thank you so much for your time today.  That was AECI Chief Executive, Mark Dytor.

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