Shimao Group – The New Bond Express Selection for Investment-Grade Bonds

Table 1: Bond Information

Company Introduction

Shimao Group is a large real estate developer in China. It was ranked 8^th in 2020 by CRIC, a China Real Estate Information Corporation, for its total contracted sales. It was listed on HKEX in 2006 (Stock Code: 813.HK) and has a market capitalization of around HKD 36.1 billion.

Business and Credit highlights

In the first ten months of 2021, Shimao Group recorded total contracted sales of RMB 241.8 billion, which increased 5% YoY. Its sales growth is slightly less than its peers.

In the first half of 2021, the group generated a total revenue of RMB 73.4 billion, which increased 13.7% YoY. Its core net profit was RMB 9.38 billion, having increased 13.6% YoY. Its revenue growth and profitability are better than that of its peers, rendering a fairly good overall performance.

In terms of contracted sales and land bank, the group focuses on tier one and tier two cities. These core cities have solid economic growth and stronger demand for properties, and the land bank in these core cities have higher liquidity. These are essential factors that help maintain the group’s future growth.

The group’s land bank is around 72,830 thousand sq. m., equivalent to total saleable resources of RMB 1,290 billion. Its land bank to sales ratio (in terms of area) is 4.2 times, close to the industry average, and is sufficient for the group’s development plans for the next three to four years.

As shown in Table 2, the group has successfully passed all three red lines and reached the “Green Light” level, according to Three Red Lines Guidance. As of June 2021, the group’s net gearing ratio decreased to 50.9%, and its non-restricted cash to short-term debt stood at 1.68 times. These indicators imply that its short-term solvency is strong, with a fairly good leverage level.

Table 2: Shimao Group’s Credit Indicators

Despite an increase in debts as the group expanded and scaled up over the past few years, most credit indicators did not worsen, and the increasing rate of debt was lower than that of sales. The group’s cost of borrowing remains at around 5.6%, and debt to sales ratio hit a low of 0.54 times – both of which outperformed its peers’ average. With a steady sales growth and decent credit metrics, its credit risk should be low.

On a side note, the group’s Chairman, Mr Hui Wing Mau, bought the group’s shares on 9 November, and also increased his holdings by 116 million shares through a scrip dividend. This is an indication of Mr Hui’s confidence in the group’s future development. Apart from that, Shimao Services, a property management company of which the group has a 64.5% stake in, managed to raise around HKD 4.8 billion by placing shares and issuing convertible bonds – an indication of strong financing ability of the group’s high quality assets.

Risk related to Off-balance Sheet Items is still Under Control

Currently, the market is more worried about the developers’ off-balance sheet items. We made a quantitative analysis on six aspects to address these (see Table 3):

1. Guided consolidated ratio and estimated consolidated ratio (a higher difference means the attributable contracted sales may be unreasonably high)
2. Contracted liabilities / attributable contracted sales (a lower number means some projects that should be consolidated, are likely not consolidated)
3. Return on JVs and associates (a lower number means the JVs may be either unprofitable or not consolidated)
4. External guarantees / investments in JVs and associates (a lower number means the actual guaranteed amount may be underestimated)
5. Payables to JVs and associates / total debt (a higher figure means the actual debt level may be underestimated)
6. Minority interests / total equity (a higher number means the flexibility to access hidden debt is higher)

Table 3: Comparison between Large Developers

Shimao Group’s off-balance sheet debt situation is similar to Sunac and Agile’s. It is possible that they have some projects that are yet to be consolidated into the financial statement. However, such risks should be manageable, given its lower net gearing ratio (50.9%) and higher non-restricted cash to short-term debt (1.68 times) on the balance sheet.

Trust Loan Event and Speech of the Group’s Vice Chairman Triggered Market’s Panic

At the beginning of November, there were rumours that Shimao Group held discussions with Lujiazui International Trust on extending the payment schedule for its trust loan of RMB 3.0 billion. Following which, both its affiliated stocks and bonds dipped in the capital market. Even through the group clarified that its collaboration with Lujiazui Trust is normal and stable, and that the trust loan’s maturity date is next year, the market is still worried about its tightening cash flows. As such, its stock and bond prices only rebounded slightly.

The group’s vice Chairman, Mr. Hui Sai Tan, subsequently gave an recent update on the group. He admitted that the group has issued a few wealth management products, but said it amounts to a few to ten billion RMB, or less. He also reiterated that the group’s cash collection from sales is the largest safeguard for debtholders, and they can access liquidity through selling its investment property assets when necessary. Moreover, he stated that if the policies are not going to be relaxed, even the strongest property developers could only survive three months more. This statement triggered market fears once again.

As mentioned in our previous articles, with more signals about loosening regulations, such as increasing the limit of personal mortgages, speeding up mortgage approvals and clarifying the misunderstanding about the three red lines policy, the property market might be rebounded soon.

Shimao’s 2023 USD Bond is Now Available on Bond Express

The group’s land bank is more concentrated on tier one and tier two cities, as well as an investment properties of around HKD 20.0 billion in Hong Kong. These property projects give rise to greater liquidity as they can be converted into cash more easily. The group’s subsidiary, Shimao Services, managed to raise around HKD 4.8 billion, indicating a strong financing ability of the group’s assets. Apart from that, the group has decent credit indicators.

Therefore, we believe that the group has the ability to go through this China’s real estate crisis. The Trust Loan Event and the speech of the Group’s Vice Chairman which led to market woes, in turn, provide a good opportunity for investors to buy its bonds. As such, we have provided this 2023 USD bond SHIMAO 3.975% 16Sep2023 Corp (USD) on Bond Express for investors to enter at a lower cost.

The current yield of the bond is around 17.0%. Compared to the previous yields (4% to 5%) in the past few years, it is apparently more attractive now – something that investors can consider paying attention to.

Related Risk

The group is barely in the investment grade range with its issuer ratings of BB+ / BB- (S&P / Fitch). The group might possibly be downgraded further. Fitch still remains an investment grade rating for the group while S&P and Moody’s already downgraded the group to a non-investment grade rating, which might lead to forced selling from bond funds which could only hold investment-grade bonds. Its bond price might therefore be more volatile. 

The regulatory policies is still tightening in different cities, as the policy direction remains “houses are for living in, not for speculation”. With a negative sentiment, the group’s sales figure might be decline significantly.

Its bonds are traded at over 10% yield. We believe that it is difficult for the group to issue bonds in the public market. As such, its refinancing risk is higher than before.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in SHIMAO 3.975% 16Sep2023 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.