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- Last week, bonds issued by Road King saw a significant decline, with the bond due in September 2024 down about $10 and currently trading at $50. Bonds due in 2025 and 2026 fell to around $30 and $20, respectively.
- The reason that drove down the bond price is owing to the sales of 9 million USD bond due in September 2024 between 9 and 12 April by Zen Wei Peu, the chairman of Road King. The market was concerned that Road King's chairman take such an action to avoid potential loss if the company could not be able to repay the bond in September, leading to a sharp fall in the bond price.
- From past track records, “Lying Flat” must not be an acceptable choice for Road King. On the one hand, the company’s willingness and ability to repay debt are rather good in the industry. Meanwhile, Road King has a decent structure of shareholders, with parent company Wai Kee Holdings (0610. HK) taking a 45% stake in Road King as of 31 December 2023. Given that Wai Kee Holding is currently in good operating shape, Road King's "Lying Flat" undoubtedly hurts the parent company and other listed companies under Wai Kee Holding, like Build King Holdings (0240. HK). Therefore, we believe the parent company won't leave Road King its own devices. Not only that, Shenzhen Investment (604. HK) the second largest shareholder of Road King with ownership of around 27%, is also well capitalized and might inject funds into Road King through shareholder loans and other means if needed. Coupled with the fact that Road King has some collaborative projects, we believe Shenzhen Investment also has the motivation to assist Road King, and the SOE background may help to get refinancing from the onshore market.
- Moreover, Road King has ample sellable projects in Hong Kong, and with Hong Kong scrapping all tightening measures for the real estate market, the sentiments improved a lot. For example, the MORI project released 150 units of completed properties last week, and 17 units were sold within three days. We believe that the sales proceeds from these offshore projects could be able to support the company’s debt repayment to a greater or lesser extent.
- We are not aware of any major negative news about Road King, like loan withdrawal from banks. We thus believe the sales of bonds by the chairman is a personal matter and has nothing to do with the company's operation condition.
- What’s more, the sales of China’s toll roads, a critical factor that affects the company's liquidity, have made substantial progress. China Merchants Expressway, the transaction counterparty, announced on 23 Apr that the sale of toll roads had been completed. We estimate that the transaction will generate more than HKD 3 billion in cash flow, greatly alleviating the company's liquidity constraints.
- To sum up, it is a bit difficult to determine the rationale behind the chairman’s bond sales. However, based on our fundamental analysis (please refer to “Bond Focus: Can Road King Survive the Industry's Winter?"), we reiterate our view that the company could be able to repay the bond due in September this year, and the ability to make regular interest payments to perpetual bonds is an important indicator in determining a company's liquidity. Regarding the longer-term bonds, if the sales performance remains sluggish, even under the optimistic financing environment, the likelihood of default on bonds is significant.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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