Highlights:
- Shimao Group has come under the spotlight recently, as negative news mount. As a result, both Shimao’s affiliated stocks and bonds plunged. Meanwhile, its credit rating was downgraded to non-investment grade.
- The Group might fall into a liquidity crunch, but they proactively self-rescue, including issuing and placing shares, pledging its assets and conducting an internal transaction for its subsidiaries.
- We believe the Group has less repayment pressure in the secondary bond market. Even if we take some discounts of the above mentioned high quality assets, the liquidity provided by these assets should be sufficient for them to pass through the short-term difficulty.
Negative News surrounding Shimao
Shimao Group Holdings Limited (“Shimao Group” and “Group”) has come under the spotlight recently, as negative news mount. Moody's and Fitch downgraded its credit rating to Ba3 and BB respectively, with a negative outlook. This implies that the group was downgraded to non-investment grade. Right now, both Shimao’s affiliated stocks and bonds plunged. Prices of its onshore and offshore bonds have decreased, reaching 40 to 60 cents on the dollar. Related shares, Shimao Group and Shimao Services, also saw a decline of 30% and 40% respectively this week.
On 14 December, it was reported that the one of the Group’s property projects, located in Pucheng Unit, Shanghai, could not be put on the official record. This is a record where property transactions between homebuyers and developers are made available on an online database in China. As properties of the particular project had already been pledged to Lujiazui International Trust, the Group has thus been accused of selling one house to two different parties. In response, the Group said they will suspend property sales related to this project and refund monies to homebuyers. This might affect the confidence of homebuyers and the Shimao’s cash collection.
On the same day, Shimao Group was said to be in discussions with Guotong Trust for a loan extension of an undisclosed amount, in hopes of managing its liquidity so as to also repay an onshore bond due to mature this month and another onshore bond due on 15 January, 2022; an amount totaling RMB 290 million. It is thus evident that the Group is facing a liquidity crunch.
On the other hand, on 13 December, the Group’s subsidiary, Shanghai Shimao Co., Ltd (Stock Code: 600823.CH) proposed to sell its property management segment to another subsidiary, Shimao Services (Stock Code: 873.HK) for a disposal price of RMB 1.65 billion. As the transaction is taking place between subsidiaries of the Group, and the market suspect that the Group is taking advantage of Shimao Services’ assets to secure the development segment. Shanghai Stock Exchange also questioned whether the transaction would harm shareholders’ interests.
The Group might fall into a liquidity crunch, but they proactively self-rescue
From the perspective of Shimao Services’ shareholders, the transaction is rather controversial. However, from the view of Shimao Group’s debtholders, we believe this could help strike a balance between both companies’ financials and relieve the liquidity pressure on Shanghai Shimao Co:
- As of end June, Shimao Services had a net cash position of RMB 5.6 billion with almost no debt, an indication of sufficient liquidity.
- As of end September, Shanghai Shimao Co. had total debt of RMB 30.1 billion, including short-term debt of RMB 8.9 billion. Despite a low net gearing ratio of 25% and a cash position of RMB 16.7 billion, the cash might be trapped within its subsidiaries and not be used for repayment.
Although it could be considered as positive news, the internal transaction triggered panic in the market. Investors are more concerned that most of the Group’s cash has been restricted from use, possibly due to the increase in regulatory pre-sales requirements, resulting in the need to transfer capital from its property management business to its property development business.
Apart from that, we note the Group’s proactive attempts to rescue itself and stay afloat in this crisis. On 6 December, new shares were issued and placed to raise HKD 1.14 billion for debt repayments and general corporate purposes.
At the beginning of December, the Group pledged its Shanghai headquarters, Shimao International Plaza, to the Imperial Bank of China. In spite of undisclosed financing amount and the property valuation, we estimated the market value of the property to be around RMB 1.7 billion, based on its rental revenue of RMB 38 million in the first half of 2021 and a 4.5% capitalization rate - the capitalization rate on Shanghai’s top tier offices. The Group could expect to receive hundreds of millions in RMB by pledging the property.
The Group should have the ability to pass through this crisis
Given the current situation, we still believe that the Group has the ability to tide through this crisis. As mentioned in our previous article, Shimao Group – The New Bond Express Selection for Investment-Grade Bonds, their advantage over other distressed peers is its high-quality asset portfolio. This includes a 66% stake in Shimao Services (current market capitalization of around HKD 12 billion), its land bank in tier one and tier two cities (accounting for 66% of its 84,000 thousand sq. meter land bank) and its HKD 20 billion properties in Hong Kong.
On the other hand, its November contracted sales amounted to approximately RMB 16.1 billion. Although the sales dropped around 49% YoY, more severe than the industry average of -38% YoY, we believe that the Group is less likely to suffer from a significant plunge in sales, unlike the other developers in distress (such as Evergrande, Sinic Holdings and Kaisa). It is still possible for them to continue collecting cash from sales.
As
for its short-term debts, the Group is due to repay bond principals of around
RMB 4.5 billion and bond interest payments of around RMB 1.7 billion in the
first half of 2022, totaling RMB 6.2 billion. Compared to its sales amount, we
believe the Group has less repayment pressure in the secondary bond market. Even
after applying a discount on the above-mentioned high quality assets, they
should still be able to provide sufficient liquidity for the Group to tide through
this short-term difficulty.
Shimao Group stated that they will dispose assets if necessary. We believe that their strong determination in handling this crisis will help buy time for them to ensure delivery of homes, and that the regulatory pre-sales proceeds on its projects will be eventually be released (REDD reported that RMB 10 billion cash will be unfrozen gradually from January 2022). Therefore, they should have the ability to pass through this crisis.
Related risks
There are a great deal of news and rumours surrounding Shimao Group, some of which are unverifiable, and would cause its bond prices to be more volatile. Investors should stay cautious when considering buying Shimao bonds.
With consistent declines in both Shimao’s affiliated stocks and bonds, its refinancing ability in the public market would decrease significantly. Property sales might also decline due to the weakening confidence of homebuyers. The Group might not be able to dispose of the above-mentioned high quality assets or use them for financing in time. As a result, the Group might eventually default.
The Group’s off-balance sheet debt situation is not ideal, and its complicated debt structure might lead to more unverified rumours or news, or hidden debts maturing soon, resulting in greater pressure on its bond prices and its liquidity.
Conclusion
Shimao has come under the spotlight recently, as worries and negative news mount. As a result, both Shimao’s affiliated stocks and bonds plunged. Meanwhile, its credit rating was downgraded to non-investment grade.
The Group might fall into a liquidity crunch, but they proactively self-rescue, including issuing and placing shares, pledging its assets and conducting an internal transaction for its subsidiaries.
We
believe the Group has less repayment pressure in the secondary bond market.
Even if we take some discounts of the above mentioned high quality assets, the
liquidity provided by these assets should be sufficient for them to pass
through the short-term difficulty.
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