Guangzhou Developer KWG Property’s Latest Sales Milestone

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Note: This is an edited version of an article published earlier on our affiliates on 25 June 2021

Highlights:

• KWG reached its RMB 100 billion milestone sales target in 2020, and its profitability has since remained stable.
• The group remains in the yellow zone under the Three Red Lines policy, and has a strong financial profile.
• Investors may consider shorter-term bonds such as the bond due in 2024 which offers 5.560% YTM.

KWG Group Holdings (Stock Code: 1813.HK) is a well-known Guangzhou property developer which engages in property development, property investment and hotel operation businesses. The company is considered to be a second-tier property developer in China. In this article, we will provide an update on the 2020 business overview of the company and introduce its bonds.

Business Overview

In 2020, KWG's revenue totaled RMB 29.7 billion, increasing 24.2% YoY. Due to the decrease in fair value gains on properties, profit attributable to owners of the company decreased 31.9% to RMB 6.7 billion.

KWG's revenue is primarily generated from its three business segments: property development, property investment and hotel operation. The group spun off its property management business KWG Living (Stock Code: 3913.HK) in October last year. 

Over 90% of the group's income came from property sales, and the rest includes income from rent and hotel operations and services. In 2020, KWG had a total of 37 commercial projects in operation, including 9 shopping malls, 8 office buildings and 20 hotels, all located in core areas and new Central Business Districts in tier-one and tier-two cities, such as M • Cube Beijing, Guangzhou International Finance Place, W Hotel Guangzhou etc.

According to the 2020 sales ranking announced by China Real Estate Information Corp (CRIC), KWG was classified as a tier-two property developer and ranked 39^th nationally in terms of contracted sales in 2020. KWG reached its RMB 100 billion milestone sales target for the first time, indicating stable sales growth and profitability.

The group achieved an annual sale of RMB 103.6 billion in 2020, a YoY increase of 20%, higher than the industry average. Despite the trend of plummeting gross profit within the industry in China, the company's gross profit margin and profit margin were higher than the industry average’s. KWG held a gross profit margin of 31.5% in 2020, displaying its profitability.

In 2020, KWG acquired 3.32 million sq.m. of Gross Floor Area (GFA), in which 80% of the new land bank was concentrated in tier-one and tier-two cities, especially in regions like the Yangtze River Delta and the Greater Bay Area, i.e. Guangzhou, Suzhou, Beijing, Shanghai. By the end of 2020, the group had a total land reserve of 24.4 million sq.m., accumulating sufficient land for development in the next three years.

In the context of rising land costs and continued regulatory pressure, we noticed that the land acquisition cost of the group increased significantly during the year, whereas the sales price only rose slightly. Therefore, we expect a certain degree of downward pressure on KWG’s profit margin. The group seems to be behind schedule already - in the first five months of this year, the group recorded RMB 45.9 billion in contracted sales, which only accounted for 37% of its RMB 124 billion contracted sales target of 2021. 

However, KWG's saleable resources amounts to RMB 205 billion this year, and therefore the group can meet its target as long as its sell-through rate reaches 63%. We believe that the group has sufficient saleable resources to support the completion of the sales target and get back on track in the second half of the year. Furthermore, with KWG's tendency of developing in mainly tier-one and tier-two cities, we believe that its competitive positioning helps to support the long-term development of the group. Thus, the outlook is relatively stable.

Credit Overview

According to the Three Red Lines' requirements, KWG has met the standard for two metrics and remains at the yellow zone. The group's net gearing ratio was 61.7% and cash to short-term debt ratio was 1.8 times at the end of 2020, reflecting satisfactory leverage and short-term liquidity. The group's management is confident of lowering the adjusted liability to asset ratio to 70% by the end of 2021, allowing them to advance to the green zone.

In response to the Three Red Lines policy, many developers enlarged their equity base by substantially increasing minority interests on their balance sheet to control their gearing ratio. KWG was no exception, as its total non-controlling interests in its balance sheet increased 3.2 times from 2019 to 2020. However, this accounted for only less than 20% of total equity, which was relatively lower than its peers.

By the end of 2020, KWG's total assets amounted to RMB 232.2 billion. Its total borrowings amounted to RMB 78 billion, where 32% was due within one year. Given its debt duration of three years, the overall debt maturity profile is manageable. Meanwhile, its weighted average funding cost decreased 20 bps, to 6.2% during the period. As a result of the three USD bonds issued during 2020 (totaling USD 900 million) and its bank credit lines of RMB 74.7 billion, the group's credit profile is underpinned by adequate liquidity.

Bond Review

KWG and its bonds are currently rated B+ / BB- (S&P / Fitch) and BB- (Fitch) respectively, which are non-investment grade.

The six bonds on our platform have remaining tenors ranging from one to six years, and the bond yields are reasonable, providing YTMs between 4.164% and 7.449%. Considering the high uncertainty of long-term bonds, we suggest investors consider the short- to medium-term bonds, such as the bond KWGPRO 7.400% 05Mar2024 Corp (USD) with 5.560% YTM, due in 2024.

Since Times China and KWG have similar sales and revenue scales, and were both awarded BB credit ratings from Fitch, we will use the Times China 2024 bond TPHL 5.550% 04Jun2024 Corp (USD) as a comparison. It currently offers a 5.447% YTM which shows that KWG’s 2024 bond is offering a reasonable yield.

Corporate Risks

It is worth mentioning that KWG's attributable contracted sales was lower than some of its peers, accounting for only 62% of its total contracted sales. This means the group’s sales growth was largely reliant on joint-venture projects. Although this can help reduce project financing costs and competition in land auctions while improving operational efficiency, it also undermines financial transparency.

Since the company usually has a minority position in joint ventures, this allows it to keep details of the joint venture and relative debts off its balance sheet. However, the group still has an obligation to repay the related debts and will likely offer an additional guarantee for these subsidiaries' indebtedness. At the end of 2020, the group's guarantees given to banks in connection with bank loans granted to joint ventures and associates amounted to RMB 32.9 billion. Therefore, this might result in an underestimation of their debt burden.

Conclusion

KWG reached their RMB 100 billion milestone sales target in 2020, indicating stable sales growth and profitability. The group had a strong financial profile and remained at the yellow zone under the Three Red Lines policy during the period. Investors can consider the bonds with shorter years to maturity such as the bond due 2024 which offers 5.560% YTM.

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