Highlights:
- CSI Properties has strong sales ability, which could efficiently absorb a large amount of property inventories. The company repeatedly stated that it has no plans of having new acquisition in the foreseeable future. Its top priority is to retain ample cash liquidity. It is well-prepared for this downturn.
- The company’s leverage level is well under control. Its operating profit can cover the Interest expense in the same period. The company’s refinancing ability is strong, and it is highly likely that it continues to get the loan refinancing. It has a sufficient liquidity to repay the 2025 USD bond.
- The credit risk of “CSIPRO 5.450% 21Jul2025 Corp (USD)” is manageable, with the current yield to maturity of about 14.3%, which is worth investors' attention.
We discussed the investment opportunity about the CSI Properties’ bond in “Idea of the Week: Trust in HK Luxury Properties? You may Consider CSI Properties”. To recap some of the keypoints:
- Many of the company's projects entered the pre-sale or sale stages, which would provide strong support to its liquidity and debt repayment.
- The company would adopt a conservative approach to maintain sufficient liquidity. The leverage level is decent, with a simple debt structure.
- Its cash and short-term investments are sufficient to repay the bond. The bond has a good margin of safety.
After a year, does CSI Properties still maintain the above mentioned advantages to repay the bonds due in July next year on time? Let us now analyse the company's recently announced results and answer this question.
It has Strong Sales Ability and is Well-prepared for this Downturn
As shown in Chart 1, in FY2024 (from April 2023 to March 2024), CSI Properties’ attributable contracted sales increased by 32% YoY to HKD 3.13 billion. Together with the unrecognized contracted sales committed of around HKD 790 million, which will normally be recognised as contracted sales in the next financial year, the sales amount would be HKD 3.92 billion.
Chart 1: CSI Properties’ Attributable Contracted Sales
As shown in Table 1, if we assume that the gross margin associated with these sales (attributable to contracted sales in FY2024) is 30%, these sales are equivalent to absorbing 26% of the current book value of inventories, reflecting its strong sales ability and efficiently absorb a large amount of property inventories.
Table 1: Contracted Sales As of Current Book Value of Inventories
(USD billion) | Mar 24 |
Attributable Contracted Sales | 3.13 |
Unrecognized Contracted Sales Committed | 0.79 |
Gross Margin (Assumed) (%) | 30% |
Direct Cost of Related Properties (Estimated) | 2.75 |
Attributable Properties Under Development for Sale | 10.7 |
As of Current Book Value of Inventories (%) | 26% |
Sources: Company’s Announcements, iFAST Compilations Data as of 31 March 2024 | |
In recent years, CSI Properties repeatedly stated that it is making no new acquisition in the foreseeable future. Its top priority is to retain ample cash liquidity. It is well-prepared for this downturn. We expect the company's leverage will be effectively reduced once the company receives all of its cash and books for these contracted sales.
It is worth mentioning that the pre-sales system in Hong Kong is different from that in Mainland China. In general, for Hong Kong developers, most of their pre-sales residential units are paid and settled by Stage Payment Plan, which means the developers receive the remaining part (around 90% of the property prices) when they deliver the units. Conversely, the pre-sales projects of Chinese developers are paid and settled by Cash Payment Plan in general. Within a few months after the completion of transactions, the developers already receive a larger portion or even the full amount of cash. Therefore, upon delivery, these projects do generate an additional cash inflow to the company, which can be used directly for debt reduction or debt repayment.
As shown in Chart 2, in FY2024 (from April 2023 to March 2024), CSI Properties generated revenues of around HKD 4.7 billion (including revenues from JV and Associates), increased by 47% YoY, reflecting more properties to be delivered. In the same period, its EBITDA slightly increased 8% YoY to HKD 780 million, and the EBITDA margin dropped to 22%. The operating performance is fair.
Chart 2: CSI Properties’ Revenues, EBITDA and EBITDA Margin
However, CSI Properties suffered a profit loss during the same period, mainly due to the company’s failure to reach a consensus within the prescribed time limit with the Hong Kong Government on the land premium. The land lots at Kwu Tung North/ Fanling North in Hong Kong were resumed by the Government in exchange for the release of ex-gratia land compensation. The related impairment loss was HKD 550 million. If excluding the impairment loss, the company recorded a net profit attributable to shareholders of approximately HKD 130 million. It is worth mentioning that this impairment does not involve cash outflow and is a one-off loss, which has little impact on its business performance, cash flow and liquidity.
Leverage Level is Well Under Control; Its Operating Profit can cover Interest Expense
As shown in Table 2, as of the end of March 2024, CSI Properties’ leverage level is well under control. The gearing ratios (including the liability to asset ratio, the net gearing ratio and net debt / total property assets) are lower than 50%, reflecting the company can fully repay the debt under the situation that the company has to sell the assets at a discount compared to their book value.
Table 2: CSI Properties’ Credit Metrics
(HKD billion) | Mar 22 | Mar 23 | Mar 24 |
Total Assets | 29.0 | 27.8 | 26.2 |
Total Property Assets | 24.4 | 23.6 | 22.9 |
Total Debt | 11.3 | 11.2 | 10.2 |
Cash and Short-term Investments | 4.1 | 3.7 | 2.9 |
Liability to Asset Ratio (%) | 45% | 48% | 48% |
Adjusted Net Gearing Ratio (Include Unrealised Revaluation Surplus in Total Equity) (%) | 34% | 39% | 42% |
Net Debt / Total Property Assets (%) | 29% | 32% | 32% |
Net Debt / EBITDA (times) | 9.4x | 10.4x | 9.4x |
Interest Coverage Ratio (times) | 2.4x | 1.4x | 1.2x |
Average Cost of Borrowings (%) | 2.6% | 4.5% | 6.2% |
Sources: Company’s Announcements, iFAST Compilations Data as of 31 March 2024 | |||
As up to 77% of CSI Properties’ debt is in the form of bank loans, around 90% of these loans are in HKD, whose interest rates are linked to the Hong Kong Interbank Offered Rate (HIBOR). During the USD interest rate hike cycle, the HIBOR rose sharply, resulting in a significant increase in the company's average cost of borrowings to 6.2%, which dragged the interest coverage ratio down to 1.2 times.
However, with the improved profitability of CSI Properties, the interest coverage ratio is still at 1.2 times, which means that the company's operating profit can barely cover the interest expense for the same period, which means that the company does not need to use internal resources (e.g. by selling its assets or utilizing its cash on hand, etc.) to pay off the interest for each period. As the U.S. is about to enter a rate cut cycle, it would drive HIBOR down. Coupled with its strong pre-sales figures, we believe the company will be able to maintain its interest coverage ratio at 1x or above in the next one to two years.
Highly likely in Loan Refinancing and Sufficient Liquidity to Repay 2025 USD bond
After tackling the concern about the interest expenses, the more important aspect is whether CSI Properties will be able to refinance the bank loans and repay the USD bond (with a principal amount of about HKD 2.3 billion) on time in case the company could not issue another USD bond for replacement.
As shown in Chart 3, CSI Properties’ debt maturity profile is distributed quite evenly, with the debt maturities every year ranging from HKD 2.3 billion to HKD 2.8 billion. The company successfully refinanced its HKD 1.3 billion syndicated loan in April this year, extending its original maturity date from 2024 to 2028. This demonstrated the company’s refinancing ability.
Chart 3: CSI Properties’ Debt Maturity Profile (After taking account into Syndicated Loan Refinance in April)
In terms of secured loans, CSI Properties pledged almost all of its property assets (totaling HKD 8.8 billion, including investment properties and properties held for sale, but excluding the interests and receivables in JVs and Associates) as collateral for borrowings. Considering these assets are valuable with the loan to value (LTV) of only 47%, it is highly likely that the company could continue to refinance its loans.
CSI Properties’ attributable contracted sales (including the unrecognized part) were around HKD 3.9 billion in FY24. The company could sell the reminding part of the property projects as sales proceeds. Together with the company’s cash and short-term investment of around HKD 2.9 billion and interests in JVs and associates totaling about HKD 13.9 billion, we believe that the company has sufficient liquidity to repay the July 2025 USD bond, with a principal amount of around HKD 2.3 billion. The bond has a good margin of safety.
Therefore, the credit risk of “CSIPRO 5.450% 21Jul2025 Corp (USD)” is manageable, with the bond price of $92.9 and the yield to maturity of about 14.3%, which is worth investors' attention.
Related Risks
The concentration of the company’s property pipeline is high. If there are lower-than-expected property sales or pricing issues or delays for a single project, the company’s liquidity might be affected.
Although the company has fewer projects in Mainland China, its sales plans could still be affected by the downturn in Chinese property sales. For the rich who relied on real estate to get rich, there might be a bigger drop in their wealth due to the Chinese real estate crisis. The demand for luxury apartments in Hong Kong or the Mainland could be affected. This impacts the sell-through rate of the company's projects.
If CSI Properties defaults on the debts unexpectedly, the USD bondholders could be in a less favourable position in terms of post-default claims. Most of the property assets are used to borrow the secured loans. There is a high uncertainty of the recovery value of these interests and receivables in JVs and associates that are not used as collaterals. For example, the proceeds from projects are only available to improve the balance sheet of CSI Properties after the liabilities in the project level are repaid. Therefore, in terms of claim priority, USD bondholders may be in a less favorable situation.
Conclusion
CSI Properties has strong sales ability, which could efficiently absorb a large amount of property inventories. The company repeatedly stated that it is making no new acquisition in the foreseeable future. Its top priority is to retain ample cash liquidity. It is well-prepared for this downturn.
The company’s leverage level is well under control. Its operating profit can cover the Interest expense in the same period. The company’s refinancing ability is strong, and it will likely continue to have loan refinancing. It has sufficient liquidity to repay the 2025 USD bond.
The credit risk of “CSIPRO 5.450% 21Jul2025 Corp (USD)” is manageable, with the current net yield to maturity of about 14.3%, which is worth investors' attention.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position and the analyst who produced this report holds a NIL position in the abovementioned securities.
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