Idea of the Week: Road King Infrastructure (New on Bond Express)

• Road King’s contracted sales in 2021 was less influenced by the stagnant Chinese property market, with a 21% increase. The current lank bank is ample and situated in desirable locations, which could support its sales performance. Due to an improvement in average daily traffic volume, income from toll roads rallied by 38.5% in 2021, and is expected to grow at a stable rate.
• In terms of credit profile,  the adjusted net gearing ratio increased to 89.2% as of 31 December 2021, while the ratio of cash to short-term debt to 1.6x. There is no significant deterioration on off-balance-sheet credit metrics, and overall credit risk is manageable.
• The pessimistic sentiment of the high-yield sector acts as a drag on the bond price recently. Given its good credit and fundamentals, investors can consider the 2023 USD bond, which is a new addition to Bond Express. 

We believe that Road King’s good sales performance should be attributed to its ample land bank in good locations. As of 31 December 2021, the total land bank owned by Road King amounted to 6.5 million square metres, equivalent to RMB 191.0 billion based on the average selling price of 29,000 per square metre in 2021. The land bank was 3.7 times bigger than the contracted sales in 2021, showing its ampleness.

From the perspective of locations of the land bank (Chart 2), more than half of it was located in the Yangtze River Delta, a region with a relatively advanced economy. 23% of the land bank is located in Bohai Rim Region, such as Beijing and Tianjin. Overall, the current land bank could provide strong support for Road King’s development. 

Chart 2: Land Bank of Road King

Toll Road has Bottomed Out, and is Expected to Grow Stably

Due to the pandemic outbreak, road tolls were suspended for a long time in 2020, resulting in a significant setback in Road King's toll road business. The related revenue was RMB 2.7 billion in 2020. However, the business has bottomed out in 2021, the revenue rallied about 38.5% to RMB 3.8 billion (see Table 1).

Table 1: Toll Road Sector

Credit Metrics are Slightly Weakening, but Beating Our Expectation and Meeting Regulatory Requirement

We observed that all credit metrics in 2021 weakened slightly. The net gearing ratio rose to 71.8%, and the adjusted net gearing ratio, which has taken perpetual bonds into account, stood at 89.2%, increased by 6 percentage points compared to the mid of 2021(see Table 2). However, given that many developers stepped into distress with halted refinancing channels in 2H2021, we consider that the deterioration of credit metrics of Road King is insignificant and beat our expectation.

In addition, the ratio of cash to short-term debt rose from 1.4x in the mid-2021 to 1.6 x in the end-2021, hinting an improvement in liquidity. The adjusted liability to asset ratio, which failed to meet the regulatory requirement previously, declined to 64.1% and reached the requirement in 2021. The indicators suggested that Road King has become a “Green Zone” developer. 

Table 2: Credit Metrics of Road King

Manageable Off-balance-sheet Debt

In terms of the off-balance-sheet credit metrics (see Table 3), as of 31 December 2021, the minority interest/total equity ratio was 18.2%, close to the previous year. The payable to associate/joint ventures over the total debt was around 18.0%. Both two indicators are relatively low, suggesting the associates/joint ventures are relatively small, and the reported debt amount can nearly match the real debt amount. The overall credit risk is manageable.

Table 3: Credit Metrics of Road King

Road King has issued many perpetual bonds. So far, the company faces three outstanding perpetual bonds, with a total amount of USD 900 million (Table 4).

It is worth mentioning that the first call date for two perpetual bonds issued in 2017 will be on this year. As a result, there would be USD 600 million (about RMB 3.8 billion) cash outflow if the company chooses to redeem them this year, and Road King’s liquidity might be adversely influenced under the current market circumstance.

Generally speaking, perpetual bonds are embedded with the coupon set-up clause. It means that if the issuers do not redeem perpetual bonds at the designated call date, the coupon rate will be greatly revised upward. 

Interestingly, such a clause is not included in the issuance covenant of Road King’s perpetual bonds, which means even though Road King does not redeem the bonds, the coupon rate will remain unchanged. In fact, Road King did not redeem the perpetual bond issued in Feb 2017 on 17 Feb this year, and we expect that the company will take the same action to perpetual bond that is first callable in June. As a result, it can avoid a USD 600 million cash outflow and weaken the liquidity. 

Feb 2023 Bond Could Be Considered 

Currently, there are six bonds issued by Road King on Bondsupermart. The credit rating is BB- by S&P, and the specification is listed  below:

Table 5: Road King’s Bonds

Investors should be aware of the following risk. Firstly, the pandemic surges again, causing the lockdown of some cities in China. Both the property development sector and toll road sector will be adversely affected, which will weaken the cash inflow and solvency as a result. 

Moreover, floating-rate debt constitutes over 40% of total debt, and most of the floating-rate debt is denominated in non-CNY. The debt amount of Road King will likely be revised upward along with the interest rate hike cycle (excluding China), therefore the company will suffer from a higher debt repayment stress.

Lastly, the recent wave of default in Chinese real estate sector caused a massive loss of confidence in the market, with some high-grade bonds also being affected. If Road King’s bonds encounter another round of selloff, its refinancing ability will be severely damaged.

Conclusion 

Road King’s contracted sales in 2021 was less influenced by the stagnant Chinese property market, with a 21% increase. The current lank bank is ample and situated in desirable locations, which could support its sales performance. Due to an improvement in average daily traffic volume, income from toll roads rallied by 38.5% in 2021, and is expected to grow at a stable rate.

In terms of credit profile, the adjusted net gearing ratio increased to 89.2% as of 31 December 2021, while the ratio of cash to short-term debt to 1.6x. There is no significant deterioration on off-balance-sheet credit metrics, and overall credit risk is manageable.

The pessimistic sentiment of the high-yield sector acts as a drag on the bond price recently. Given its good credit and fundamentals, investors with high-risk tolerance can consider the  ROADKG 7.875% 01Feb2023 Corp (USD) 2023 USD bond  , which is a new addition to Bond Express.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in ROADKG 7.875% 01FEB2023 CORP (USD), and the analyst who produced this report holds a NIL position in the abovementioned securities.

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