New Choices on Bond Express - Sunac China and Hopson Development

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Sunac China’s Apr2024 USD Bond

Company Introduction

Sunac China was established in 2003, and has been listed on HKEX since 2010 (Stock Code: 1918.HK), with a current market capitalization of HKD 145.5 billion.

The Group is one of the real estate giants in China. According to CRIC, Sunac’s contracted sales remained the fourth in ranking among the entire industry in 2020.

Business and Credit highlights

In 2020, the Group recorded total contracted sales of RMB 575.2 billion, increasing by 3.4% YoY, which was slightly below the industry’s average. In January 2021, Sunac achieved ¥35.2 billion contracted sales, up 89% YoY.

The Group’s debt amounted to ¥320.3 billion as at June 2020, a reduction of ¥13.0 billion from December 2019, but still failed to meet all the requirements in the “Three Red Lines” policy.

Table 2: Sunac’s Key Credit Indicators

Nevertheless, the Group announced a positive profit alert in January. Profit attributable to owners of the company in 2020 are expected to increase by over 35% YoY. It also forecasted that the net gearing ratio of the Group would fall below 100%, its non-restricted cash to current borrowings ratio would exceed 1.0x, and that its assets to liabilities ratio after excluding receipts in advance would be below 80%.

As a result, the Group will be upgraded to a “Yellow Light” developer, meeting only two Red Lines out of the three.

According to China Index Academy, the Group only spent ¥69.5 billion on land buying in 2020, ranking 15^th in the industry, accounting for less than 20% of its attributable contracted sales. With a more conservative approach, we believe Sunac will continue to improve its credit profile, and the impact of the Red Lines will be limited given its deleveraging strategy.

We estimate that the Group could have generated over ¥300 billion attributable cash inflows in 2020, with a 92% cash collection ratio. This amount exceeds its ¥140.6 billion short-term debt, demonstrating the strength of its cash flows.

On the other hand, the Group had an estimated land bank value of over ¥3 trillion, about 5.2 times of its annual sales. This number is much higher than that of its peers and able to support a promising growth of the Group for three to four years. Moreover, the Group Chairman Mr. Sun Hongbin has recently purchased shares of Sunac three times with a total amount of HKD 154 million, reflecting his confidence in the Group’s outlook.

Sunac’s 2024 USD Bond is Now Available on Bond Express

Given the improving credits, Sunac is now offering better yields than other BB-rated peers such as Seazen, Agile, CIFI and KWG.

As the largest developer in terms of size in the BB-rated category, Sunac’s SUNAC 5.950% 26Apr2024 Corp (USD) is offering a yield to maturity of around 6.185%. We think it is attractive for investors, and have made this bond available on Bond Express, where the minimum investment amount is just 5,000.

Corporate Risks

Despite the credit improvements, if Sunac once again spends a large amount on acquiring new land parcels this year, the debt size will increase and place further pressure on the Group’s solvency, slowing down the Group’s deleveraging progress.

If the COVID-19 pandemic resurges in mainland China, it will adversely affect the Group’s sales performance again. As Sunac is still highly leveraged, the negative impact will be greater on them than some of its peers.

Hopson Development’s Jun2022 USD Bond

Company Introduction

Established in 1992, Hopson Development is a traditional developer in Guangdong. Back in the early 2000s, the Group was once the first real estate developer to hit the ¥10 billion annual contracted sales benchmark. Hopson has recently launched its equity investment business and made some changes to its property development direction. Property sales started to pick up and the Group has since made its way back to the top 100 developers list.

Hopson is now listed on HKEX (Stock Code: 0754.HK), with a current market capitalization of HKD 54.4 billion.

Business and Credit highlights

In 2020, the Group recorded property contracted sales of ¥35.8 billion, up 53.7% YoY, which is superior to its peers. With the strong growth, the Group has climbed quickly in the sales ranking ladder, and made it back into the top 100 developers list (see Table 3).

Table 3: Hopson’s Contracted Sales and Industry Ranking

In 2021, the Group remained its strong sales performance, with total contracted sales of ¥5.49 billion in the first two months, up 276% YoY.

While Hopson Development’s credit status has worsened due to aggressive land buying, its overall leverage level has remained healthy (see Table 4). The Group is actually a “Green Light Developer” which met all the latest “Three Red Lines” regulations. Therefore, we do not see a significant risk here in terms of overall solvency

Table 4: Hopson’s Key Credit Indicators

For bond investors, one key selling point of the Group is its enormous land bank size. For mainstream developers, the average land to sales ratio (in area) is about three to five times, while some better performers could reach higher about six to nine times. However, for Hopson Development, the residential land to sales ratio is about 13.9 times. Even if we assume that the Group adopts a high-speed growth strategy in the future, this land reserve can still support their developments for five to seven years.

From the perspective of cash flows, the Group does not actively participate in joint venture projects and therefore has arguably the highest attributable ratio of its land projects at about 98%. Based on an annual sales amount of RMB 35.8 billion, we believe that the Group can easily meet its short-term borrowings and cash interest payment with its sales return.

On the other hand, the Group had an average borrowing cost of 6.9%, similar to its peers. Yet, if we take reference to its one-year bond issued earlier this year, the cost remained at 6.0% even though it was obviously a rollover move. This demonstrated that the market is still optimistic about Hopson Development’s debt-servicing ability.

Furthermore, the Group started its large-scale share repurchase in late August 2020, and the total spending has amounted to HKD 600 million as of today, showing that the management is confident in the Group’s current liquidity as well as its future prospects. 

Hopson’s 2022 USD Bond is Now Available on Bond Express

Currently, there are three USD bonds issued by Hopson Development, and they will be due in 2021 and 2022. Even if we assume that the Group’s growth strategy fails, the investment risks are manageable since all of them are short-term bonds.

The HPDLF 7.500% 27Jun2022 Corp (USD) is currently offering a yield to maturity of 5.567%. We believe the bond looks appealing given its investment horizon of around 1.3 years. Now investors can purchase the bond with just a minimum of 5,000 on Bond Express.

Corporate Risks

Hopson Development’s diversification has emphasized the importance of equity investments. If the stock market experiences a sharp decline, the Group must prudently control its investment level, in order to prevent it from affecting the real estate business.

Furthermore, if Hopson Development is unable to improve its sales turnover rate, it may face short-term liquidity pressure due to difficulty in converting its huge land assets to cash flows.

Both Chinese real estate developers SUNAC 5.950% 26Apr2024 Corp (USD) and HPDLF 7.500% 27Jun2022 Corp (USD) are now available on Bond Express at a minimum size of 5,000!