What's happening?
Hong Kong-listed real estate firm SEA Holdings (251 HK) recently met fixed income investors in Hong Kong and Singapore with regards to a potential new bond issue, which would be the firm's maiden bond issue. Having concluded those fixed income meetings, SEA Holdings has now announced a new 3Y USD bond issue, with indicative pricing at the 4.875% area. We offer some takeaways from our meeting with management, as well as our take on pricing.
About SEA Holdings
SEA Holdings is a real estate firm listed in Hong Kong; as of 12 Jan 17, the company sported a market capitalisation of HKD12.6b (USD1.63b) and operates in the PRC, Hong Kong, the United Kingdom and Australia, across various business segments including property development, property investment, hotel operation and financial investments. As of end-Jun 16, the firm held 9 major property projects with an appraised value of HKD6.1152b, including the Crowne Plaza Hong Kong hotel, 20 Moorgate, London (HQ of the UK Prudential Regulation Authority), and the Lizard Island Resort in Australia.
Strong management track record; family-owned, family-managed business
SEA Holdings was founded by the Lu family in 1956, and is still managed by the family today, with Mr Lu Wing Chi, Mr Lincoln Lu and Mr Lambert Lu all currently serving as executive directors of the company. Under the family's stewardship, the firm has successfully navigated various real estate booms and busts over the past decades, while the family has sizable "skin" in the game, owning 65.55% of SEA Holdings (at the time of writing).
Strong net cash position, conservative positioning
As of end-Jun 16, SEA Holdings was in a strong "net cash" position, sporting a cash balance of HKD10.3387b versus bank borrowings of HKD1.8385b; this comes on the back of the sale of Dah Sing Financial Centre for approximately HKD10.1b (in early 2016) to China Everbright. In our meeting with management, it was also communicated that the firm was deliberately positioned in a more conservative fashion, given management's "underweight" view on the China and Hong Kong real estate markets.
Our comments
We came away from our meeting with SEA Holdings with a sense that the company tends to be managed in a more prudent manner, with a clear recognition of property cycle booms and busts, which entails varying the firm's exposure to different geographical locations and property segments. The firm's strong net cash balance is obviously a huge plus from the perspective of a creditor, although it raises some questions as to the need for the company to tap debt capital markets at this juncture. Management responded to this saying they felt it was a necessary step given that its Hong Kong peers have already done so, while giving it the ability to lock in fixed rate funding to provide some diversification from the company's current bank financing. We also understand that SEA Holdings will not be seeking a credit rating in the near term (owing to the small size of the firm), although management indicated that its bank lenders have already viewed the company as an investment-grade entity (based on internal ratings); we would concur given the current strong balance sheet position and absence of development stage projects (with assets tilted towards income-generation).
In terms of peer comparables, investors would be looking at issuers like Far East Consortium International Ltd's FAEACO 3.750% 08Sep2021 Corp (USD)s (~4.7% ask YTM), CSI Properties' CSIPTY 4.875% 08Aug2021 Corp (USD)s (5.2% ask YTM), Regal Hotels' REGH 3.875% 20Jul2021 Corp (USD)s (4.37% ask YTM), as well as Emperor International's EMPINT 4.000% 19Sep2021 Corp (USD)s (4.9% ask YTM). While guidance for SEA Holdings' new issue is in the same ballpark (~4.875%), investors may note that SEA Holdings has opted for a 3-year tenor (rather than the 5-year convention adopted by its peers), while the company also sports a larger market capitalisation alongside a significantly stronger balance sheet (thanks to its "net cash" position).
Consequently, we think that at 4.875% guidance (representing a spread of 344bps over USD Swaps), the new SEA Holdings USD bonds are good relative value against its peers, and offer investors a higher-yielding short tenor opportunity via the credit of a net cash Hong Kong-based real estate developer.
