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- The contracted sales of Shui On amounted to RMB 11.4 billion in 2023, slumped by roughly 58% YoY. The contracted sales from residential properties plunged by 72% from a year ago to RMB 7.2%. Unlike what one might expect, the higher-than-average decline in contracted sales was not driven by depressed market demand, but rather by the fact that the company just launched limited sellable projects for 2023, as the vast majority of sales came from Wuhan Tiandi.
- From the angle of the average selling price, only two projects, namely Shanghai Lakeville Luxe and Chongqing Tiandi, showed a slight decrease in the average sales price (down 3.9% and 17.5% respectively), while the average selling price of the other projects rose to varying degrees among all the projects. In other words, Shui On did not adopt a price-cutting strategy to promote sales as other Chinese property developers are doing, reflecting to a certain extent the company's favorable project location and sell-through rates, as well as the fact that the company's liquidity should be at a reasonable level and has no urgent need for fire sale. Shui On plans to launch more sellable projects this year, such as Shanghai Yangpu Binjiang, which is expected to start sales in the second half of 2024, and we believe the company will see an improvement in contracted sales this year.
- Looking into commercial properties, the contracted sales of commercial projects hit RMB 3.0 billion, representing a more than doubling of 2022. In addition, the commercial properties held by Shui On also performed well. Following the relaxation of pandemic-related restrictions, the shopper traffic for 2023 recovered to 110% of the levels seen in the same period in 2021, resulting in a 16% year-on-year growth in rent and related income to RMB 3.2 billion, which accounting for 33.2% of total revenue, and higher profit margin on commercial properties drove the company’s gross margin to 52%, making profitability one of the best in the industry.
- In terms of credit, the net gearing ratio stood at 52% ending 31 December 2023, which is below the average of the industry. Total borrowings totaled RMB 31.9 billion, of which the short-term debt was around RMB 12.0 billion, almost remaining unchanged in comparison to last June. Concurrent cash and cash equivalents amounted to RMB 8.9 billion and adjusted cash balance hit RMB 5.8 billion after deducting the restricted cash of RMB 3.1 billion. As a result, the short-term debt ratio was 0.5x, remaining unchanged from June last year, and the company's liquidity is still relatively fragile.
- Despite the funding gap of over RMB 6.2 billion, we believe the company could be able to manage the liquidity risk at a reasonable level, given ample room for improvement in liquidity. One of the reasons is that the company's debt structure is relatively desirable. From the perspective of the structure of short-term debt, more than RMB 5.1 billion came from offshore syndicated loans, which accounted for 42% of the total short-term borrowings. Based on Shui On’s stable operation, we expect that these kinds of loans are relatively easy to renew or extend maturity. Theoretically, it will not create much pressure on the company's debt repayment.
- Furthermore, the company's large portfolio of commercial properties could undoubtedly be a potential source of funding, with the book value of unencumbered commercial properties exceeding RMB 57.0 billion as of the end of 2023, and the potential scale of the financing could reach RMB 23.5 billion assuming a 50% loan-to-value ratio. We see that the company issued the largest commercial mortgage-backed securities (CMBS) among non-SOE property developers in April last year, receiving about RMB 4.4 billion cash inflow, we believe Shui On could continue to raise funds by issuing CMBS going forward. It’s important to take note that the People's Bank of China (PBoC) announced a notification about the relaxation of commercial real estate loan uses in January this year, allowing property developers to use commercial property loans to repay other real estate loans and bonds issued by them or their parent companies. We thus believe property developers with higher exposure to commercial properties and stable operational track records such as Shui On could be potential beneficiaries.
- More than that, Lo Hong-sui, the chairman of Shui On, repeatedly mentioned that the company is moving into a conservative operating style and has maintained its asset-light strategy since 2022. We see that the company disposed of two non-core assets recently, starting with the sale of a 65% stake in the Shanghai Hongshoufang project to Dajia Life Insurance at a price of RMB 1.2 billion at the end of 2023, and then the sales of Shanghai Panlong hotel to Shanghai Qingpu Xujing in March this year, which yielded approximately RMB 100 million in proceeds. All in all, taking into account the positive factors such as the possibility of renewal of offshore syndicated loans, additional refinancing from commercial properties, disposal of non-core assets as well as cash collection of sold projects, we are convinced that the company could close the liquidity gap to keep the credit risk at a manageable level in short term.
- In relation to our thoughts on USD bonds, the company has three outstanding bonds, which will mature in August 2024, March 2025, and June 2026, respectively, with their respective principal amount of USD 500 million, USD 490 million, and USD 400 million. The current trading price of the bond due in August 2024 is around $90, reflecting the market's confidence in the company's ability to make payment of the bond as scheduled, which is also in line with our view that the company's liquidity risk is manageable in the short term. As for bonds due in 2025 and 2026, they are trading at $70 and $60 respectively, translating into some uncertainty of repaying bonds. If the market sentiment remains sluggish, bond prices might further decline as a result.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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