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- Rumors that Shui On Land hired Morrow Sodali as a financial advisor to identify noteholders of its two USD bonds (Bond due in November 2023 and Bond due in August 2024) aroused the market to believe that Shui On Land might be experiencing financial difficulties and there is a likelihood of bond rollover. Despite Shui On immediately denying the financial difficulties and clarifying that such an action is just designed to improve communication with bondholders, the price of USD bonds still saw a marked decline.
- Our view is that the company is unlikely to hire a consultant solely for the purpose of communication with bondholders. We believe that Shui On Land intends to learn about the holding concentration levels of these bonds. If the holdings are pretty concentrated, the company might reach a private agreement with major bondholders, like bond payment deferral, but make payment to remaining bondholders as scheduled. However, if the holding positions are dispersed, the company would likely announce the exchange offer to extend the maturities in the open market.
- The price of the bond due in November this year dropped to roughly $88, while bonds with longer maturities are trading at around $40, reflecting the market's concern about the company's solvency.
- Operation-wise, owing to less sellable projects and depressed market sentiments, Shui On Land’s contracted sales for 1H2023 slumped by 75.6% from RMB 18.7 billion in 1H2022 to RMB 4.6 billion. Total rental and related income slightly rose by 3% to RMB 1.5 billion during the same period.
- In terms of credit metrics, Shui On Land's net gearing ratio slightly gained to 55.6%, with its leverage at a relatively low level. Short-term borrowings amounted to RMB 11.8 billion, and the cash balance excluding pre-sale proceeds stood at RMB 6.2 billion, translating into the cash to the short-term ratio of 0.5x, and the funding shortfall of RMB 5.6 billion suggesting tight liquidity.
- From the debt structure perspective, offshore syndicated loans amounted to RMB 6.3 billion, accounting for 53.3% of total short-term debt. We expect that these kinds of loans are relatively easy to renew or extend maturity. If these loans are renewed as expected, it would be enough to close the funding gap in the near term. Additionally, the company has little exposure to cooperative projects, making its reported debt amount almost match the real debt amount, and the off-balance-sheet debt is at a manageable level.
- In contrast to other Chinese property developers, Shui On Land has a significant advantage concerning fundraising. On the one hand, as a Hong Kong-funded property developer, Shui On Land could easily get refinance from the offshore market. On the other hand, the company owns a large number of investment properties, which have a carrying value of RMB 97.2 billion at the end of June 2023, with approximately RMB 37.2 billion being pledged, leaving ample room for further fundraising from investment properties.
- As a matter of fact that the company issued the largest commercial mortgage-backed securities (CMBS) among non-SOE property developers in April this year by pledging Hongqiao HUB, receiving about RMB 4.4 billion cash inflow. The CMBS has a tenor of three years and a coupon rate of 3.9%, which to a certain extent alleviated the company's liquidity pressure.
- We noticed that most developers cancelled interim dividends due to the market downturn, but Shui On Land still declared an interim dividend of HKD 0.032 per share, with an estimated outlay of RMB 240 million. Shui On Land's action demonstrates the company's confidence in its liquidity.
- To wrap up the points above, our view is that the company's credit profile remains rather stable and a material debt default is unlikely in the near term. However, taking into account the recession in the property market, Shui On Land's liquidity might continue to weaken. Particularly, the principal of the bond due in November is very large at USD 500 million (about RMB 3.6 billion), we do not rule out the possibility of the rollover of the USD bond due in November this year. Bond prices might further decline as a result, investors may consider selling or holding the bonds based on their risk appetite.
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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