China May Have New Property Debt King After Sunac’s Big Buy

- Sunac’s $9.3 billion deal to push up net gearing, says CIMB

- Indebtedness levels of Sunac may exceed that of Evergrande

As some Chinese tycoons slow acquisitions to focus on digesting their massive debt loads, one property billionaire is moving the other way.

Sunac China Holdings Ltd. Chairman Sun Hongbin over the past year oversaw an acquisition spree that culminated with Monday’s $9.3 billion purchase of hotel and tourism assets from Dalian Wanda Group Co. While the deal set a record for China’s property industry, it also may bring Sun’s company another claim to fame: the title of China’s most indebted developer.

Sun is leading an ambitious expansion at Sunac even as other deal-hungry conglomerates have cooled their pace of acquisitions this year amid greater scrutiny from China’s leaders. For the 14-year-old Sunac, which is dwarfed in market value by industry leaders such as China Vanke Co. and China Evergrande Group, the deal raises concerns the firm is straying beyond its core expertise of residential property and taking on high leverage levels.

The deal may boost Sunac’s net gearing to 300 percent from just over 208 percent at the end of last year, said Raymond Cheng, a Hong Kong-based analyst at CIMB Securities Ltd. That could push Sunac’s gearing above that of the current reigning champion of leverage, China Evergrande Group, according to Cheng, who said his estimate counts perpetual securities as debt and could change based on additional financial information from the companies.

“The market is seeing Sunac as the new Evergrande,” Cheng said in an interview, adding that Evergrande’s net gearing may have eased to below 200 percent from 432 percent.

One twist in the deal’s financing: Wanda will arrange a bank loan for Sunac to fund 29.6 billion yuan of the 63.2 billion yuan purchase, according to a Sunac stock exchange filing on Tuesday. Sunac’s shares fell as much as 1.9 percent in Hong Kong before climbing as much as 8.2 percent.

Sun is seeking to ease concern on Sunac’s leverage levels, saying in a Caixin interview that that the company won’t raise extra debt, using its own funds for the Wanda deal. In addition, high-leverage deals have paid off for Sunac in the past, according to Citigroup Inc., which cited examples such as land purchases in 2014 and 2015. Investors backing the company’s growth story have fueled the shares’ gains of 129 percent this year.

Still, many concerns linger. Sunac had the slimmest gross margin of China’s big developers at the end of last year, according to data compiled by Bloomberg, reporting falling net income on rising revenue. CreditSights maintained an “underperform” on Sunac notes on Monday, citing the firm’s aggressive and debt-reliant model.

Expressing Skepticism

Chuanyi Zhou, credit analyst at Lucror Analytics, also expressed skepticism on whether the assets acquired by Sunac would be a good fit with its existing business, while warning of potential “liquidity issues” after deals to invest $2.2 billion earlier this year in Chinese tech tycoon Jia Yueting’s LeEco empire.

“I don’t see the acquisitions adding much value to Sunac,” Zhou said.

Sun has said that while he’s optimistic about the outlook for the real estate industry for the next five to 10 years, he’s also looking at areas such as healthcare, finance and natural resources to propel growth beyond that period.

Sun holds a 53.8 percent stake in Sunac, the company he founded in Tianjin in 2003, according to Sunac’s annual report last year. The billionaire has come through adversity in the past: he was jailed in 1992 for embezzling company money but later had the conviction overturned. Key milestones for Sunac included a 2010 listing in Hong Kong and a 2011 acquisition of residential projects from Greentown China Holdings Ltd.

Sunac emerged as a high-profile acquirer in 2015 when it came close to buying troubled Kaisa Group Holdings Ltd., the first Chinese developer to default on offshore debt. Sun later dropped the deal.

Sunac’s 8.75 percent U.S. dollar bonds due 2019 have fallen 3.5 cents on the dollar to 104.5 this year, according to Bloomberg-compiled prices. The notes are rated B3 by Moody’s Investors Service, six steps below investment-grade. They are rated B by S&P Global Ratings, five steps below investment-grade and BB by Fitch Ratings, two levels below investment-grade.

Sunac’s gearing “will likely to continue to worsen, based on its acquisitive appetite,” said analyst Kristy Hung, of Bloomberg Intelligence. The company’s net debt to equity could surge to 499 percent from 228 percent at the end of 2016, counting perpetual securities as debt and excluding minority interests, Bloomberg Intelligence estimates.

Hung said the hotel business hadn’t been an easy one for Chinese developers, citing three companies which posted losses on hotels in 2016 and noting that previous filings showed about 60 percent of Wanda’s hotels as of 2015 were in smaller cities with oversupply problems.

Bloomberg News
July 11, 2017, 10:23:00 GMT
With assistance by Emma Dong, and Denise Wee