Property pipeline holds firm
IFR Asia 858 - August 23, 2014 | By Lianting Tu
Chinese property companies are set to continue tapping the offshore bond market for the rest of the year even though slowing sales and falling profit margins have dented the industry’s appeal.
First-half financial results show that the market slowdown and rising costs are hurting the small developers more relative to the larger national ones. Regional developers, such as Fantasia and Hopson Development, reported disappointing earnings, while national heavyweights, such as Country Garden and China Vanke, continued to post solid top-line growths.
Persistent softness may mean developers will decelerate expansion plans, which could translate to less need to raise money. Yet, companies will need to refinance debt or lock in long-term fixed-rate financing before the US Federal Reserve’s anticipated interest rate hikes, analysts say.
“We believe there will be more bond issuances in the remainder of this year, some for refinancing and some for expansion,” said Bei Fu, Chinese property analyst at Standard & Poor’s.
“Investors are likely to remain selective and prefer those with strong execution and financial management track records,” Fu said.
A tougher Chinese property market has already led to fewer bond sales from the country’s real estate companies this year, but analysts do not anticipate problems for existing bondholders.
“At the margin we are observing some increase in financial leverage,” said Charles Macgregor, managing director and head of Asia for Lucror Analytics, an independent high-yield research house.
“That said, liquidity levels are sound and we are not expecting any issuer of US dollar bonds to be financially challenged over the next 12 months,” Macgregor said.
Volume falls
The volume of high-yield bonds real estate companies sold in China and Hong Kong declined to US$5.1bn in the first half from US$8.3bn in the same period last year, according to Thomson Reuters data.
So far in the second half, only six Chinese developers have sold high-yield bonds totalling US$1.65bn in the offshore market. HSBC expects to see a total of US$5bn in the second half, meaning another US$3.3bn is likely to be sold this year. Last year, developers raised US$4.2bn in the second half.
Among companies that have either announced deals or scheduled non-deal roadshows are Powerlong Real Estate Holdings, Oceanwide Holdings,Road King Infrastructure and China Aoyuan Property Group.
Agile Property Holdings is the only large developer currently expected to sell bonds before the end of the year, although it has not announced a deal. The company will hold a series of non-deal roadshows in Hong Kong next week.
Still, other developers might issue opportunistically, according to an analyst at a proprietary trading desk, who said: “If they [developers] see a good window, they may decide to tap the market.”
Developers also may have an unexpected need to fund land acquisitions.
“Although we expect many developers to slow down land acquisition if market condition remains challenging in the second half of the year, some could still raise funds if they see a good window to buy cheap land,” said S&P’s Fu.
Although the market has been receptive to China property bonds, smaller companies may find it harder to access capital.
“For smaller and weaker developers, it will be a test of survival. Domestic funding access will be tight for them this year. Offshore fundraising won’t be any easier,” Fu said.
“Some of their Ebitda margins have dropped to 15% or below. So, if they do issue offshore bond at above 12%–13% coupon, it will be challenging for them to make any profit.”
Weak results
Investors may also scrutinise balance sheets more carefully before diving in. Most smaller Single B rated developers experienced flat revenue growth, slow contracted sales, declining margins and rising leverage earlier in the year. On average, debt-to-earnings ratios at these developers were up about a quarter of a point from the end of last year, the prop desk analyst said.
“The soft market conditions this year will differentiate the Chinese developers with good access to funding and project execution capabilities from the weaker ones,” Fu said.
Nearly half of China’s developers have released first-half earnings. Gross profit margins have come down across the board, in a sign that the sector is maturing and outsized margins are harder to come by.
As one of the strongest developers in China, Country Garden, for example, saw its gross margin fall five percentage points in the first half to 28.6%.
Fantasia was among the worst performers with a 6% rise in first-half revenue, but a 51% drop in contracted sales, only 18% of its revised full-year target of Rmb10bn. The Shenzhen company implement a 33% cut to Rmb10bn in its full-year contracted sales target in its first-half results report, becoming the first Chinese developer to lower its 2014 target.
Moody’s, subsequently, cut Fantasia’s family rating and senior bond rating one notch each to B2 and B3, respectively, while S&P downgraded it one notch to B+.