A Tianjin property project developed by Shimao Group Photo: shimaogroup.hk

Shimao Group, a Chinese property developer listed in both Shanghai and Hong Kong, is facing a shortage of cash and has to pay at least 2.5 billion yuan (US$393 million) to bondholders next month and more in the following months.

The Shanghai-based company was recently involved in a dispute over its failure to deliver 93 apartments to homebuyers after it used the properties as collateral to borrow money. After government intervention, it agreed to offer full refunds to the buyers.

In two meetings with local property developers on December 9 and 15, the Shanghai government urged the companies to report all their debts, including off-balance-sheet loans. It said it would assist and that local banks could extend loans for property developers.

Analysts said Shimao could be yet another major Chinese developer that fails to repay its debts like the Shenzhen-based Evergrande Group. They said although the size of Shimao’s balance sheet was less than one-third of Evergrande, Shimao’s collapse could seriously hurt investor confidence.

Established in 1989, Shimao had positioned itself as a high-end property developer and engaged in property development and investment and serviced apartments, offices and the hotel businesses. It said it had developed 460 residential property projects and 61 commercial property projects and set up 136 hotel brands across 100 Chinese cities.

In 2006, Shimao’s shares were listed in Hong Kong. In 2014, the company, controlled by billionaire Hui Wing-mau, acquired a 28-story office building at 175 Liverpool Street in Sydney for A$390 million (US$339 million) and planned to convert it into residential use.

In 2018, it sold its 50% stake in the building.

A construction site by Chinese property developer Kaisa Group at an area of downtown Shanghai on February 17, 2015. Photo: Reuters / Carlos Barria

‘Three red lines’

Although Shimao had been praised for its healthy financial situation in the past, it suffered a cash crunch after Chinese financial regulators introduced the “three red lines” to stop highly-leveraged developers from borrowing money and expanding in August last year.

Due to the “three red lines” and a property down cycle, Evergrande had a cash flow problem and failed to pay its bondholder on December 6. Kaisa Group also failed to repay $400 million worth of bonds on December 7, but avoided an immediate default as it was offered a formal forbearance proposal from bondholders.

On December 7, Shimao raised net proceeds of HK$1.17 billion ($150 million) by issuing 145 million new shares, or a 3.82% stake, for HK$8.15 each, which represented an 8.54% discount to its closing price of HK$8.9 on December 6.

Prior to this, its shares have dropped 63.7% from HK$24.5 so far this year.

While Evergrande was suffering its debt crisis in late September, Shimao sold a batch of 96 apartments in Shanghai overnight for about 4 million yuan each, thanks to its good brand reputation.

But as of December 9, buyers had still not received their apartments. They then discovered that Shimao had used 93 of the apartments as collateral to borrow money.

The Shanghai government’s housing bureau then held two meetings with some Shanghai-based property developers and urged them to report their local and foreign debts, as well as off-balance-sheet ones, the 21st Century Business Herald reported on Wednesday.

Officials said property developers should avoid defaulting on their debts and apply for loan extensions, according to the report. They said government officials would assist in this process, but would report to the central government if they could not resolve the problems.

On Tuesday evening, Shimao released a statement saying it would cancel the transactions for the 93 flats and would arrange a full refund, perhaps with interest, for the buyers.

However, the company faced another setback when it announced on Monday its plan to sell its property management services business and related value-added services to its subsidiary Shanghai Services Holdings Ltd for 1.65 billion yuan.

On Tuesday evening, its unit Shanghai Shimao received a letter from the Shanghai Stock Exchange, which raised concerns about the proposed transaction.

“The connected party transaction not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flag as it is essentially transferring the cash from property manager to developer level,” JPMorgan analysts said in a note on Tuesday.

Analysts say medium-to-long-term investment prospects for private Chinese property developers are unconvincing. Photo: Handout

Liquidity problems

Both Shimao Group and Shanghai Shimao were downgraded to “underweight” by JPMorgan due to their liquidity problems.

Between Monday and Wednesday, Shimao’s shares slumped 31% to close at HK$5.53. The shares rebounded 4% to HK$5.75 on Thursday.

Francis Kwok Sze-Chi, vice-chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators, said many investors who bought Shimao’s shares some time ago had to make a difficult decision about whether they should sell their stock at a huge discount.

Kwok said Shimao’s cash flow situation would not significantly improve within a short period of time due to the requirements of the “three red lines,” while it would have to repay a large number of debts next year.

According to a UBS research report, Shimao will have to repay a 2.5 billion yuan renminbi bond in January next year and a $700 million offshore bond in April. For the whole year of 2020, the company will have to repay $4.4 billion of debt, plus an additional 120 billion yuan of off-balance sheet debts.

UBS said whether Shimao could avoid a default would depend on the progress of the sales of its Hong Kong apartments worth $1.6 billion.    

A collapse of Shimao, a high-quality company, would be far worse than Evergande as it would severely hit global investors’ confidence and drive up funding costs for other higher-rated developers, Dhiraj Bajaj, the head of Asia credit at Lombard Odier, told Bloomberg.

In a report published on Wednesday, Matt Jamieson, an analyst at Fitch Ratings, said the increase in credit polarization of developers and sector consolidation would expedite a decline in annual property sales volumes, which would fall by 10-15% year-on-year in 2022.

Fitch rated China’s property sector outlook as “deteriorating” and said the restoration of homebuyer and creditor confidence would be the key to improving the situation.

Read: China’s economy sagging on property downtrend