The shares of Hong Kong-listed Chinese property developers declined on Monday after Moody’s downgraded the rating of Sunac China Holdings, a Beijing-based real estate firm, and raised concerns about weak homebuyer confidence in China despite the relaxation in property curbs.
Some analysts said that although the People’s Bank of China (PBoC) was set to relax some of its property curbs, it’s too early to buy Chinese property stocks as the sector would continue to face pressure in the first quarter.
Beijing’s policy direction for the property market would be clearer in early March after the “two sessions” – the annual meetings of the National People’s Congress and the Chinese People’s Consultative Conference, they said.
Many property developers have been selling their assets to replenish their cash flow as they expect their contract sales would not rebound significantly in the first quarter due to weak market sentiment extending from the fourth quarter of last year, analysts said.
Chinese property markets entered a down cycle last year after the PBoC launched “three red lines” in 2020 to prevent heavily-indebted property developers from borrowing more money for expansion.
In 2021, shares of Evergrande Group declined 89% to HK$1.59 (20.4 US cents) from HK$14.9, while Shimao Group dropped 79% to HK$5.07 from HK$24.7. Fantasia Holdings lost 76% to 33 HK cents from HK$1.35.
Under this backdrop, Sunac, owned by Chinese billionaire Sun Hongbin, also fell 59% last year. On January 13, the company announced a plan to raise HK$4.52 billion by selling 452 million new shares for repayment of loans and general corporate purposes.
The new shares were issued at HK$10 each, representing a 15.3% discount to the closing price of HK$11.80 each on January 12.
On Monday, Sunac’s shares slumped 11.84% to HK$9.68 from HK$10.8 after Moody’s downgraded the company’s corporate family rating (CFR) last Friday to B1 from Ba3 and senior unsecured rating to B2 from B1. Moody’s also changed Sunac’s outlook on the ratings to negative from stable.
“The downgrade reflects Sunac’s reduced liquidity buffer due to its constrained funding access and weakened operating cash flow,” said Kelly Chen, a Moody’s Assistant Vice-President and analyst. “The negative outlook reflects a potential further weakening in the company’s operating and financial performance over the next 12-18 months amid a challenging operating environment.”
On January 19, Fitch Ratings downgraded Sunac’s Long-Term Foreign-Currency (LTFC) issuer default rating, together with the company’s senior unsecured rating and the ratings on its outstanding US-dollar senior unsecured notes, to “BB-“ from “BB.”
Fitch said Sunac had 12.3 billion yuan (US$1.93 billion) of onshore public capital-market bonds maturing or becoming puttable through to the end of 2022, as well as $600 million of offshore senior unsecured bonds due in June 2022 and another $600 million due in August 2022.
Fitch said Sunac would have to use its cash reserves to pay upcoming debt maturities as debt capital markets are largely closed to the company and other developers in the “BB” and “B” rating categories for now.
It said Sunac would continue to dispose of onshore assets to improve short-term liquidity, but these asset disposal plans were likely to take time and were subject to execution risks. On January 20, S&P Global Ratings also downgraded Sunac’s rating by a notch to “BB-”.
Sunac has raised more than 20 billion yuan through the sale of shares and assets in recent months to repay its debt, Caixin reported on January 20. Sunac’s chairman Sun Hongbin also provided an interest-free loan of $450 million to his company.
On Monday, his younger brother Sun Hongbing had realized a combined loss of at least HK$74.7 million after selling three luxury apartments in Hong Kong this year, according to the city’s newspapers.
In 2015, the duo jointly bought the controlling stake of Wuzhou International Holdings, a property developer, but it was then delisted from the Hong Kong stock exchange in 2020 due to financial difficulties.
Most Chinese property stocks declined on Monday due to Moody’s downgrading of Sunac. Shares of China Aoyuan Group decreased 10.8% and Agile Group lost 9%. Many other property developers, including Kaisa and Evergrande, dropped by 5-7%.
On February 7, Sunac said its contracted sales fell 21% to 27.92 billion yuan in January from the same period last year, while the contracted sales area decreased 4.2% to 2.14 million square meters.
In fact, Sunac has outperformed its peers in terms of property sales. Contracted sales of key developers declined by 40% year-on-year in January 2022, further deteriorating from a decline of 29% in December and 32% in November, according to the China Real Estate Information Corp, a research unit of E-House (China) Holdings Ltd.
“The weak contracted sales in January were largely expected by the market, due to the seasonality effect and weak market sentiment extending from the fourth quarter of last year,” said Lung Siu-fung, a property analyst at CCI International Securities, adding that basically, all Chinese property developers were expecting a core profit decline in 2021.
Lung said most developers had seen revenue decline due to construction delays amid a liquidity crunch and margin squeezes on property price cuts. He said the potential devaluation of renminbi, caused by the widening interest rate spread amid the opposite monetary policies adopted by China and the United States, would have an immense impact on Chinese property developers’ US dollar bond refinancing.
He said such a trend had already led to a collapse in their bond prices in both onshore and offshore markets since the second half of last year.
“We have seen the Chinese policymakers turn supportive towards the property sector,” Lung said. “The ‘three red lines’ which used to curb developers’ financing has now excluded merger and acquisition (M&A) loans.
“The ‘two caps’ which used to limit banks’ property exposure has been toned down and the incremental lending to the property sector has become the new key-performance indicator (KPI) monitored by the central bank.”
However, Lung said China’s homebuyer sentiment would only improve in the second quarter after the PBoC’s policy relaxation was reaffirmed in the “two sessions” next month and excessive liquidity gradually channeled to the property sector.
On December 15, the PBoC cut reserve requirement ratios for banks by 50 basis points. The move, which will inject 1.2 trillion yuan into the economy, will help support small and medium-sized enterprises, while allowing state-owned banks to allocate more funds to the property sector, analysts said at the time.
The PBoC was expected to exclude debt accrued from acquiring distressed assets when calculating property developers’ compliance with the “three red lines,” REDD, a financial intelligence provider, reported on January 7.
Local governments including Shanghai and Guangdong had held meetings with some state-owned developers and asked them to acquire assets from 11 private developers with liquidity issues to ease their financial stress, it said.
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