KWG (issuer rating of B1/B+/BB- by Moody’s/S&P/Fitch respectively, withstable outlook) announced earlier today a 5NC3USD bond for refinancingpurposes, with Bloomberg reporting the IPT to be 5.6% area. Since about 1.5-2years ago, KWG management has started to become less conservative inlandbanking and expansion, which has led to high leverage; having said that,the proactive landbanking should underpin a better growth path, with robustsaleable resources and good EBITDA growth for the next few years, in ourview. The company is a seasoned China HY issuer, with attributable landbankof about 15.67mn sq m as of August. Year-to-August, KWG acquired 13sites,of which 10were via M&A. We like the developer’s strong margins (facilitatedby still some vintage landbank in Tier-1and 2cities with low land cost),diversified landbank, and a good mix of property type (residential, office, retailand hotels), but reckon its leverage is high. There is also potential to unlockasset value via en-bloc office sales. KWG has various well-located officebuildings across a number of cities including Shanghai, Chengdu, Guangzhouand Beijing which could unlock some asset value. Its staff partnership schemecould help to align some incentives with employees, which we see as apositive move to improve the company’s future growth.
The company achieved 1H17 contract sales of RMB108.9bn, up 94% YoY andlocking in 52% of FY17 contract sales target of RMB210bn (which we expectSunac to surpass by RMB55bn). On an attributable basis, 1H17 contract salesaggregated to RMB75.0bn. We expect its cash collection to be in the mid-80s% for full year 2017. We expect Sunac's de-leveraging to occur in 2H2017or in 1H2018. Given a very high amount of landbanking and acquisitions yearto-date, we believe its acquisition pace will slow down in the remainder of theyear. We also think opportunities of big-scale acquisition such as the Wandaasset purchase (at what we see as cheap on a per sq m basis) do not comealong often. Sunac’s net gearing ratio and leverage ratio could peak in June-2017 at a very high level and could be lower in Dec-2017 HoH, in our view. Interms of on-shore financing, Sunac indicated that its construction loans haverates of around 105%-110% of PBOC benchmark lending rate.
This morning, Ronshine announced a proposed issuance of 3-year puttable 2-year USD bonds, with Bloomberg reporting initial price guidance of 9.25% area.
New issue from KWG
We believe Sunac’s landbank is of high-quality and it can sustain a fast growthof property sales even in 2018, given recent transaction with WandaCommercial Properties. Sunac has an established brand name in many keycities in China (including Tianjin, Beijing, Suzhou, and Hangzhou). Itsmanagement has shown a strong track record of M&A and good timing foracquiring property assets and landbank. As of end-2016, Sunac had 239property development projects in 44 cities in China. In 1H17, Sunac acquired23.5mn sq m of estimated aggregate GFA, per its announcement. Recall thatin 2016, the company issued on-shore corporate bonds and ABS aggregatingto RMB22.5bn. We believe the company should be able to issue some onshorecorporate bonds again under our assumption of a window re-openinglate this year or in 1H2018 for it.
Looking at China property HY companies under our coverage, we see Xinyuan(issuer rating of B/B from S&P/Fitch, stable outlooks) and Guorui (issuer ratingof B/B from S&P/Fitch, with a negative outlook from S&P) as reasonablecomparables of Ronshine. We believe Ronshine should trade wider thanXinyuan as we see XIN as having lower total debt/EBITDA and higher marginsthan Ronshine, but trade tighter than Guorui. All three companies have roughlysimilar total debt/total capital ratios at end-June, 2017 (Ronshine: 70%,Xinyuan: 74%, and Guorui: 68%) but Ronshine’s reported GPM was lowestamong the three for 1H17 (19% vs Xinyuan’s 22%, Guorui’s 46%). We believeRonshine has stronger sales execution in China. We expect Ronshine to traderoughly 40-70bp wider in yield than Xinyuan for the same maturity, given theformer’s credit metrics, more aggressive landbanking, despite Ronshine’shigher growth in contract sales and bigger GFA in landbank. As of end-June,2017, RONXIN had 76 projects with an attributable landbank of 7.6mn sq m.