By Rebecca Choong Wilkins December 14, 2021

  •  Connected-party deal is a ‘red flag,’ JPMorgan analysts say
  •  Property stock index heads for lowest close since 2017

Chinese property stocks sank for a third day, heading for the lowest level since early 2017, after a deal between units of Shimao Group Holdings Ltd. heightened governance concerns in an industry already grappling with a liquidity squeeze.

Shares of Shimao Group and its property-services unit were among the biggest losers in Hong Kong trading on Tuesday after JPMorgan Chase & Co. analysts said the connected-party acquisition “not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flag.” 

A Bloomberg index of developers sank 3%, on course for its lowest close since March 2017. Shimao Group bonds dropped by about 3 cents on the dollar, leading declines among Chinese high-yield debt, according to traders. The losses came amid a wider slump in Hong Kong shares that centered on companies most exposed to Covid-related restrictions, including casinos.

China's dollar junk bonds rebound halted by renewed concerns about Shimao

Shimao Group isn’t nearly as systemically important to the economy as China Evergrande Group, but the smaller developer’s woes have become a major focus of investors in recent days. After the company blamed “rumors” for a selloff in its stocks and bonds on Monday, Shimao’s services unit announced after the market close that it had agreed to buy another unit of Shimao Group for 1.65 billion yuan ($259 million).

The deal’s valuation was higher than usual, suggesting Shimao Group “is essentially transferring the cash from property manager to developer level,” JPMorgan analysts wrote. They noted equity investors are increasingly worried that publicly listed property managers are being used as a “financial tool” by developers that share the same owners. 

Shimao Group, founded by billionaire Hui Wing Mau, said in an emailed reply to questions from Bloomberg that the company hired Cushman & Wakefield to advise on the valuation. The price took into consideration factors including liquidity and a control premium, Shimao Group said.

The company’s shares fell 12% as of 11 a.m. in Hong Kong, heading for the lowest close since 2011. Shimao Services Holdings Ltd. plunged 20%. JPMorgan downgraded both stocks to underweight.

This week’s losses in Chinese property stocks and bonds have upended the buoyant mood that dominated trading last week, when Beijing’s shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years. Optimism over further easing steps had helped counter the long-anticipated defaults by Evergrande and Kaisa Group Holdings Ltd. 

The selloff underscores the fragility of investor sentiment toward China’s troubled real estate sector as President Xi Jinping pushes forward with plans to reduce risk in the financial system.

— With assistance by Abhishek Vishnoi, and Emma Dong