News Alert: Asset disposal to cushion the 1Q22 repayment peak
- Recent asset acquisitions from SOEs showcase regulator’s firm stance to keep the sector’s repayment risk in check
- More SOE-led acquisitions to be unveiled in the near term to ease repayment risk throughout 1Q22
- Asset disposals will likely exert liquidity to troubled developers and gradually settle investor confidence
- Worst for the sector should be over, but volatility to remain until dusts settle
What’s new?
Shimao (813 HK) announced last Friday to dispose 100% stake of a Shanghai land plot at Rmb1,060m to Shanghai Jiushi North Bund Construction and Development (developer held directly by Shanghai SASAC). Agile (3383 HK) disclosed this morning to sell 26.66% equity interest of Guangzhou Asian Games City to COLI (688 HK) at a consideration of Rmb1,380m in cash and Rmb464m loan obligation takeover. CR MixC (1209 HK) also announced last Thursday to acquire Zhongnan Construction (000961 CH)’s property management arm at a maximum consideration of c.Rmb2,260m.
Aside from official announcements, it was reported last Friday that Minmetals trust has acquired stakes of two projects from Evergrande (3333 HK). Regulators are also rumoured to have intervened Evergrande’s restructuring/asset disposal plan, and have asked PwC to help carry out the necessary audit procedures on certain of Kaisa (1638 HK)’s project assets.
Our view:
SOEs on the move to help out on repayment risks. Shanghai SASAC, CR MixC and COLI’s move came shortly after PBOC’s comment to actively address liquidity risk of distressed developers via the encouragement of quality asset acquisitions. While the striking of some M&A deals were generally expected, the speed of which these deals were concluded came as a pleasant surprise to us. We believe this showcases regulator’s firm stance to keep the sector’s repayment risks (particularly their ability to settle payables to up- and downstream) in check.
Asset disposal to cushion the 1Q22 repayment peak. Certain developers (e.g. CMSK (001979 CH)) and financial institutions (e.g. SPDB (600000 CH)) have come to the onshore market for funding to facilitate the carrying out of M&A activities in the property space. There are also rumours relating SOEs conducting due diligence on certain distressed developers’ assets (e.g. Evergrande, Kaisa). We believe more SOE-led acquisitions will be unveiled in the near term, most likely concentrated on 1) property management arm; and 2) consolidation of interests in existing cooperation projects. These should help ease distressed developers’ liquidity and repayment risks throughout 1Q22.
Worst should be over, but volatility will likely remain until dusts are settled. Regulators have adopted a much more proactive approach (support over M&A, dovish tone on monetary policy, potential relaxation of presales proceed control, etc) since early Jan-22 to handle liquidity and repayment risks of developers, which we believe should be gradually transmitted to the market and settle investor sentiment. The announcement and completion of more asset disposals between SOEs and troubled developers will likely exert liquidity to troubled developers and start to restore market confidence. That said, volatility is likely to persist in near-term before distressed developers are out of the woods from the repayment peak. We recommend investors to stay with names of solid land acquisition and presales outlook – COLI (688 HK), COGO (81 HK), CR Land (1109 HK) and Longfor (960 HK).