- Bond prices, being a tracker for accessibility to offshore financing, saw strong correlation to share price since liquidity struggles in 2H21
- We introduce a China property-specific bond index to identify sector turning points
- Substantial bond price movements may be a leading indicator of share price volatility
- Top picks: COLI, COGO, CR Land, and Longfor
Offshore bond prices started to become a leading indicator of developers’ share prices. We found that offshore bond prices for Chinese developers have started to exhibit a leading relationship to share prices since 2H21 as the sector’s liquidity and access to funding come into question. The correlation of the sector’s share prices with the offshore bond price has meaningfully picked up from 0.54 between Jan 20 and Jun 21 to 0.85 since Jul 21. Share price rebounds were short-lived without bond price support, as shown in Sep-Oct 2021. Substantial bond price movements have had evident impacts on developers’/sector’s share prices, with Country Garden (2007 HK) and Logan (3380 HK) as cases in point in early Jan 22. With onshore bonds’ lower trading liquidity, offshore bond prices have become the indicator for investors to infer and monitor developers’ credit health and fund accessibility.
Introducing the DBS China Property Offshore Bond Price Index to identify share price turning points. Due to the absence of an index solely for the Chinese property sector’s bond prices, we have compiled the DBS China Property Offshore Bond Price Index (refer to P.5 for detailed methodology) for the purpose of tracking the magnitude of bond market recovery and how far it is from reopening refinancing functions. We aim to identify potential developer/sector share price turning points via daily tracking of the index as well as the top 10 gainers/losers. In addition, we will also regularly update developers’ onshore bond issuance applications, approvals, and issuance statuses to track if there are early signal of changes to developers’ refinancing sources.
A sustainable sector-wide share price rally would require a meaningful recovery from the bond market. Near-term volatility is likely to persist as we cruise through the 1Q22 repayment peak in the on and offshore markets and a gloomy FY21 results season ahead. We believe normalisation of bond prices (i.e., back to >90bps vs. current 67bps) would be necessary for the sector to see a sustainable price and valuation recovery. We suggest investors to stay with quality companies with solid balance sheets and abundant saleable resources before any further improvements are seen on the liquidity front. Our top picks are COLI (688 HK), COGO (81 HK), CR Land (1109 HK), and Longfor (960 HK).