- Our short-term liquidity test shows 14 of 22 names we track can stay solvent if they have to repay all short-term debts and settle payable changes without any form of refinancing
- Further delay in sales recovery from tighter lockdown measures in China may reduce the number of developers that can stay solvent down to 4-8 names on a 20-40% miss in FY22F presales
- Stay with defensive plays to ride on potential policy supports and manageable risk profiles
Don’t ignore challenges on the liquidity front. Our short-term liquidity analysis (details on pg.2) indicates that 16 of the 22 developers we track should be able to cover their short-term debt and normal operating expenses using their deployable cash and operating cash inflows under our base case, or 14 with changes in payables added to the picture. Aside from the expected SOE names such as COLI (688 HK), COGO (81 HK), Greentown (3900 HK) and Jinmao (817 HK), Yanlord (YLLG SP) surprisingly was the only POE in the top five in both cases. While the sector on average can stay solvent for over a year in both scenarios, there are liquidity challenges for c.1/3 of the names we track. We believe there are liquidity risks for the sector despite the likelihood of more supporting policies ahead.
Evident impact on sector’s liquidity from tougher COVID-19 lockdowns. Our scenario analysis aims to highlight the potential liquidity impact of a delayed recovery in presales led by COVID-19 lockdown measures in China. Our analysis, which assumes a 20-40% miss in developers’ FY22F presales, showed that without refinancing, liquidity of the developers we track will take evident hits as measured by the average number of months that the sector can remain solvent. There would be a drop from c.13 months under our base case down to 8-10 months (4-8 names may remain solvent for >1 year) if developers have to repay ST debt and settle payable changes. Yanlord, COLI, Greentown and COGO would take the top spots despite taking a potentially heavier hit than others from a delay in presales recovery.
Stay with defensive names to ride on potential policy support. While we believe more supportive policies are on the way to cushion the impact of a hard landing, sector risks must not be ignored as pointed out in our analysis. In addition, the current COVID-19 lockdowns and sales delays will likely pose additional challenges for developers as we head into the next repayment peak in Jul-Aug. We recommend investors to stay with quality names that are largely unaffected on a liquidity standpoint for supportive policies to come – COGO (81 HK), COLI (688 HK), Longfor (960 HK), CR Land (1109 HK) and Yuexiu (123 HK).