- Impact of FX losses from RMB depreciation on short-term liquidity and balance sheet will affect cashflows but should be manageable
- Sector valuation becomes less attractive after reflecting FX and translation losses
- Top picks: COGO (81 HK), COLI (688 HK), Longfor (960 HK), CR land (1109 HK), Yuexiu (123 HK)
An unusual year where FX loss from RMB depreciation may not be non-cash. In the absence of offshore refinancing channels, developers will have to settle their offshore non-Rmb bonds with internal RMB cash. As such, FX loss from maturing bonds is no longer non-cash and will weigh on developers’ repayment capability. Thus, we conducted a RMB sensitivity analysis to assess the impact of a 5-15% RMB depreciation (USDCNY=6.6-7.3) by Dec-22 on developers’ liquidity and balance sheet.
Substantial FX losses on the way, but impact on ST liquidity and balance sheet should be manageable. Our analysis indicates there could be total FX losses amounting to c.3-9% of developers’ FY22F book value, or c.32-95% of FY22F core earnings. Assuming such FX losses are recognised according to developers’ respective ST debt to total debt ratios, a 5-15% RMB depreciation should be manageable with adj. cash to ST debt ratio (ex-restricted cash and regulated presales proceeds) falling from 1.38x to 1.31x. Net gearing ratio would pick up by 3-12ppts along the way. CCRE (832 HK), Agile (3383 HK), KWG (1813 HK) and China SCE (1966 HK) would be the four most impacted names in these regards, whereas SOEs of COLI (688 HK), Longfor (960 HK), CR Land (1109 HK) and Yuexiu (123 HK) that are considered highly sensitive to RMB movements by the market will in fact be least affected.
Valuation will be less attractive. Coupled with translation losses, the sector’s FY22F PE would rise from c.3.8x currently to 4.0x-4.5x for the names we track (vs 5-year average of 5.6x), along with a higher forward PB from the current 0.42x to 0.45-0.51x (vs c.0.6x when sector yielded similar core ROE of c.11% in 2016). This points to less attractive valuations both on a PE and PB standpoint. Agile, Jinmao (817 HK) and CCRE should see the largest impact on a PE perspective, while CCRE, CIFI (884 HK) and China SCE would take the largest hits on a forward PB basis.
Stay with defensive names to ride on potential policy support. Our analysis indicates that potential impact of a RMB depreciation on fundamentals should be manageable, but its impact on valuations should not be overlooked. We recommend investors to stay with quality names that are less affected on both a liquidity standpoint and RMB depreciation for supportive policies ahead – COGO (81 HK), COLI (688 HK), Longfor (960 HK), CR Land (1109 HK) and Yuexiu (123 HK).