Management purchase a vote of confidence in repayment ability
- We think the market should be pleased with CIFI’s non-redemption of its PCS to reserve cash to repay other debts due in the next 12 months.
- We believe that stronger sales in 2H22F should enable it to repay debts due in 2023, including US$300m notes due in Jan 23.
- CIFI and its management have purchased bonds from the secondary market a few times, an indication of their confidence in CIFI’s repayment ability.
- Reiterate Add with a TP of HK$6.0. More share and bond purchases by CIFI and its management are a near-term re-rating catalyst, in our view.
Voluntary purchase of outstanding domestic bonds
CIFI’s share price was down 16% over the past four days, due to investors’ concerns over i) market-wide slowdown in contracted sales and homebuyers defaulting on mortgage payments and ii) non-redemption of its perpetual capital securities (PCS) even when there are no more US$-denominated bonds due for the rest of 2022.
Stronger sales in 2H22F to support further redemption of bonds
CIFI’s contracted sales in 6M22 declined by 54% yoy to Rmb63.1bn. It announced on 10 Jul 22 that its cash collection from property sales exceeded Rmb74bn in 1H22. Also, based on our checks on its recent sales, we expect its contracted sales could rise by 20% mom to over Rmb16bn in Jul 22, equivalent to only about a 20% yoy decline. In our view, the improvement in contracted sales and operating cash flow in 2H22F should support its early redemption of onshore and offshore bonds in the next 12 months.
Purchase of outstanding bonds by company and management
We note that on 8 Jul, it began to redeem from the secondary market the 5.5% US$ senior notes due in Jan 23 (the only tranche of US$ notes due in 2023). We expect CIFI to start redeeming its 5.375% US$300m PCS after full redemption of the Jan 23 senior notes and after its contracted sales improve further. On the other hand, the Lin family and CIFI’s management have also purchased CIFI’s bonds in the secondary market a few times since Apr 22, indicating management’s confidence in CIFI’s ability to repay debts.
Continual increase in shareholding by the Lin family
Based on CIFI’s filings to the stock exchange, since the release of FY21 results on 24 Mar 22, major shareholder, the Lin family, has purchased 10.94m CIFI shares in the secondary market at average price of HK$4/sh. We expect further purchases by the Lin family before the blackout for its interim results begins, demonstrating their confidence in CIFI’s future development. As of 13 Jul 22, the Lin family held an aggregate 55.59% stake in CIFI.
Reiterate Add with a TP of HK$6.0
We reiterate our Add rating for CIFI with an SOP-based TP of HK$6.0. We think investors are over-bearish on CIFI’s property sales and debt repayment ability. Potential re-rating catalysts include faster-than-expected recovery of contracted sales and further share and bond purchase by CIFI and its management. Key downside risks: prolonged Covid-19 outbreak in China and gross profit margin erosion.