News Alert: More concrete steps pushed forward by the Zhengzhou Government
- Subsequent to local media reporting of Zhengzhou looking at ways to contain delivery risks of projects from distressed developers (see our comment here), Zhengzhou government has unveiled a detailed action plan last Friday on the set up and execution guidance of a relief fund with an initial planned size of Rmb10bn to address the matter
- While the planned size of the Rmb10bn may look insignificant at the first glance, the full implementation of the plan could potentially create >Rmb80bn of liquidity for the city to contain delivery risk
- We note that the requirements on projects eligible for the plan seems difficult to meet, but we do see room for these criteria for eligible projects for the plan to be relaxed later on
- Investor confidence on the sector remains weak and will require more evident signs of recovery in the physical market for market sentiments to stabilize
- We recommend investors to stay with quality names to ride on the potential release of effective supports and physical market recovery to come – Longfor (960 HK), COLI (688 HK), CR Land (1109 HK), Yuexiu (123 HK) and COGO (81 HK)
What’s new
Subsequent to local media reporting of Zhengzhou looking at ways to contain delivery risks of projects from distressed developers (see our comment here), Zhengzhou government has unveiled a detailed action plan last Friday on the set up and execution guidance of a relief fund with an initial planned size of Rmb10bn to address the matter. The effect could be amplified with the participation from external parties. The overall structure of the relief fund is as below:
Criteria that projects must meet to be qualified for the relief fund:
- Projects originally acquired via public auction market will be prioritized
- Project company should only be holding the development project in question, with clear debtor and creditor relationship, absence of asset seizure or asset freeze, and clean ownership.
- Residual value of the unfinished projects is sufficient, with total asset exceeding total liabilities. Remaining saleable resources should be able to cover all project expenses
- Projects that fulfills the requirements and have secured four certificates (??) with invested capital >25% of total investment (ex-land cost) will be prioritised
Our view
Initial planned size of Rmb10bn may look insufficient, but it could potentially provide >Rmb80bn of actual liquidity for distressed projects. While the planned size of the Rmb10bn may look insignificant at the first glance, the full implementation of the plan – on the assumption of 1) government to contribute the full Rmb10bn into the fund; 2) external parties, LGFVs and financial institutions to contribute their shares in the setup of sub-funds and project acquisitions in full as stipulated in the chart above as well; 3) such funds are fully deployed into problematic projects – could potentially create >Rmb80bn of liquidity for the city to contain delivery risk.
Projects eligible for the plan is scarce for now, but requirements could potentially be relaxed in the future. We note that the requirements on projects eligible for the plan seems difficult to meet. Debt clarity of the projects in question would be a clear case in point as projects held by distressed developers often have more complicated debt structures. Many projects subject to delivery risks are also fully sold with limited or insufficient residual value left to cover project expenses. We therefore believe most of the problematic projects will be barred from the plan for now. Having said that, we do see room for these criteria for eligible projects for the plan to be relaxed later on, as the planned size of the relief fund should be able to cover more than the projects that meets the criteria.
A potential way that may be mimicked by other local governments. We believe policymakers are seeking ways to stabilize homebuyer sentiment and to contain the spreading fear over project delivery risks. Zhengzhou’s approach, if its plan is not challenged by the central government, could potentially be learned and followed upon by other local governments.
Recovery of the physical market remains key to revive market sentiment. While there has been surging news flows for local governments seeking to contain the spreading of the mortgage boycott and project delivery risks, we believe more concrete progresses and follow-ups will be required to address potential homebuyers’ rising concerns. Investor confidence on the sector remains weak and will require more evident signs of recovery in the physical market for market sentiments to stabilize.
Stay with quality names to ride on the potential release of more effective supports to come. The upcoming result season in Aug might deliver negative news flow due to completion delays and margin compression. High beta names like CIFI will likely continue to exhibit strong price volatility along the way. We recommend investors to stay with quality names to ride on the potential release of effective supports and physical market recovery to come – Longfor (960 HK), COLI (688 HK), CR Land (1109 HK), Yuexiu (123 HK) and COGO (81 HK).
