Increasing difficulty in repaying bonds
- Faces increasing difficult in repaying bonds due Sep given its 1) slow asset sales progress, 2) weak sales, 3) slow refinancing progress of HK project.
- Ap Lei Chau project is critical for KWG to resolve its liquidity problem as the project can help it obtain HK$4bn-5bn additional refinancing, if completed.
- We expect KWG’s contracted sales to decline 45% in FY22F and stay largely flattish in FY23F and FY24F, as it focuses on managing its balance sheet.
- Our TP drops to HK$2.2 to reflect EPS cut and potential bond defaults. Still an Add as cheap valuation (2x FY22F P/E) prices in weaknesses, in our view.
Increasing difficulty to repay its debts, esp US$ bonds due in Sep
Given the slower-than-expected progress of its asset sales in the past few months and weaker-than-expected sales recovery since Jun (especially with negative news flow related to a mortgage boycott which further hurt homebuyers’ sentiment), we assess that KWG faces increasing difficulty in repaying its c.Rmb10bn debt due later this year – including Rmb4.5bn onshore debts and US$900m US$ bonds due in Sep 2022. The latter currently trades at about 30% of its principal value, implying that there is a high chance KWG would fail to repay them.
Ap Lei Chau project unlikely to get refinancing near term
KWG last week announced it has sold its entire 50% stake in its 50:50 JV residential project in Kai Tak, Hong Kong to Longfor for HK$1.3bn. The deal can help but will not be sufficient to solve KWG’s liquidity pressure in the near term. Ap Lei Chau project is the key in resolving KWG’s liquidity issue if it can obtain additional refinancing of HK$4bn-5bn, in our view. However, the progress to refinance Ap Lei Chau looks slow given the financial problem of its JV partner as well as the current very weak market sentiment.
We expect its contracted sales to drop 45% in FY22F
In 7M22, KWG’s total sales were Rmb31bn, down 52% yoy, slightly wider than peers’ average decline of 48%, and we expect its FY22F sales to be about Rmb57bn, a 45% decline, despite some recovery in the remainder of the year. Meanwhile, given that KWG will focus on managing its balance sheet by cutting its land purchase budget and slowing its construction progress etc., we expect sales to stay largely flattish in FY23F and FY24F.
FY22-24F EPS cut by 56-63%
We cut our FY22-24F EPS estimates by 56-63% as we cut our assumptions on: 1) sales over FY22-24F, and 2) GPM as a result of price cuts – we estimate its GPM to drop to about 18% in FY22F.
Maintain Add but TP cut by 69% to HK$2.20
We cut our NAV for KWG by 37% to reflect weaker sales and lower GPM assumptions for FY22-24F. Meanwhile, given the increasing likelihood KWG would be unable to repay its US$ bonds in Sep 2022, we widen our NAV-based target discount from 50% to 75%, on par with the discount we apply to developers with liquidity issues. These lead to a 69% cut on KWG TP to HK$2.2, still a potential upside of 45%; hence we maintain our Add call. Key risks include weaker-than-expected sales in 4Q22F.