Downgrade to Hold on liquidity deterioration
- CIFI’s liquidity situation has unexpectedly worsened in the past weeks, as illustrated by its failure to fulfil its debt obligation for a project in Tianjin.
- Its fundraising in the past 12 months seems insufficient to meet its liquidity needs, as free cash flow from sales are limited YTD.
- We think CIFI may request to delay the payment of its short-term debts, to give it more time to manage its balance sheet.
- Downgrade to Hold with lower TP of HK$0.92. It is not a Reduce given its low valuation of 0.16x FY22F P/BV.
Worsening of liquidity position
CIFI’s liquidity situation has been worsening recently, as illustrated by its failure to make a timely payment of investment return to a minority shareholder of a residential project in Tianjin last week. CIFI said it will negotiate with that project shareholder to come up with a resolution that both parties can accept. So far, we have not heard of any progress over this. Meanwhile, based on Chinese media Hexun, in an internal letter sent to CIFI’s staff last week, chairman Mr Lin indicated that CIFI’s financial position is very challenging on the back of weak sales and added that CIFI has limited room to use its so-called Rmb30bn cash reserves as the majority of these are restricted or cannot be freely used.
Past 12 months’ fundraising seems insufficient
Although CIFI has raised a few billions Rmb in the past 12 months through equity, asset disposal and onshore debt issuance, the efforts seem insufficient to meet its liquidity needs (onshore/offshore debt repayment, construction capex) as its major cash inflow from contracted sales has declined significantly and most of the cash obtained from sales were not to be freely used. Meanwhile, CIFI has limited room to cut its construction capex as it needs to ensure delivery of its presold projects. While CIFI does not have any major debt repayment due before Jan 2023, we understand that it needs to pay interest expense or amortise some of its syndicate loans or US$ bonds. Given limited refinancing opportunities currently, we think CIFI, like some of its peers, could request to delay the repayment of some of its debts, giving it more time to manage its balance sheet.
FY22-24F sales assumptions cut by 8%, EPS by 19-39%
Given CIFI’s weaker sales progress, we now expect sales of about Rmb139bn in FY22F, down 44% yoy, and c.8% below our previous estimate. For FY23F and FY24F, we expect sales will be about 10% lower than in FY22F. Its weaker sales, coupled with a lower GPM, lead us to cut our FY22-24F EPS forecasts by 19% to 39%.
Downgrade to Hold with a lower TP of HK$0.92
We cut our SOP-based TP for CIFI by 75% to HK$0.92 to reflect 1) a 52% cut to our NAV, 2) a wider target discount of 80% for property NAV (previously 60%) of HK$0.86 and 3) Rmb’s 5% depreciation in the past two months. With 8% share price upside potential, we downgrade CIFI from Add to Hold. Key downside risks include further weakening of contracted sales, which would stiffen its liquidity. Massive supportive measures from regulators, which could improve CIFI’s liquidity, are key upside risks.