Senior Credit Analyst, Lucror Analytics

Leonard Law, CFA

Senior Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

Recognizing the importance and value-add of Factor Investing in fixed income, Lucror developed the Smart Quant Navigator (SQN), an intuitive platform that helps clients devise and implement factor-based strategies ranging from pure quant to active fundamental, with integrated ESG.

Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Credit

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.<ul><li><a href='#lucror-entity-7613'>China Aoyuan Property</a></li><li><a href='#lucror-entity-8205'>China South City</a></li><li><a href='#lucror-entity-12705'>Greenland Holdings Corp</a></li><li><a href='#lucror-entity-227'>Guangzhou R&F Properties</a></li><li><a href='#lucror-entity-169'>Kaisa Group Holdings</a></li><li><a href='#lucror-entity-14882'>Seazen (Formerly Future Land)</a></li></ul>

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.China Aoyuan PropertyChina South CityGreenland Holdings CorpGuangzhou R&F PropertiesKaisa Group HoldingsSeazen (Formerly Future Land)

Morning Views Asia: China Aoyuan Property, China South City, Greenland Holdings Corp

The Asia HY Trade Book for the month of October includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds in the Lucror Asia HY index.

  The Asia HY Trade Book for the month of October includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds in the Lucror Asia HY index. 

Asia HY Trade Book - October 2021 - Lucror Analytics

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The Background
A bit more a year ago, I looked at the situation of Evergrande (3333 HK) as it faced what would become a funding squeeze in Evergrande May Be Facing a Funding Squeeze. It has, indeed, faced such a funding squeeze. 
I wrote at the time that the implementation of the Three Red Lines pilot program (setting limits on bank borrowings and debt by developers: a liabilities-to-assets ratio (excluding pre-sales) of no more than 70%; a net debt-to-equity ratio of less than 100%; and cash holdings at least equal to short-term debt for a dozen major real estate developers) risked a quantum change in the state of the real estate market and economy. My warning:



I also wrote...

To be clear, this is not a story of criminal embezzlement as much as it is a story of wealth-building during times when people are relaxed, trusting, and money is plentiful. And it is possible that we are now on the cusp of a Moment - a time when the bezzle is discovered. Banks are being told not to lend more. Companies are being told not to borrow more. And off-balance sheet liabilities are making their way onto the front pages.
The rate of discovery is increasing.

Indeed, the discovery rate increased and regulators pressured banks to not increase real estate exposure, and not lend to developers - even those not part of the "pilot programme."
And the discovery rate increased on Evergrande when market observers noted that when the plan to inject Hengda into Shenzhen-listed Shenzhen Special Economic Zone Real Estate &amp; Properties Group Co. Ltd was not realised by end January 2021, it would require Hengda to spend some $20-22bn buying back the minority shares. This was a real scare because the documents and their terms were reasonably public (and the deadline had been extended) and there was a Letter Asking For Help to the local government, variously denied by Evergrande in a Solemn Declaration that the letter was pure fabrication, and re-asserted by media (which claimed to have seen it). In early November, the plans to merge Hengda with SSEZRE&amp;P were terminated and shareholder agreement amendments by those minority shareholders to not seek redemption at end-January were signed or in the works. In the end, Hengda only had to repay "principal" of RMB 4.3bn, and the remaining RMB 125.7bn held 40% of Hengda Real Estate (up from 36-odd percent before), which would indicate the "non-principal" portion of the buyback guarantee was worth something like 10% and was turned into shares rather than Suning.com (002024 CH) had owned RMB 20bn and had been most forthright in saying it would ask for its money back, as it was facing problems, and in the end, it too agreed.

That may have been the straw which broke the camel's back as the company required a restructuring earlier this year which saw Suning founder-tycoon Zhang Jindong give up half his stake and step down as chairman (the company may still be in negotiations to repay a $600mm debt put-able on the change in control - a bondholder solicitation requiring 90% approval to agree to changes was launched in August but holders of 25% were said to be demanding their money).

In the end, I said that significant asset sales and gross deleveraging were the only avenues to save the company from its impressive debt and payables obligations over the next 12-18 months. 
Not long after, Evergrande tried to sell some equity, but was only partly successful (discussed in Evergrande Equity Placement - Musical Shares). The shares did not react well, and fell further, leading the cash-strapped company to actually buy back its own shares, discussed in Evergrande Equity De-Placement: Musical Shares), apparently to boost the price. Evergrande then listed Evergrande Property Services (6666 HK), then bought shares of EPS in the market, then bought more in the market, then eventually sold some at a lower price. And Evergrande bought more shares in Evergrande Auto (708 HK), then sold more at a lower price. It sold shares in its unit Fangchebao ("FCB") in March, on its way to a presumed IPO, but these too were backed by a "buyback guarantee" (effectively loans with shares as collateral). And Evergrande's own shares neared the HK$11 mark in early June, the company bought back its own shares for a few days before giving up on the effort.
Since then, I have discussed the company's situation a few more times (the Special Dividend, and Losing Room to Manoeuvre). And the most recent piece in August (Evergrande as a Study of Quantum Mechanics Theory) investigated the near-philosophical issue of how to think about the state of the company. The situation has become a bit more dire since then. 
Nearly 13 months ago when the company made a wholly unsolicited "Announcement on the Operation of the Company" after its Solemn Declaration, it noted, 

In the 24 years since the establishment of the Company, the Company has borrowed loans across 20,523 transactions. There has never been any late payment of interest nor overdue repayment of principal.

Counting trust loans which apparently did not get repaid in August, WMPs not paid in September, bank interest which did not get paid in September, and several USD bonds which did not see their coupons paid on 23 and 29 September, or their principal repaid in October, this is no longer the case. 
The company is in virtual default. Hengda Real Estate owes trust interest and trust principal payments, bank loan interest, or at least some of it. It may owe CNY bond interest, but may have done a deal with bond investors on a CNY bond which had a coupon due 23 September. There have been issues with Wealth Management Product (WMPs) and their repayment, and Evergrande's initial proposals to repay investors have not been received well. Work on half the company's 800 projects across China have halted and the company has not repaid commercial acceptance bills to contractors and suppliers. Evergrande did not pay global investors on 23 September for two bonds which had USD coupons fall, and those bonds and others since have a 30-day grace period before the bondholders can call a default. Evergrande and unit Tianji Holding apparently were also the guarantors for a US$260mm bond issued by a non-consolidated Hengda joint venture called Jumbo Fortune Enterprises Limited which came due on 3 October. That was a Sunday so the effective repayment date was the next day, but apparently there was no grace period attached to this bond which means default may be called at any time. There has been no news on this and it was a privately-placed bond so we cannot know how this turns out until the bondholders, the company, or those later in charge choose to tell us.
On 14 September, the company issued an "update" where it said, 

The month of September is typically when real estate companies in China record higher contract sales of properties. However, the ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group. The Company expects significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity.

The company noted in that filing that asset monetisation had not come as expected - and negotiations to sell stakes in two listed companies, and to sell the HQ headquarters were nowhere, that subsidiaries had failed to repay WMPs, and said it had engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited as financial advisors. Houlihan Lokey, is of course, known for its bankruptcy/default work. 
Law firm Kirkland and Ellis and investment bank Moelis are apparently working on behalf of holders of US$5bn of face value of Evergrande USD bonds and initiated contact prior to 23 Sep, but as of a week ago, there had been "no meaningful contact." 
On 29 September, the PBOC got the financial regulators, MOHURD, and the top 24 banks together to make it clear to lenders they needed to "accurately grasp and enforce the prudential management system of real estate finance around the goal of ‘stabilizing land prices, house prices and expectations'". Bloomberg said, "The regulators asked banks to refrain from cutting off funding to developers all at once, according to a person familiar with the matter. Lenders should continue supporting projects under construction and approve mortgages for buyers of homes that are qualified for pre-sales."
New Developments


Late Friday (15 October), Reuters reported that Guangzhou SASAC Yuexiu Property (123 HK) had withdrawn from negotiations to buy the Hong Kong headquarters of Evergrande in Wan Chai. The story was that the Board feared "unresolved indebtedness would create potential complications in completing the transaction smoothly" (which is code for 'Evergrande's likely bankruptcy will mean questions over an over-hurried sale - if it is "too cheap" it might be undone in restructuring proceedings, and if it is "too expensive" then Yuexiu might be accused of a shadow bailout of banks which have lent money to Evergrande with the building as security (and as the central government and financial authorities have been urging a "market-oriented approach" to the resolution of Evergrande's debt issues.

This is not surprising. It was apparent at the end of August that the municipal government had told Yuexiu to halt the deal while it was combing through the developer's books. The news Friday should not have been a surprise whatsoever.
Given the HK$10+bn of securitised loans against the HK$12.5bn Evergrande purchase price and rumoured HK$13+bn sale price, Evergrande and/or Hengda (the ultimate owner may be either because they were switched at one point, without much announcement) will end up with minimal net cash from the sale.



On Friday 15 October, the PBOC held a press conference with Zou Lan, director general of the Financial Market Department of the PBOC, who stated "risks to the financial system stemming from the developer’s struggles are controllable” and "unlikely to spread." A Bloomberg article noted he said the PBOC had asked lenders to keep credit to the real estate sector “stable and orderly.” He reiterated that property would not be used as a short-term boost to the economy, and mortgage restrictions had helped curtail an excessive surge in property prices. He also said that property investment has slumped recently after some developers faced credit problems, but that this was a normal market phenomenon. 

Regarding Evergrande, he said, “In recent years, [Evergrande] failed to manage its business well and to operate prudently amid changing market conditions... Instead it blindly expanded and diversified.” The developer’s rapid expansion “led to severe worsening of its financial metrics, and risks blew up in the end.” 
When a financial regulator says “risks blew up in the end” or calls that “the final outbreak of risks” (depending on one's translation) that tells you they know this is the end for Evergrande, but the press conference clearly contrasted Evergrande and “some developers” with most developers which have 'healthy financial performance'. To me, the press conference was remarkable in that it seemed to be an effort to ring-fence risks. 
I note his highly market-conciliatory statements about policy support for the real estate market within the bounds of “reasonable” price. Importantly, he said that some lenders had “misunderstandings” about macro-prudential policy (the Three Red Lines) which had caused strains for some developers, as some new projects were unable to get loans even as older projects repaid existing loans. He said “This short-term extreme reaction is a normal market phenomenon.” He noted that in some cities property prices surged too quickly, causing mortgage approvals and issuance to be limited, but that “once housing prices stabilise, the supply and demand of mortgages in those cities will be normalised too.”



This tells you that banks are being urged to make sure already-started projects are able to go through to completion (but it also tells you banks will be urged to make sure adequate developer collateral is kept in the cash pre-sales accounts so that banks don't take a hit). 
This is a follow-on from the Yi Gang-led meeting on 29 September. 

He also said Evergrande had been urged to continue asset disposals and restart stalled projects, and that regulators would ensure such projects had adequate support to continue.
I note that PBOC head Yi Gang was on a virtual conference call Sunday with the Group of 30 according to Bloomberg and said similar things to what Zou Lan said Friday. 

Also on Friday 15 October, an essay by China's leader Xi Jinping was published in Qiushi, which is the leading journal of theory for the Chinese Communist Party, published twice a month by the Central Committee and the Central Party School. This can be thought of as enormously important. The subject, of course, was “Common Prosperity.” The bulk of the essay dealt with topics which have been emphasised before - increasing equality of opportunity, regardless of current income or location, increasing support for less developed regions, increasing the level of education of the “skilled workforce”, increasing the level, reach, and equality of public services and fiscal spending, and other points. The sections to which readers might pay close attention are the following:

The Fourth Section, which says China should strengthen the regulation and adjustment of high income, crack down on illicit income, study methods to encourage ways to avoid excessive income, and “actively and steadily promote real estate tax legislation and reform, and do a good job of pilot work.” This may translate to a near-term expansion of a property tax system, as has been trialed in Shanghai and Chongqing for high-end residences since 2011. Reuters reported that China Property News (managed by MOHURD) quoted Jia Kang, ex-director of the finance ministry-backed Chinese Academy of Fiscal Sciences as saying, “China could consider conducting system innovations to expand the scope of property tax while moving forward with tax legislation as soon as possible,” and suggested it could start soon in Zhejiang. The 2021-2025 development plan released in March said it would push for property tax legislation in the next five years, but it is not on the current legislative agenda.
That section also talks about the necessity to “increase the management of income distribution in monopolistic industries and state-owned enterprises, rectify the order of income distribution, and clean up the chaos of distribution such as increasing the income of executives in the name of reform” which could suggest less pre-tax profit for SOEs through lower pricing. This could theoretically lead to increased payout ratios on lower profitability so disposable income goes further with lower prices on electricity, gas, and telecoms. One would think that this is tough given the current situation in energy, but this would be a vote against the capital gains potential of monopolistic SOEs.  
The Fifth comment was about promoting the common prosperity of people's spiritual life. This is, as far as I can tell, the goal of moving people's meaning of life away from the pursuit of monetary gain, and towards a kinder, gentler, socialist society. 
The Sixth comment talks about promoting the common prosperity of farmers and rural areas. This means spending more on rural and low-income areas. It means more subsidised housing and probably means more infrastructure, and subsidies for manufacturing buildout. 
The final bit notes that it would take until the middle part of this century for common prosperity to be basically achieved by all, and for the gap in income and consumption level (consumption ability level) to be reach a reasonable range. This is key. It will take 19-39 years to get there (assuming 2040-2060 is "the middle of this century"), and there are lots of caveats about how it will take hard work, and some people will achieve prosperity before others. “We must be down-to-earth and work for a long time, not everyone is rich at the same time, and not all regions reach a level of prosperity at the same time, different people not only achieve a high degree of prosperity, there will be time first and later, there will be some differences in the degree of prosperity in different regions, it is impossible to advance in parallel. This is a dynamic process of development, which must be continuously promoted to achieve results.”  The only way that works is for central authorities to guide rules and distribution forevermore. But we knew that. 


Also on Friday Evergrande's Hengda unit said (PDF, website) it would pay a coupon on the CNY October 2025 bond (149258.SZ) on 19 October. This got some upset that Evergrande was prioritising local bondholders to foreign bondholders. This is a bad take. The two issuers are separate. Bondholders of EVERRE bonds have access to 60% of the residual equity of Hengda, not to funds which pay bondholders. EVERRE bondholders, should, if anything, be happy that Hengda is paying its coupons, which means that Hengda's shareholders (i.e. EVERRE estate) are still "alive."
On Saturday, Reuters reported Evergrande CEO Xia Haijun had been in Hong Kong for two months dealing with investment banks and creditors on restructuring, and trying to accomplish asset sales. This had not been previously reported. That he has been here for two months and hasn't gotten any asset sales done tells you that they aren't happening easily.

These are the background items as we start the last week of non-defaulted Evergrande. Of course, the PBOC press conference is the only real new news. 
More discussion on what to do with that information below. 

Evergrande Update - Limited Contagion, and Positive Regulatory Noises Near-Term

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.<ul><li><a href='#lucror-entity-169'>Kaisa Group Holdings</a></li></ul>

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.Kaisa Group Holdings

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" data-smartkarma-citation="entities:20954:1" rel="noopener">Chinese Estates Holdings (127 HK)</a> is principally engaged in property investment and development, building and property management, brokerage, securities investment, money lending and cosmetics distribution and trading. After market close on Wednesday, it announced a privatisation offer by way of a scheme of arrangement from an entity controlled by Ms HW Chan, the CEO. The offeror will offer HK$4.00 in cash for each scheme share. The bid represents a premium of 83.5% over the closing price of HK$2.18 per share on the last full trading date (28 September prior to the trading halt). Chinese Estates’ shares are down 40% since 30 June largely due to the fallout from its substantial shareholding in <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>. Chinese Estates built up a 6.48% shareholding in Evergrande in 2017 and 2018 at an eye-watering cost of HK$13,596.0 million ($1.7 billion) and an average cost of HK$15.8 per share. Due to the precipitous decline in Evergrande share price (HK$2.95 last close prior to a trading halt), since 30 August, Chinese Estates has reduced its shareholding in Evergrande to 4.39% of outstanding shares for total cash proceeds of HK$689.2 million ($89 million). If Chinese Estates disposes of its entire shareholding, it could result in a realised loss in other comprehensive income of -HK$10,408.3 million (-$1.3 billion) in 2021. Unabashedly, the CEO justifies the privatisation based on the “material adverse change to the financial position of the Group” due to this material loss. The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and &lt;10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 408.4 million shares or 21.41% of shares outstanding, the 10% blocking stake is 40.8 million shares or 2.14% of shares outstanding. No shareholder holds a blocking stake. <div class="content-highlight">Chinese Estates predicament is self-inflicted and due to Joseph Lau’s (HW Chan’s husband), close relationship (said to be poker pals) with Hui Ka Yan, Evergrande’s Chairman. The Lau family which controls Chinese Estates is taking advantage of the fallout from their ill-advised investment in Evergrande to privatise Chinese Estates at the cost of minority investors. While we think the offer price is unattractive, the shareholding structure suggests that that privatisation bid will be likely successful. </div>

Chinese Estates Holdings (127 HK) is principally engaged in property investment and development, building and property management, brokerage, securities investment, money lending and cosmetics distribution and trading. After market close on Wednesday, it announced a privatisation offer by way of a scheme of arrangement from an entity controlled by Ms HW Chan, the CEO. The offeror will offer HK$4.00 in cash for each scheme share. The bid represents a premium of 83.5% over the closing price of HK$2.18 per share on the last full trading date (28 September prior to the trading halt). Chinese Estates’ shares are down 40% since 30 June largely due to the fallout from its substantial shareholding in Evergrande (3333 HK). Chinese Estates built up a 6.48% shareholding in Evergrande in 2017 and 2018 at an eye-watering cost of HK$13,596.0 million ($1.7 billion) and an average cost of HK$15.8 per share. Due to the precipitous decline in Evergrande share price (HK$2.95 last close prior to a trading halt), since 30 August, Chinese Estates has reduced its shareholding in Evergrande to 4.39% of outstanding shares for total cash proceeds of HK$689.2 million ($89 million). If Chinese Estates disposes of its entire shareholding, it could result in a realised loss in other comprehensive income of -HK$10,408.3 million (-$1.3 billion) in 2021. Unabashedly, the CEO justifies the privatisation based on the “material adverse change to the financial position of the Group” due to this material loss. The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and &lt;10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 408.4 million shares or 21.41% of shares outstanding, the 10% blocking stake is 40.8 million shares or 2.14% of shares outstanding. No shareholder holds a blocking stake. Chinese Estates predicament is self-inflicted and due to Joseph Lau’s (HW Chan’s husband), close relationship (said to be poker pals) with Hui Ka Yan, Evergrande’s Chairman. The Lau family which controls Chinese Estates is taking advantage of the fallout from their ill-advised investment in Evergrande to privatise Chinese Estates at the cost of minority investors. While we think the offer price is unattractive, the shareholding structure suggests that that privatisation bid will be likely successful. 

Chinese Estates’ Privatisation Bid from the Lau Family

China

Kaisa Group Holdings Limited is an integrated real estate company. The Group focuses on urban development and operation. Kaisa Group's real estate business covers the planning, development and operation of large-scale residential properties and integrated commercial properties.

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Kaisa Group Holdings (1638 HK)

Morning Views Asia: China Aoyuan Property, China South City, Greenland Holdings Corp

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region,...

Lucror Analytics

Asia HY Trade Book - October 2021 - Lucror Analytics

The Asia HY Trade Book for the month of October includes a summary of our recommendations, as well as our high-conviction ideas. The report also...

Lucror Analytics

Evergrande Update - Limited Contagion, and Positive Regulatory Noises Near-Term

An update on Evergrande, policy news, bond and equity index contribution, and commentary on the way things are viewed vs the way things are.

Travis Lundy

Morning Views Asia: Kaisa Group Holdings

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region,...

Lucror Analytics

Chinese Estates’ Privatisation Bid from the Lau Family

The Lau family is taking advantage of the Evergrande stake fallout to privatise Chinese Estates at the cost of minorities. The offer is...

Arun George

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