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.

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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

<p><br/> The Asia HY Trade Book for the month of September 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.<br/></p>

  The Asia HY Trade Book for the month of September 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 - September 2021 - Lucror Analytics

Credit Analyst, Lucror Analytics

Chuanyi Zhou

Credit Analyst

<p><br/> Yesterday, China Evergrande provided an update on its latest developments, including the engagement of Houlihan Lokey and Admiralty Harbour as joint financial advisors. The hiring of financial advisors could be a precursor to a debt restructuring. Evergrande is in talks with onshore banks and financial institutions, as well as retail investors on repayment options. A restructuring plan with bondholders may be inevitable.<br/><br/> Evergrande’s situation is worse than we had expected. It appears that the company's key channels for cash inflows are faring poorly, with weakening contracted sales, and no progress on asset sales or the addition of strategic investors. The off-balance-sheet wealth management investors might be repaid ahead of bondholders, regardless of their seniority in terms of payment. Such an outcome is possible on account of the social instability caused by the retail investors’ protests, which could pressure the government and in turn push the company to act.<br/><br/> We continue to believe a liquidation is an unlikely outcome, given Evergrande's size and the number of stakeholders involved. Beijing has never underestimated the company's systemic importance, with the government apparently urging the company to prioritise the interests of home buyers, suppliers and employees. That said, regulators are leaning towards a “market led” solution for Evergrande's debt.<br/></p>

  Yesterday, China Evergrande provided an update on its latest developments, including the engagement of Houlihan Lokey and Admiralty Harbour as joint financial advisors. The hiring of financial advisors could be a precursor to a debt restructuring. Evergrande is in talks with onshore banks and financial institutions, as well as retail investors on repayment options. A restructuring plan with bondholders may be inevitable.   Evergrande’s situation is worse than we had expected. It appears that the company's key channels for cash inflows are faring poorly, with weakening contracted sales, and no progress on asset sales or the addition of strategic investors. The off-balance-sheet wealth management investors might be repaid ahead of bondholders, regardless of their seniority in terms of payment. Such an outcome is possible on account of the social instability caused by the retail investors’ protests, which could pressure the government and in turn push the company to act.   We continue to believe a liquidation is an unlikely outcome, given Evergrande's size and the number of stakeholders involved. Beijing has never underestimated the company's systemic importance, with the government apparently urging the company to prioritise the interests of home buyers, suppliers and employees. That said, regulators are leaning towards a “market led” solution for Evergrande's debt. 

China Evergrande - Event Flash - Update On Recent Developments - Lucror Analytics

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>I estimate <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group (3333 HK)</a> (CEG) is trading at an extraordinary <strong>discount to NAV of 93%</strong> against a one-year average of 77%. </p>
</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/889/original/image_37048166931631684887321.png?1631684888" class="editor-image img-responsive" data-smartkarma-image-id="229889"></figure>
</div>
<div style="text-align: left;" class="content-caption">Source: CapIQ, my estimates. According to <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0408/2021040802085.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to <a href="https://www.smartkarma.com/entities/hengten-networks-group-ltd" target="_blank" data-smartkarma-citation="entities:3296:1" rel="noopener">HengTen Ltd (136 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0427/2021042700547.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds <a href="https://di.hkex.com.hk/di/NSForm2.aspx?fn=CS20210826E00320&amp;sa2=as&amp;sid=223&amp;corpn=HengTen+Networks+Group+Ltd.&amp;sd=15%2f09%2f2020&amp;ed=15%2f09%2f2021&amp;cid=0&amp;sa1=cl&amp;scsd=15%2f09%2f2020&amp;sced=15%2f09%2f2021&amp;sc=136&amp;src=MAIN&amp;lang=EN&amp;g_lang=en&amp;" target="_blank" rel="noopener">26.55%</a>.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.</div>
<p>The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. </p>
<p>The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.</p>
<p>Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in <em><a href="https://skr.ma/jrXuN" target="_blank" rel="noopener">StubWorld: What To Do With Evergrande?</a></em>; and in greater depth by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a>, in which he said in his latest insight <em><a href="https://skr.ma/KkUHL" target="_blank" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a></em>: </p>
<blockquote>
<p>Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.</p>
<p>Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. </p>
</blockquote>
<ul style="list-style-type: disc;">
<li>It need not be said, the general consensus is bearish.</li>
</ul>
<hr>
<div>
<h3>The New News</h3>
<ul>
<li>Early yesterday morning, Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0914/2021091400059.pdf" target="_blank" rel="noopener">announced</a> it expects significant declines in contract sales in September.</li>
<li>Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.</li>
<li>Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: <em>"ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group</em>."</li>
<li>Evergrande added it is actively exploring with potential investors the sales of part of its interests in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.</li>
</ul>
<blockquote>
<p>In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.</p>
</blockquote>
<ul>
<li>Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.</li>
</ul>
<p><strong><em>Separately ...</em></strong></p>
<ul>
<li>Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. </li>
<li>This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, <a href="https://www.thestandard.com.hk/section-news/section/2/234150/Evergrande-tries-to-calm-investors" target="_blank" rel="noopener">The Standard</a>, and others. </li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/892/original/image?1631686617" class="editor-image img-responsive" data-smartkarma-image-id="229892"></figure>
<p><em>Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: <a href="https://www.mingtiandi.com/real-estate/finance-real-estate/china-evergrande-hires-houlihan-lokey-as-financial-advisor/" target="_blank" rel="noopener">Mingtiandi</a>)</em></p>
</div>
<div>
<ul>
<li>Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. </li>
<li>Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). </li>
</ul>
</div>
<p>The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. </p>


I estimate China Evergrande Group (3333 HK) (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 




Source: CapIQ, my estimates. According to Shengjing Bank Co Ltd H (2066 HK)'s 2020 annual report (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to HengTen Ltd (136 HK)'s 2020 annual report (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds 26.55%.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.
The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 
The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.
Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in StubWorld: What To Do With Evergrande?; and in greater depth by Travis Lundy, in which he said in his latest insight Evergrande as a Study of Quantum Mechanics Theory: 

Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.
Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. 


It need not be said, the general consensus is bearish.



The New News

Early yesterday morning, Evergrande announced it expects significant declines in contract sales in September.
Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.
Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: "ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group."
Evergrande added it is actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services (6666 HK) - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.


In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.


Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.

Separately ...

Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. 
This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, The Standard, and others. 


Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: Mingtiandi)



Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. 
Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). 


The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. 

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

Bond market data and technology, BondEvalue

BondEvalue

Bond market data and technology

BondEvalue is a Singapore-based Fintech that specializes in bond market data and technology. The company's information services business offers bond market data on hard-currency corporate & sovereign bonds across Asia, Middle East, Europe and the Americas. The data, which includes bond prices, yields, news and analytics, is offered to end investors via interactive Mobile and Web Apps. Investors can sign up for a free trial of the service either via the company's website (https://bondevalue.com) or by downloading the BondEvalue Mobile App (http://onelink.to/wej7jq). BondEvalue is also developing an electronic bond exchange, BondbloX in Singapore that allows investors to trade bonds electronically in smaller sizes (US$1,000 or equivalent). For more information, visit https://www.bondblox.com/

Bond Market Data and Technology

China Evergrande’s dollar bonds jumped ~30%, its largest rise since October 2020, after the company came out with a statement saying that they promise to redeem all wealth management products (WMPs) as soon as possible. Bloomberg also reports that some investors bet the government will prevent the developer’s liquidity crisis from ending in a worst-case scenario. At the Evergrande Wealth Conference on September 10, the Chairman, Hui Ka Yan said that at while the developer has encountered unprecedented difficulties, the fundamentals of Evergrande have not changed. He said that the strong combat effectiveness of the staff, the land bank with sufficient scale and reasonable layout, and the ability to build high-quality communities have not changed. He added, “I can have nothing, but the investors of Evergrande Wealth can’t have nothing!”As per Reuters ,  investigative agency REDD reported that Evergrande had outlined an interim repayment plan for retail investors on Thursday. The plan suggested it would repay matured WMPs of less than RMB 100,000 ($1,550), but those holding more than that will have their payments extended by two to four years and amortized, with the first payment to be made next year, while payments to institutional investors will be suspended to an undecided date.

Evergrande’s Dollar Bonds Jump 30% On Promise to Redeem WMPs at the Earliest

China

China Evergrande Group is an integrated residential property developer. The Company, through its subsidiaries, operates in property development, investment, management, finance, internet, health, culture, and tourism markets.

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Evergrande (3333 HK)

Asia HY Trade Book - September 2021 - Lucror Analytics

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

Lucror Analytics

Asia HY Trade Book - September 2021 - Lucror Analytics

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

Lucror Analytics

China Evergrande - Event Flash - Update On Recent Developments - Lucror Analytics

Yesterday, China Evergrande provided an update on its latest developments, including the engagement of Houlihan Lokey and Admiralty Harbour as...

Lucror Analytics