Daily Brief China: ENM Holdings, China Mengniu Dairy Co, Bank Of Ningbo Co Ltd A, Seazen (Formerly Future Land), Agile Property Holdings, Guangzhou R&F Properties, Country Garden Holdings Co and more

• ENM Holdings (128 HK)‘s scheme document is out, with the vote scheduled for 26 September. The IFA considers Chime Corporation’s HK$0.58 per share offer fair and reasonable.
• The spread of 7.4% reflects vote risk – cash required for the proposal is lower than the net cash, and the offer price is below the IFA’s SoTP valuation (HK$0.658). 
• Shareholder approval of the scheme is aided by no shareholder holding a blocking stake, a low AGM minority participation rate and no visible retail opposition to the offer. 

• China Mengniu Dairy Co (2319 HK) is a good pick for those seeking value in the China consumer sector. 
• The company currently trades at 15x 2024E PE, compared to over 20x forward PE in the last 5 years, as the industry growth stagnated. 
• We can still expect above 10% net profit growth over the next three years, with the company looking to return more cash to shareholders. 

• Despite worsening doubtful, loss loans, the bank opted to lower impairment costs in 2Q23 YoY
• There is almost no profit growth without the bank’s provision cost decline, in 1H23 and 2Q23
• Loans more than doubled since FY19, but against this LLR/loans continues to decline

Seazen’s H1/23 results were in line with expectations, with sustained weakness in contracted sales and revenue, along with weaker margins. The group generated CNY 4.7 bn of investment property income in H1/23 (+10% y-o-y), with a gross margin of 70% (H1/22: 72%). We note positively the growing recurring revenue. The annual gross profit of c. CNY 7 bn now covers interest expense of c. CNY 6.3 bn.

Seazen’s liquidity will be tested by homebuyers’ growing concerns over private developers’ ability to complete properties. This has been exacerbated by lenders’ reluctance to roll over debt. In this regard, we note that the regulatory authorities committed to improve funding access for private firms in late August 2023.

We revise our trade recommendation to “Hold” on the FUTLAN 6 24 and “Not Recommended” on the remaining FUTLAN/FTLNHD notes, from “Hold”.

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Country Garden Holdings Co
2. Yankuang Energy Group
3. Health And Happiness (H&H)
4. Xiaomi Corp
5. Anton Oilfield

and more…

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Country Garden Holdings Co
2. Yankuang Energy Group
3. Health And Happiness (H&H)
4. Xiaomi Corp
5. Anton Oilfield

and more…

• Guangzhou R&F Properties Co. Ltd. has 48.1 billion yuan ($6.6 billion) of debt due within a year with less than 10 billion yuan on hand as of the end of June, the southern China property developer disclosed.
• Even though R&F extended some debt last year, its first-half financial report showed that it is still mired in a liquidity crisis. R&F Properties delayed payment of 46.7 billion yuan of domestic and offshore bonds in 2022 for three to four years.
• The developer reported a net first-half loss of 5.1 billion yuan, 26% narrower than a year ago.

Country Garden’s H1/23 results were weak, as expected, and we believe there is a high chance that the company will default. Country Garden also warned in the interim results report about uncertainties associated with its ability to continue as a going concern.

Consistent weakness in contracted sales and deteriorating profitability (both rooted in Country Garden’s significant exposure to lower-tier cities) will likely lead to further liquidity pressure for the developer going forward. We do not foresee a near-term turnaround in profitability, given weak home-buyer sentiment in China and the fact that a majority (>80%) of Country Garden’s land bank is in lower-tier cities. In H1/23, the company recorded a gross loss of CNY 24.3 bn (H1/22: CNY 17.2 bn gross profit) and CNY 45.4 bn in core net loss attributable to owners (FYE 2022: CNY 4.91 bn core net profit).

We believe default risk remains high, even if Country Garden manages to extend the payment deadline for the CNY 3.9 bn (USD 535 mn onshore bonds). The company reported CNY 258 bn of interest-bearing debt as at end-June 2023, of which 42% (CNY 109 bn) will become payable within 12 months. This compared to CNY 101 bn in cash and equivalents, as well as CNY 29.5 bn in restricted cash reported at end-June. External funding access appears very limited, especially considering the deteriorating value of assets that could be used as collateral.

In the event of a default, we believe offshore bondholders will have very limited access to property assets on account of structural and effective subordination. All of the company’s offshore USD notes are trading at distressed levels, pricing at only c. 7-12. We maintain our “Not Recommended” view on the COGARD notes.