Debt Risk Worries Turn to Sino Ocean Land

Sino-Ocean Land Holdings (3377) is the focus of renewed debt worries. Weak sales and a weak balance sheet has people wondering if the firm won't run into financing trouble.

Note: Google translates Sino-Land as "offshore real estate"

iFeng: 远洋地产或存资金链断裂风险：负债460亿再举债百亿

Meanwhile the huge liabilities, sales did not reach the target. According to this year's sales target of 42 billion yuan of offshore real estate, as of the third quarter, the sales revenue of 22.1 billion yuan, like in the fourth quarter to reach 20 billion yuan in sales, the difficulty is not small.

...Changjiang Daily reporter inquiries found that , since last year, the frequent offshore real estate financing, corporate debt continues to climb.

In July last year, offshore real estate issue 1.2 billion dollars Senior Notes. Six months of this year, January 29, again issued $ 1.2 billion two-year senior notes, became in 2015 the largest Asian investment grade bonds trading margin narrowed.

Open offshore real estate Annual Report 2014 found that the company can be said to bear the financial weight. The report shows that as of the end of 2014, the net debt ratio of about 66%, total loans reached 45.6 billion yuan, an increase of nearly thirty percent, then to pay interest expenses reached 470 million yuan, compared with 2013 increased the amount of over 100 million yuan.

The first half of this year, the financial situation of Sino-Ocean Land has not significantly improved. This year's semi-annual report, the Group's turnover 15.107 billion yuan, down 15% from a year earlier, gross margin remained at 20 percent, with the year-ago quarter, in which the core net margin rose by 2% compared with last year. Group has total interest-bearing liabilities amounted to 46 billion yuan, total cash resources of 17.436 billion yuan, net gearing ratio was 63%, compared with last year fell by 3 percentage points, but still a relatively high level since 2009.

This is not as bad as Kaisa, but something to keep an eye on. The debt ratios deteriorate rapidly as the end approaches because firms relying on debt use it to maintain operations. The article also discusses Sino-Land's "crazy expansion:"

Ocean Land shoulder huge debt supported by its crazy expansion, this expansion continued to show rapid trend.

August 15 this year, Sino-Land in downtown Wuhan, the two projects have appeared. October 24, Changjiang Daily reporter in a real estate sales department located at Hankou Road, see the tree aunts, promotional exhibition card display, offshore real estate tentacles has been extended from Beijing to Chongqing, Tianjin, Shanghai, Hangzhou , Wuhan, Guangzhou , Shenzhen, Hong Kong, Qingdao and other major cities in the country a second-tier.

Data show that in 2014, when the country entered the property market downturn, the pace of offshore real estate suddenly taken adverse economic expansion, breath scored 13 spend 18.7 billion yuan, a total of 1,455,000 square meters.

Changjiang Daily reporter noted that offshore real estate is about to enter the Wuhan city center last year, has now opened is located in Hankou He Zhujiadun of two real estate plots, resulting from last year acquired Fuxing Fitch. Last August's announcement showed an EIA, the program requires an investment of 9 billion yuan to develop.

The punchline:

Huge debt hanging, a number of big moves in urgent need of funds of funds and real estate sales are not ideal due to the slow return, profit compression, no doubt cover the head crazy expansion in offshore real estate haze, its tight liquidity or deposit fracture risk.

...Shen Meng believes that crazy about the expansion in 2010, Zeng offshore real estate trouble. Today, offshore real estate at the time of planning the business model innovation and profit model needs careful restructuring, debt to repay, under apparent turnaround has not yet appeared in the macroeconomic environment, capital chain stretched too tight too risky.

Sino Ocean plans to raise 5 billion yuan in two bond tranches for working capital and to pay down existing debt. However, there's 46 billion yuan in debt on its balance sheet, which is why it has also been shedding assets.

The Standard: Evergrande takes over Chongqing project

Evergrande Real Estate Group (3333) will spend HK$7 billion to take over a Chongqing project from Sino Land (0083), Chinese Estates (0127) and CC Land (1224).
Evergrande will spend HK$3.5 billion buying all of Sino Land's 50 percent interest in the project, Sino Land and its parent Tsim Sha Tsui Properties (0247) announced jointly yesterday.

The company is also putting a big chunk of capital into Huarong's IPO. The investment is equivalent to more than 80% of the planned bond issue.

Moody's: Sino-Ocean's planned investment in Huarong delays deleveraging efforts

Moody's Investors Service says that Sino-Ocean Land Holdings Limited's (Baa3 stable) proposed subscription of China Huarong Asset Management Co., Ltd.'s (A3 stable) shares will delay its deleveraging efforts, but has no immediate impact on its Baa3 issuer rating and its stable rating outlook.

On 14 October, Sino-Ocean announced that it will -- as its cornerstone investor -- subscribe to Huarong's H-shares for a total consideration of HKD5.3 billion.

...The impact of the proposed transaction on Sino-Ocean's financials will also be mitigated by the slowdown in its purchases of land this year for its land bank, mainly due to high land prices in the markets that it operates. According to the company, its purchases of land declined by about 33.8% year-on-year in 1H 2015 as measured by gross floor area.

Sino-Ocean says that it intends to cooperate with Huarong on the acquisition and disposal of real estate assets, and to also cooperate with Huarong's property arms to jointly develop property projects.

Chinese shares pummeled in Hong Kong

Investors are pricing in a much slower Chinese economy as disappointing economic numbers come in and today was the worst one-day decline in the past three months. The Hang Seng China Enterprises Index tracks H-shares in Hong Kong. Today, the HSCE was knocked for a 3.4% loss and was down as much as 3.7% late in the day. Beijing Capital International Airport (0694) was hit for a 7.1% loss. Jianxi Copper (0358) fell 6.0%; Sinofert (0297) lost 5.9%; China Minsheng Bank (1988) declined 6.2%; Sands China (1928) slid 4.9%; CITIC (6030) tumbled 5.7%; and Chow Tai Fook (1929) plunged 9.6%.

In the real estate sector, Sino-Ocean (3377) sank 7.5%; Guangzhou R&F (2777) fell 6.6%; China Resources Land (1109) declined 6.1%; SOHO China (0410) lost 4.1%. On the Mainland, Vanke (000002.SZ) fell 3.4%, well ahead of the 1.2% drop in the Shanghai Composite.

Chinese developers rush to unload ￥5 trillion inventory

Chinese developers are putting 100% of their workforce into sales with inventory and debt pressure mounting, as ￥5 trillion in inventory weighs on their balance sheets. Inventory increased 50% in 2011 over 2010; the average inventory per developer is ￥10 billion.

Among them, China Merchants (000024.SZ) had inventory of ￥51.44 billion yuan, an increase of 33% over 2010; Vanke (000002.SZ) inventory reached ￥208.3 billion yuan, up 56%; Beijing Capital Development (600376.SS) ￥43.049 billion, an increase of 72%; Sino-Ocean (3377.HK) inventory is quite small, but the increase was very high, from ￥231 million at the end of 2010 to ￥487 million at the end of 2011, an increase of 111%.

Credit remain tight, trust loans are coming due and the inventory has become a nightmare for the developers. Ren Zhongwei of Beijing Normal University's Institute for Monetary Research estimates the inventory has a cost of capital of ￥345. In 2011, the property sector had profits of ￥500 billion, but this will fall in 2012 and that could put the industry close to break even.

Industry analysts say that after the "winter" comes the selling season. Sales dried up at the end of 2011 and into 2012, while prices declined. Now comes the rush to unload inventory and what I expect will be the waterfall price declines, as I wrote here:

To sum things up: home prices need to fall at least 20% in order for buyers to see their costs decline, due to higher interest rates and taxes. There's some local differences such as the high transaction tax in Beijing, but overall, it seems that 20% is a good rough estimate. On top of that, prices will need to fall at least another 5 to 10% to attract buyers who now expect price declines. Now we're talking about a 30% price decline as the baseline scenario! Markets always overshoot and China will be no different. Waterfall price declines are coming in 2012; local government and the banking sector will be severely impacted.

I do not have a wave count on Chinese home prices, but to put it into terms of Elliot Wave, wave 3 is coming. The "winter" of 2011 and early 2012 was wave 1, the recent thaw that's seen transaction volumes and some prices rebound is wave 2.

Source: 500强房企库存近5万亿 开发商进入全员卖房模式