* Chinese property companies post poor annual numbers
* Bond prices fail to reflect declining credit quality
By Jonathan Rogers
SINGAPORE, Feb 23 (IFR) - Holders of bonds issued by China property companies are bracing themselves for the release of February property sales data, with fears growing that a severe contraction in sales will reverse the rally seen in the bonds since the start of the year.
The data could be an upset for those who saw the USD6bn-plus issuance of bonds from Hong Kong property companies so far in 2012 as a prelude to the return of Chinese property companies to the bond market. It could even affect secondary levels of some of these recently issued bonds, which include two names from the mainland, China Overseas and Shui On.
The February data are also significant because the January figures were distorted by the Lunar New Year holiday break, and did not give a clear reading of the underlying trend in the sector.
Still, even though January was a holiday-shortened month, the sales data released earlier this month by China's National Bureau of Statistics made for disturbing reading. Some 48 out of 70 cities experienced sharp month-on-month declines, while 22 were unchanged. And on a year-on-year basis 15 cities reported lower prices, versus nine reporting declines in December.
The year-on-year performance of contract sales for a raft of companies operating in the Chinese property sector was dismal. Sino-Ocean saw its sales plummet 91%. And declines were steep across the sector: China SCE -87%, Evergrande -77%, SPG Land -74%, Longfor -72%, Shimao -70%, Greentown -69%, KWG -69%, Glorious Property -64%, Powerlong -50%, China Overseas Land -49%, Vanke -39% and Agile -35%.
Given this less than auspicious performance it is something of a mystery why the seasoned Chinese property bond complex has continued to grind higher. A host of bonds which were beaten down towards semi-distressed prices late last year on refinancing fears are steadily approaching a return to par. Sector bellwether Country Garden 2018s are a stark illustration of how the offshore China property bond market has recovered this year. (See chart).
Dyed-in-the-wool optimists in the DCM community habitually divide China property issuance into two segments: the large cash and land bank-rich players, and the smaller lower rated players. Country Garden and Vanke - China's largest developer by market capitalization, which has no offshore bond debt outstanding - fall in to the first category, and are expected to muddle through. The smaller players, however, such as Greentown and Coastal Greenland, might go to the wall.
But the likely reality is that even the largest players are facing a collapse in sales of such magnitude that their financial fundamentals will be severely strained. The rising tide which lifted all boats in China property will just as likely drag them down as it falls, and this will be reflected in the companies' stock and bond prices.
Such a shift could dampen widespread high hopes. Chinese property stocks listed in mainland markets rose last Wednesday after local media reports suggested that Shanghai could ease home purchasing restrictions. The move underlined the current driver of sentiment among investors towards the PRC property sector: optimism rises when local authorities attempt to institute moves which run counter to the Chinese government's desire to cool the overheated sector.
INVESTORS SANGUINE
Investors became sanguine when Shanghai Securities News reported that non-local residents of Shanghai will qualify to buy second homes once they have held residence in the city for three years. However, the market seems to have missed that "third-tier" Wuhu, in Anhui province, had planned to ease property restrictions but its proposals were scuppered after resistance from the national government.
"There is a 'five minute rally' phenomenon in China property stocks emerging, with stocks rallying on local authority easing proposals and failing to correct when the national government steps in to quash the latest proposal. Local authorities' attempts to bolster property markets in their jurisdictions seem doomed to fail for the moment, in the face of the national government's determination to rein in property prices in China," said Owen Gallimore, head of Asia credit strategy at ANZ in Singapore. "For bondholders the key driver from here really is how bad 'clean' February contract sales data is, and whether any of the top tier developers can tap equity markets."
Country Garden is a good example of what may be in store. Bank of China's equity researchers observed in a recent note entitled "2012 a repeat of 2008?": "2011 contracted sales can hardly repeat in 2012ASP (average selling price) is likely to go on a downtrend under intensifying competitionCountry Garden's relatively low margin makes its net asset value more sensitive to ASP drops." The bank suggests that Country Garden's financial position will go on a downtrend in 2012 and placed the stock on a "sell" recommendation, targeting HKD2.28 per share, or a discount to net asset value of 40%.
The company's bonds due 2018 closed last week at 97.00, a yield of 11.8%, having printed as low as 65.00 bid in October. That month, reports emerged of China property companies having large exposure - at sky-high internal rates of return (of as much as 40%) - to the country's shadow banking system, mainly via loans from trusts. Yet, their precipitous recovery has been one of the more peculiar phenomena seen in Asian capital markets so far this year.
If Country Garden still seems to be holding up, the cracks are already beginning to show for the smaller property companies. Last Monday S&P lowered its rating outlook on mid-tier developer Yuzhou (B2/B) to negative from stable, citing expectations that sales and cashflow will weaken amidst the deepening property market downturn.
WORST YET TO COME
Yuzhou's optimistic management is targeting Rmb5bn in contract sales for 2012, despite the fact that in 2011 sales plunged from Rmb5.2bn to Rmb4.3bn, with just 67% of the company's targeted budget met. S&P expects the company's adjusted leverage to increase from 3.5 times to 4.5 times this year and Ebitda to interest coverage to fall from 3.3 times to 2.5 times. Yuzhou's 13.5% dollar bond due 2015 was indicated unchanged at 85.50 immediately after the outlook downgrade.
"The worst is yet to come for China property in our opinion. In terms of many China property companies' credit profiles we have not yet hit bottom. The ratings trend in the sector has been negative since the second half of 2010 and remains intact," said Christopher Lee, credit analyst at S&P in Hong Kong.
In addition to the action on Yuzhou, S&P recently downgraded Coastal Greenland's corporate rating a notch to CCC+, and Greentown's to B-, again by a notch, citing heightened refinancing risks.
Despite the ratings noise, China property reared its head in the G3 markets this week when Shui On Land tapped its recent 2015s to the tune of USD75m. As was the case with the original USD400m Reg S deal, private banks anchored the print. They might not be as willing to step up to the plate if the widely expected cascade in February property sales is confirmed early next month. (Reporting By Jonathan Rogers; Editing by Julian Baker)
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