This morning, Ronshine announced a proposed issuance of 3-year puttable 2-year USD bonds, with Bloomberg reporting initial price guidance of 9.25% area.
Another new issue in the China property HY sector
Ronshine is rated at B2/B/B+ in issuer rating by Moody’s/S&P/Fitch, withnegative outlooks from Moody’s (since Sept 2017) and S&P (since Aug 2017).
Agile Group announced a proposal of USD bonds, with Bloomberg reportingthe initial price guidance of 5.75% area for a 5NC3bond (issue ratings ofB1/B+ from Moody’s/S&P). The issuance size is capped at USD200mn. Theintended use of proceeds is for refinancing of AGILE 8.375% 2019C17s.Moody’s put Agile on a positive outlook since June, while S&P revised up itsoutlook to positive in May. We expect these rating agencies to upgrade Agile’scredit ratings in next year. We like Agile as a developer as it has beenimproving its operations and there are also potential positive catalystsincluding potential spin-off of its property management business. We also likeits diversified landbank, with its overall average land cost at belowRMB2,000/sq m. As of end-2016, Agile’s off-shore debt accounted for about50% of total debt (not including perps) and the company targets to lower theportion of off-shore debt.
Looking at China property HY companies under our coverage, we see Xinyuan(issuer rating of B/B from S&P/Fitch, stable outlooks) and Guorui (issuer ratingof B/B from S&P/Fitch, with a negative outlook from S&P) as reasonablecomparables of Ronshine. We believe Ronshine should trade wider thanXinyuan as we see XIN as having lower total debt/EBITDA and higher marginsthan Ronshine, but trade tighter than Guorui. All three companies have roughlysimilar total debt/total capital ratios at end-June, 2017 (Ronshine: 70%,Xinyuan: 74%, and Guorui: 68%) but Ronshine’s reported GPM was lowestamong the three for 1H17 (19% vs Xinyuan’s 22%, Guorui’s 46%). We believeRonshine has stronger sales execution in China. We expect Ronshine to traderoughly 40-70bp wider in yield than Xinyuan for the same maturity, given theformer’s credit metrics, more aggressive landbanking, despite Ronshine’shigher growth in contract sales and bigger GFA in landbank. As of end-June,2017, RONXIN had 76 projects with an attributable landbank of 7.6mn sq m.
We see the proposed Agile 2022s’ fair value at low-5%
Xinyuan Aug 2019s trade at ask YTW of 8.1%, and Xinyuan Nov 2020s trade atask YTW of 8.8%, and we believe a theoretical Xinyuan early 2020 USD bondshould trade at about 8.3% yield. Thus, we believe the proposed Ronshine2021P20s with a puttable option in early 2020 should trade at fair value of8.7%-9.0% in ask yield and we view it more as a two-year bond given the putoption. Ronshine has much refinancing needs this year. RONXIN 2019s USDbonds (USD400mn) are puttable in Dec of this year; its 364-day USD150mnwill mature in June of this year, and it has some on-shore bonds that areputtable this year, but we expect the company to refinance or repay these debtwithout problem. We maintain Buy on RONXIN 2019P18s (ask price: 99.125,ask YTP: 8.0%, Z-spread: 600bp), given its attractive valuation for a short-datedpaper with only less than 11 months to go to the put date. Downside risksinclude a rating downgrade by credit rating agency, higher-than-expectedlandbanking, and tougher-than-expected policy. The proposed USD bonds willbe used for refinancing and Fitch has assigned B+(EXP) to these bonds.
Given the cap of the proposed USD bonds at USD200mn, stronger margintrends and its solid, multi-channel funding (including on-shore bonds, on-shoreABS, and off-shore syndicated loans), we believe Agile is well-positioned.FTLNHD 2022C20s trade at ask price of 99.85(ask YTM: 5.03%) and CIFIHG2022C20s trade at ask price of 102.375(ask YTM of 4.90%). We see FutureLand Holdings and CIFI as rough comps to Agile. As CIFI has Ping AnInsurance (which has a 9.9% stake), as a strategic partner we believe AGILE2022s should trade about 20bp wider than CIFI in yield for the same maturity.We then adjust 10bp higher in yield for Agile’s longer duration vs. CIFIHG2022s. Separately, vs.. Future Land Holdings, we expect Agile to trade slightlywider. We see the fair value of the proposed Agile 2022s at around 5.2%.Agile’s landbank and contract sales scale are larger than Yuzhou’s (thoughAgile has more lower-tiered cities’ exposure), we believe AGILE 2022s shouldtrade around 30bp tighter in yield than YUZHOU 2022C20s (ask price: 102.0,YTM: 5.5%) after factoring in 10bp more in yield for about half a year’sdifference in longer maturity of the proposed Agile bonds.
Management plans to call its 2019bonds in whole
Despite its quota received from NDRC was only USD200mn, Agile’s CFO saidon its investor conference call that it plans to call its USD500mn 2019C17s inwhole, using internal resources as well as this proposed USD bond to call the2019s. A few weeks ago, Agile managed to tap the Panda bond market,issuing RMB3bn of on-shore bonds of 2+1year paper at 6.98%. It is one ofthe few non-SOE China developers which have managed to tap the on-shorebond market this year, which we appreciate.
Proactive landbanking YTD
Landbanking was very active year-to-date, and management indicated on itsinvestor conference call that YTD landbanking is around or under RMB20bnincluding the purchase of 30% stake in Hainan Clearwater Bay (project A) fromMorgan Stanley. In March’s analyst briefing, the company had stated a FY2017landbanking budget of RMB20-30bn.
Overall, we expect Agile to post a good set of interim 2017results, with 1H17GPM to be 30-35% but higher HoH net gearing as of end-June. Its GPMshould show noticeable improvements given many of its projects are located incities that saw good increases in ASPs (such as Zhongshan, Nanjing, Huizhouand Guangzhou). Hainan presales have been strong, exceeding RMB10bn YTD
already. As of end-2016, its total GFA was 31mn sq m counting those projectswith land use rights, with 33% GFA exposure to Southern China, 41% toHainan and Yunnan, 11% to Eastern China, 1% to overseas, and the rest toother regions in China.
We expect FY17presales target to be revised up
We expect Agile to revise up its full year 2017presales target in its interimresults, given its first seven months’ presales already reached RMB45.1bn, up41% YoY and locking in 75% of its FY17presales target of RMB60bn. Lastyear’s property presales were RMB52.8bn. Its 7M17presales ASP wasRMB12,254/sq m, a notable increase YoY which should help facilitate marginexpansion. We maintain our Hold on AGILE 2019s (ask price: 104.65), AGILE2020s (ask price: 108.375) and AGILE PerpsC18(ask price: 103.35).
Upside risks to Agile include easier refinancing, successful spin-off of itsproperty management business, and stronger-than-expected margin recovery.Downside risks include higher-than-expected dividend payout, moreaggressive expansion into environmental business, and harsher policytightening.