"China Properties 45% Bond Yield Endangers Developer Stock Rally
By Tom Kohn
March 18 (Bloomberg) -- Record high yields on the dollar bonds of China Properties Group Ltd. and Coastal Greenland Ltd. show some investors have no faith this year’s rebound in Chinese real estate stocks will last.
While the China Se Shang Property Index of 24 developers’ shares is up 56 percent following a 65 percent plunge in 2008, prices of their dollar-denominated bonds have fallen to historic lows, according to data compiled by Bloomberg. Hong Kong-based China Properties’ $300 million of 9.125 percent notes due 2014 yield 45 percent, and Coastal Greenland, which builds in six Chinese regions, saw yields on its $150 million of 12 percent notes due 2012 rise as high as 85 percent in February.
The prices show bond investors doubt China’s proposed $585 billion stimulus plan will boost the economy fast enough to prevent developers from defaulting as home prices fall. Equity investors are betting house price discounts, and urbanization in a country where 570 million of 1.3 billion people live in towns or cities, will spur demand.
“Developers are running out of cash and facing higher default risk,” said Bei Fu, a credit analyst for Standard & Poor’s in Hong Kong. “The weakest players won’t survive long enough to reap the benefits.”
Home prices in 70 Chinese cities fell by 1.2 percent last month, the most since the government starting compiling the data in August 2005, according to the National Development and Reform Commission. Property isn’t included in the 10 industries covered by China’s stimulus package, and the central government hasn’t indicated if it would bail out developers.
Growth Slows
China’s economy grew at a 6.8 percent pace in the fourth quarter, the slowest in seven years, after a 9 percent gain the previous quarter, government data show. Shanghai-based Shenyin & Wanguo Securities Co. upgraded the shares of Chinese developers this month to “overweight” from “neutral,” forecasting faster sales amid a “V-shaped” economic recovery.
“We’re pretty positive about real estate on the mainland, which is a little bit of a controversial view right now,” said Hong Kong-based Howard Wang, a stock fund manager at JPMorgan Chase & Co. unit JF Asset Management Ltd., which oversees $35 billion in Asia outside Japan. “The guys who will survive this situation can buy land cheaply and make exceptional profits two or three years from now.”
Shenzhen-based China Vanke Co., the country’s biggest developer by market value, slashed prices as much as 15 percent in 2008 to attract buyers. The housing slump may have bottomed, Wang Shi, the company’s chairman, said at a March 9 briefing in Hong Kong after reporting a 150 percent surge in February sales.
Default Risk
Poly Real Estate Group Co., China’s second-biggest builder, said in February that sales almost tripled from a year earlier to 2 billion yuan ($292 million).
Neither China Vanke nor Poly Real Estate has dollar- denominated bonds outstanding, Bloomberg data show. Poly Real Estate’s shares have gained 57 percent this year and the yield on the Guangzhou-based company’s 4.3 billion yuan in 7 percent notes due 2013 has fallen to 4.62 percent from 5.17 percent a month ago, Shanghai exchange prices show. China Vanke’s shares are up 23 percent after falling 53 percent in 2008.
International financing is raising concerns for investors, said Michael Klibaner, the national director for real estate broker Jones Lang LaSalle Inc. in Shanghai. “Some of these projects are financed offshore, where it’s still very, very difficult,” he said.
China Properties’ credit rating was cut two levels to Caa1 on March 5 by Moody’s Investors Service, which cited the company’s “very limited ability to secure sufficient bank facilities, both onshore and offshore, to support its development activities.”
Missed Payment
Neo-China Land Group (Holdings) Ltd., a developer in Shanghai, Beijing and Tianjin, missed a coupon payment in January on $400 million of 9.75 percent bonds due 2014 and its credit rating was cut to D by S&P from CCC+. The company was raised to CC on Feb. 19 after making the overdue payment.
Agile Property Holdings Ltd.’s $400 million of 9 percent 2013 bonds trade at 62 cents on the dollar to yield 23 percent, from 11 percent in May, Bloomberg data show. The Hong Kong- listed company develops apartments, villas and commercial buildings in more than 20 Chinese cities including Foshan, Guangzhou and Chengdu. Coastal Greenland builds in the Pearl River Delta and the Changjiang Delta, according to its Web site.
China Properties shares have fallen 21 percent this year and Coastal Greenland’s stock is down 13 percent. Officials at the two companies’ main offices didn’t respond to calls and messages seeking comment on their dollar bond yields.
“The concern about the sector is that it’s leveraged and its liquidity profile is fairly weak,” said Viktor Hjort, a credit analyst at Morgan Stanley in Hong Kong who’s advising clients to be wary of buying Chinese developers’ debt."
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