China developer selloff deepens as Shimao deal raises 'red flag'

[HONG KONG] Chinese property stocks plunged for a third day, heading for the lowest level since early 2017, after a deal between 2 units of Shimao Group Holdings heightened corporate governance concerns in an industry already grappling with a liquidity crisis.

Shares of Shimao Group and its property-services unit were among the biggest losers in Hong Kong trading on Tuesday (Dec 14) as a Bloomberg index of property stocks sank 4.1 per cent.

A connected-party acquisition announced by the developer late Monday (Dec 13) "not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flag", JPMorgan Chase & Co analysts wrote as they downgraded both stocks.

Last week's burst of optimism that the worst might be over for China's embattled property sector is quickly fading as investors race for the exits once again.

Steep losses in Shimao Group's shares and bonds have been particularly unnerving, given that the company was until recently considered among the sector's strongest players - able to withstand the funding stress that led to defaults by China Evergrande Group and Kaisa Group Holdings.

Shimao Group has blamed the selloff on unspecified "rumours", but the company's sparse public comments on its financial health have only added to speculation that it faces growing liquidity stress.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

The Monday announcement that Shimao's services unit had agreed to buy another unit of Shimao Group for 1.65 billion yuan (S$355 million) was taken as a sign by some analysts that the developer is shifting money from stronger to weaker parts of the business.

The deal's valuation was higher than usual, suggesting Shimao Group "is essentially transferring the cash from property manager to developer level", JPMorgan analysts wrote. They noted equity investors are increasingly worried about publicly listed property managers being used as a "financial tool" by developers that share the same owners.

Property services companies including Sunac Services Holdings and Country Garden Services Holdings plunged at least 10 per cent on Tuesday.

Shimao Group, founded by billionaire Hui Wing Mau, said in an emailed reply to questions from Bloomberg that the company hired Cushman & Wakefield to advise on the deal. The valuation took into consideration factors including liquidity and a control premium, Shimao Group said.

Separately, a Shimao Group unit told Bloomberg on Tuesday that it has prepared funds to repay a 30 million yuan bond maturing Friday (Dec 17).

Shimao Group's shares fell as much as 18 per cent at 3.11 pm in Hong Kong, heading for a record tumble, while Shimao Services Holdings plunged 33 per cent. Shimao Group's 4.75 per cent bond due 2022 dropped 8.7 US cents to 71 cents, leading declines among Chinese high-yield debt. The company's yuan notes also tumbled.

Ranked 13th among Chinese developers by contracted sales, Shimao Group poses a much smaller systemic risk to Asia's largest economy than does Evergrande. But the former company's woes have undermined hopes that higher-rated developers would be able to weather the Chinese government's crackdown on the real estate industry.

Shimao Group had passed all of the so-called 3 red lines - metrics introduced to curb borrowing among developers - according to Bloomberg-compiled data including first-half results. That would typically suggest a more robust financial position and easier access to debt markets. Yet liquidity concerns have persisted even after a recent share placement, the company's pledge of its Shanghai headquarters for financing and a flurry of regulatory measures to designed to contain the fallout from the property crackdown.

Shimao Group and its subsidiaries need to refinance or repay US$2.5 billion in bond maturities through 2022. That includes the 30 million yuan repayment on a 4.5 per cent local bond due Dec 17 and a 2 billion yuan note due January, according to data compiled by Bloomberg.

BLOOMBERG