iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team FIXED INCOME WEEKLY China Property Bonds: Who are the Higher Quality Issuers? Differentiate Between Strong and Weak Developers The spike in yields across Chinese property developers is currently presenting attractive investment opportunities. To help investors differentiate between the stronger and weaker property developers, we highlight some of their financial ratios, giving us a gauge of who faces lower risks of default. High Liquidity The cash ratio measures the amount of cash or cash equivalents held by the company over its short- term liabilities. The higher the amount of liquid assets it holds, the greater the ability for the company to meet bond payments on time and avoid defaults. Healthy Liquidity The CFO-to-Debt ratio is a measure of how the liabilities are covered by the cash flow generated from a company’s operation. The higher the amount of operating cash flow generated from its core businesses, the lesser the reliance on the borrowing, and the greater the financial flexibility for the company to meet bond payments. Low Leverage With lower levels of net debt-to-equity ratio, tightened liquidity or access to credit should be less of a concern to these companies. Strong Solvency Interest coverage ratio is measured by operating income (or earnings before interest and tax) over interest expense. A stronger level of solvency means firms have greater ability to avoid bankruptcy and repay their debt obligations. Who are the Strong Property Developers? We calculate a composite score by combining the aforementioned ratios via a standardisation method to provide a quick measure of the developer’s overall credit quality relative to its peers. The z-score serves as a quick assessment on the relative credit risk and enables us to compare and rank developers within the industry iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team FIXED INCOME WEEKLY China Property Bonds: Who are the Higher Quality Issuers? Selloff in Property Developer Bonds Chinese property developer bonds plunged in the past week. Here are key reasons to explain the property developers’ selloff: 1. Default cases • Solar cell manufacturer Chaori Solar became the first company to default on its publicly offered bond in China’s onshore market on 7 Mar 2014, breaking China’s history of zero bond defaults since 1995. The message is clear that the government will no longer provide “implicit guarantee” on investment products. • Property developer Zhejiang Xingrun Real Estate collapsed on 18 Mar 2014 and may default on RMB3.5b worth of debt, held mainly by banks and also individual investors. The size of the default is not negligible and this is the largest property developer at risk of bankruptcy in recent years. 2. Property market risks heightens • Property sales fell 3.7% year-on-year in January and February, underscoring weak demand which will put pressure on developers • Home price growth decelerated in all three tiers cities decelerated in February, versus January. More bond defaults should not be ruled out but we do not see systemic risks on the horizon. The spike in yields across Chinese property developers is currently presenting attractive investment opportunities. To help investors differentiate between the stronger and weaker property developers, we highlight some of their financial ratios, giving us a gauge of who faces lower risks of default. (Please note that we do not offer bonds issued by all of the mentioned property developers. These bonds may be placed on our platform at a later date, nevertheless.) High Liquidity: Who has cash to meet its debt payments? Ranked by cash ratio, Table 1 shows the companies who have the highest liquidity. The cash ratio measures the amount of cash or cash equivalents held by the company over its short-term liabilities. The higher the amount of liquid assets it holds, the greater the ability for the company to meet bond payments on time and avoid defaults, which sometimes arise when issuer cannot get cash in time. Table 1: Property Developers Ranked by Cash Ratio (In FY 2013) Cash & Cash Rank Company Name Equivalents to Total Current Liabilities Top Five Developers 1 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 1.00* 2 CHINA MERCHANTS LAND LTD 招商局置地 0.57 iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team 3 SOHO CHINA LTD SOHO 中國 0.53 4 CHINA SOUTH CITY HOLDINGS 華南城 0.42 5 CHINA OVERSEAS GRAND OCEANS 中海宏洋 0.41 Bottom Five Developers 1 KAISA GROUP HOLDINGS LTD 佳兆業 0.15 2 GREENLAND HONG KONG HOLDINGS 綠地香港 0.12* 3 HOPSON DEVELOPMENT HOLDINGS 合新創展 0.10* 4 SHANGHAI INDUSTRIAL URBAN DE 上實城市開發 0.10* 5 GLORIOUS PROPERTY HOLDINGS 恆盛地產 0.04* Source: Company Data, Bloomberg and iFAST Compilations *Data as at 1H 2013 Healthy Liquidity: Who has cash generated from its core business to meet its debt obligations? Ranked by operating cash flow to total liabilities ratio, Table 2 shows the companies who have the healthiest liquidity. The CFO-to-Debt ratio is a measure of how the liabilities are covered by the cash flow generated from a company’s operation. The higher the amount of operating cash flow generated from its core businesses, the lesser the reliance on the borrowing, and the greater the financial flexibility for the company to meet bond payments. Table 2: Property Developers Ranked by CFO-to-Debt Ratio (In FY 2013) Operating Cash Rank Company Name Flow to Total Liabilities Top Five Developers 1 CHINA SOUTH CITY HOLDINGS 華南城 6.94 2 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 5.61* 3 LONGFOR PROPERTIES 龍湖地產 5.12* 4 CHINA RESOURCES LAND LTD 華潤置地 5.07* 5 C C LAND HOLDINGS LTD 中渝置地 2.97* Bottom Five Developers 1 CHINA SCE PROPERTY HOLDINGS 中駿置業 -7.01* 2 AGILE PROPERTY HOLDINGS LTD 雅居樂 -7.72* 3 FRANSHION PROPERTIES 方興地產 -9.43* 4 CHINA OVERSEAS GRAND OCEANS 中海宏洋 -19.25 5 GEMDALE PROPERTIES AND INVES 金地商置 -65.04 Source: Company Data, Bloomberg and iFAST Compilations *Data as at 1H 2013 iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team Low Leverage: Who is least dependent on debt? Ranked by net debt-to-equity ratio, Table 3 shows the companies who have relatively low leverage versus their peers. With lower levels of debt, tightened liquidity or access to credit should be less of a concern to these companies. Table 3: Property Developers Ranked by Low Net Gearing Ratio (In FY 2013) Net Debt to Rank Company Name Shareholder Equity Top Five Developers 1 CHINA MERCHANTS LAND LTD 招商局置地 3.71 2 SOHO CHINA LTD SOHO 中國 18.04 3 CHINA OVERSEAS LAND & INVEST 中國海外 28.70 4 C C LAND HOLDINGS LTD 中渝置地 31.57 5 CHINA SOUTH CITY HOLDINGS 華南城 36.93 Bottom Five Developers 1 POLY PROPERTY GROUP CO LTD 保利地產 86.71 2 CHINA AOYUAN PROPERTY GROUP 中國奧園 89.20 3 GREENLAND HONG KONG HOLDINGS 綠地香港 105.69 4 FANTASIA HOLDINGS GROUP CO 花樣年 117.84 5 GUANGZHOU R&F PROPERTIES - H 富力地產 130.59 Source: Company Data, Bloomberg and iFAST Compilations *Data as at 1H 2013 Strong Solvency: Who has strong earnings to cover interest expenses? Ranked by interest coverage ratio, Table 4 shows the companies who have a stronger level of solvency, meaning they have greater ability to avoid bankruptcy and repay their debt obligations. Interest coverage ratio is measured by operating income (or earnings before interest and tax) over interest expense. Table 4: Property Developers Ranked by Interest Coverage Ratio (In FY 2013) EBIT to Interest Rank Company Name Expense Top Five Developers 1 EVERGRANDE REAL ESTATE GROUP 恆大地產 429.16* 2 LONGFOR PROPERTIES 龍湖地產 251.12 3 CHINA OVERSEAS GRAND OCEANS 中海宏洋 230.33 4 CHINA OVERSEAS LAND & INVEST 中國海外 135.10 5 AGILE PROPERTY HOLDINGS LTD 雅居樂 121.07* Bottom Five Developers 1 GREENLAND HONG KONG HOLDINGS 綠地香港 3.30* 2 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 2.48* iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team iFAST Research Team 3 YUZHOU PROPERTIES CO 禹洲地產 1.86* 4 SHANGHAI INDUSTRIAL URBAN DE 上實城市開發 1.76* 5 GEMDALE PROPERTIES AND INVES 金地商置 1.20 Source: Company Data, Bloomberg and iFAST Compilations *Data as at 1H 2013 Who are the Strong Property Developers? We calculate a composite score by combining the aforementioned ratios via a standardisation method to provide a quick measure of the developer’s overall credit quality relative to its peers. Standardisation or z- score is a way to convert all indicators to a common scale. A z-score of 0 means the score is the same as the mean. It can also be positive or negative, indicating whether it is above or below the mean and by how many standard deviations. Table 5: Property Developers Ranked by weighted average Z-score Credit Rating 5-Year USD Bond Ask Rank Company Z-score YTM (Maturity Date) 1 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 Baa3/BBB- 3.307% (Apr 2017) 0.96 2 CHINA MERCHANTS LAND LTD 招商局置地 A2 3.716% (Dec 2018) 0.94 EVERGRANDE REAL ESTATE B+ 10.396% (Oct 2018) 3 恆大地產 0.87 GROUP 4 SOHO CHINA LTD SOHO 中國 BB+ 5.748% (Nov 2017) 0.86 5 CHINA OVERSEAS GRAND OCEANS 中海宏洋 BBB- 5.586% (Jan 2019) 0.84 6 CHINA OVERSEAS LAND & INVEST 中國海外 BBB+ 3.835% (Mar 2018) 0.71 7 LONGFOR PROPERTIES 龍湖地產 BB 6.655% (Oct 2019) 0.46 8 GEMDALE PROPERTIES AND INVES 金地商置 BB- 7.058% (Nov 2017) 0.38 9 CHINA SOUTH CITY HOLDINGS 華南城 B 7.745%* (Jan2019) 0.34 10 CHINA RESOURCES LAND LTD 華潤置地 BBB 4.332% (Feb2019) 0.30 11 FRANSHION PROPERTIES 方興地產 BB+ 5.431% (Oct2018) 0.25 12 C C LAND HOLDINGS LTD 中渝置地 --- --- 0.14 13 AGILE PROPERTY HOLDINGS LTD 雅居樂 BB- 8.872%* (Feb2019) 0.11 14 CENTRAL