[ET Net News Agency, 6 September 2018] Debt continued to mount for Chinese developers
in the first half of 2018, though the pressure on balance sheets was partially offset by
record earnings.
Still, leverage is rising for many players in the sector. This indicates that developers
are still jockeying for market dominance rather than retreating amid toughening regulatory
and funding conditions, S&P Global Ratings said today.
"Most Chinese developers are still increasing leverage to chase growth and market share,
in part because tightening also presents more opportunities for industry consolidation,"
said S&P Global Ratings analyst Matthew Chow.
The credit rating agency thinks overall debt will increase over the next 12 months, as
developers borrow to accelerate land acquisitions. Despite strong cash earnings, about
40%-50% of its rated developers have higher debt-to-EBITDA ratios compared with levels at
end-2017.
Better-funded companies see the tighter funding environment as an opportunity to seize
market share. Meanwhile, in some cases even weaker players faced with deteriorating
leverage and liquidity continue to expand. Land prices have cooled somewhat, given
property austerity measures and a crackdown on alternative "shadow banking" financing
methods favored by many developers.
Land parcels, for example, are no longer selling at significant premiums over the
opening price in auctions. In addition, some traditional sources of funding such as
project loans and some trust financing are still available, albeit at a higher cost, to
finance growing construction expenditures.
Many rated developers have built up substantial cash balances and solid contracted
sales, offering a reprieve to tough condition and help in funding outlays.
"We believe stronger Chinese developers can manage rising debt levels without an impact
on credit profiles," said Chow.
"This is because further borrowings should not cause leverage to expand markedly, given
strong revenue growth and robust margins." he added.
The average gross margin for rated developers expanded to 33% in the first half of 2018,
from about 30% in 2017. Gross margins increased by more than 200 basis points for nearly
50% of S&P rated portfolio. Only 15% showed a deterioration.
That said, higher profitability may not be sustainable beyond the next 12 months, in
light of price restrictions in higher-tier cities. Despite tough market conditions,
liquidity profiles mostly remained stable in the first half of the year, with average cash
to short-term debt coverage remaining around 1.2x. However, S&P expects liquidity risks to
rise significantly for some weak players.
S&P sees tail risks for weaker players attempting to expand despite smaller cash
balances and weak cash generation capability. These developers tend to rely heavily on
alternative financing such as short-term entrusted loans and asset management plans, thus
they face acute refinancing risk.
Liquidity and refinancing risk drove recent negative rating actions and outlook
revisions for some weaker players. S&P downgraded China South City Holdings Ltd. (01668)
to 'B-' from 'B' (B-/Stable/--), and Yida China Holdings Ltd. to 'B-' from 'B'
(B-/Negative/--).
It revised the outlooks on Xinyuan Real Estate Co. Ltd. (B/Negative/--), and Fantasia
Holdings Group Co. Ltd. (01777)(B/Negative/--) to negative from stable.
In a further sign of credit divergence, some developers have improved their debt
leverage, in part by paying down debt rather than further expanding. Roughly 15%-20% of
rated developers managed to lower their debt-to-EBITDA ratios in the first half, compared
with end-2017 figures.
S&P recently revised its outlook on Ronshine China Holdings Ltd. (B/Stable/--) to stable
from negative, and raised its rating from 'B' to 'B+' on China Evergrande Group
(B+/Positive/--)(03333). Both companies have reduced gross debt.
Moreover, they choose to apply cash earnings toward repaying alternative financing and
adopt more moderate growth targets.
"While Chinese authorities have selectively eased liquidity to stimulate growth, we
don't anticipate a material benefit to the riskiest developers," said S&P Global Ratings
credit analyst Christopher Yip.
Refinancing demand will continue to climb as maturities, for both domestic and offshore
bonds, will rise. "Effective maturities" (including put option dates) on domestic bonds
will hit RMB150 billion (US$22 billion) in the second half of 2018 and RMB250 billion
(US$37 billion) in full-year 2019.
Meanwhile, offshore bonds amount to US$6 billion (RMB40.8 billion) in the second half of
2018 and US$11 billion (RMB75 billion) and in 2019.
As such, liquidity improvements will be dependent on market conditions and developers'
proactive financial planning. Weakness in the Chinese currency is another headwind for
developers with U.S.-dollar borrowings.
However, S&P expects the impact to be manageable, given the renminbi has still not
fallen beyond levels seen at its recent December 2016 low against the U.S. dollar.
Moreover, the agency believes developers have generally reduced the proportion of offshore
debt in their capital structures, lessening the impact on their offshore debt servicing
ability. (KL)