Shimao share price slump rekindles China property concerns

Sharp falls in Shimao Group’s shares and debt, triggered by worries over an asset sale and cancelled apartment deals, renewed concerns on Tuesday over China’s property sector.

Shares in Shimao (0813.HK), which was one of China’s top-10 developers last year and investment grade-rated until a month ago, fell a record 20% and the price of its bonds fell heavily, while other firms’ stocks also dropped. .

Its Shanghai Shimoa subsidiary fell 32% (600823.SS), prompting an after-hours statement from the firm saying that it was operating normally, without any significant issues that would affect its ability to make bond payments.

The concerns were triggered by a weekend report that homebuyers who had bought some of its apartments in Shanghai had not been able to register for an ownership transfer, as they had already been pledged to a trust.

State Chinese media CCTV reported on Tuesday that those original sales would now be “terminated”.

“We think this could affect Shimao’s image and future contract sales, particularly in a weak property market,” UBS said in a research note.

“The company’s bond maturity in January will be key to watch. In the event that Shimao misses a payment, we believe this would have a negative implication for the sector,” UBS added, referring to a 2.5 billion yuan ($392.64 million) bond payment due on Jan 15.

Shares in Evergrande (3333.HK), which has been at the heart of China’s property meltdown this year, fell 7% to a record low.

R&F Properties (2777.HK), whose bonds have been tumbling in recent weeks, also slumped 7.5%. China’s biggest developer by sales Country Garden (2007.HK) dropped 4.5%, while Sunac Services (1516.HK) plunged 17% as J.P. Morgan downgraded it, along with Shimao.

RED FLAG

Shanghai Shimao had caused further worries on Monday when it said it had sold its property management business to sister company Shimao Services, for 1.7 billion yuan ($267 million).

The sale price is 16 times the unit’s expected price-to-earnings ratio this year, far higher than the average 10-14 times seen in recent M&A deals in the Chinese property sector, analysts at J.P. Morgan said.

“We think this connected party transaction not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flag as it is essentially transferring the cash from property manager to developer level,” the investment bank’s analysts said, giving both Shimao Group and Shimao Services an ‘underweight’ rating, effectively a sell recommendation.

The Shanghai stock exchange issued a statement questioning the sale of its property management assets.

UBS estimates Shimao has a combined $4.4 billion worth of local market bonds, international bonds and syndicated loan payments due next year and around $10 billion in total.

Analysts said that these will be difficult to refinance if it does not get support or regain access to international borrowing, which are effectively closed for junk-rated Chinese developers following this year’s troubles.

Home sales have also plunged amid the sector’s woes and down around 30% year-on-year.

($1 = 6.3671 Chinese yuan renminbi)