China Property:Deep dive into developers'debt profiles

Change of debt profiles lowers the risk of a currency mismatch.

    We reviewed the latest debt profiles of the HK-listed China developers. Most HK listedChina developers have tapped the fast-growing China bond market by issuing public/private domestic bonds and could issue Panda bonds in the future. Due to strongliquidity, the listed developers (under our coverage) have refinanced or piled up enoughliquidity to refinance their debt obligation until H1 2017. In addition, they managed tolower their non-RMB debt exposures from 43% of total borrowings as of end-2014 to34% as of now. We think it can help reduce the risk of a currency mismatch in light offurther downside risk in RMB currency.

    Divergence of balance sheets and financial management strategies.

    Based on FY15 results and developers' planned investment strategies, we thinkdevelopers differ in their financial management, resulting in significant differences infuture gearing levels. We expect Country Garden and Evergrande to have highergrowth in their outstanding debt liabilities; on the other hand, China Resources Landand Longfor are likely to keep their leverage at steady levels. In fact, FY15 resultsalready demonstrated the polarisation among their financial conditions.

    Interest savings from domestic bond issuance to gradually improve profitability.

    Even if we include the impact of yields rising after several default cases, we thinkdevelopers can still benefit from interest rate savings through new issues in domesticbonds and repaying offshore bonds. The coupon rate of domestic bonds is roughly200-400bps lower than that of offshore bonds or perpetual securities. The interestsavings will be gradually realized at a rate of 0.3% to 1% pa as developers refinanceinternational with domestic lending from FY16 to FY17/18.

    Sector priced in too many negatives, at 7.6x FY16E PE, or a 42% NAV discount.

    We think the sector has priced in too many negatives and select developers couldbenefit from sales and volume improvement. China's housing sector is now trading at a42% NAV discount and at 7.6x FY16E PE, which represent -0.7 SD/-0.8 SD,respectively, to the historical average since year 2011. We favour China ResourcesLand, China Overseas Land and Longfor for their healthy balance sheets, steady andimproving margins and favourable exposures in tier 1/2 cities.