LONDON : Shares and debt of Chinese property developer Shimao Group plunged on Tuesday after the sale of one of its businesses and a state media report that it had cancelled agreed apartment sales prompted investors to focus on bond repayments next month.
Shares in Shimao, which was one of China’s top-10 homebuilders last year and investment grade-rated until a month ago, had their worst day on record as they slumped nearly 20per cent, alongside heavy falls in its bonds..
The company said in a statement that it was operating normally, without any significant negative changes and there were no negative events that would affect its ability to repay its debts or pay interest due on its bonds.
A Shimao subsidiary, Shanghai Shimao, said on Monday it had sold its property management business to sister company Shimao Services, for 1.7 billion yuan (US$267 million), raising questions about the valuation.
The Shanghai stock exchange issued a statement questioning the sale of its property management assets.
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.
“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,” analysts at J.P. Morgan said, giving both Shimao Group and Shimao Services an ‘underweight’ rating, effectively a sell recommendation.
Shimao did not immediately respond to an emailed request for comment from Reuters.
UBS said Shimao has a combined US$4.4 billion worth of local market bonds, international bonds and syndicated loan payments due next year.
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 Chinese developers.
Concerns over Shimao surfaced over the weekend after local media reported 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 Shanghai Shimao will now “terminate” those sales.
“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.”
(US$1 = 6.3615 Chinese yuan renminbi)
(Additional reporting by Clare Jim in Hong Kong and Karin Strohecker in London; Editing by Alexander Smith)
For all the latest business News Click Here
