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A leading property developer in China, responsible for the renowned Shanghai Xintiandi development. Cayman Islands-incorporated with shares listed on Hong Kong Stock Exchange with market capitalisation of US$2.3bn and EV of US$4.5bn. Previously focused solely on the Shanghai market but has now expanded to Chongqing, Hangzhou, Dalian, Wuhan and Foshan. Operating income is generated from the rental of the commercial property portfolio (23%) and from the sale of new residential properties (77%). Investment portfolio is 45% office; 54% retail and 1% serviced apartments (by floor space).
9% 7%
Shanghai Foshan
Wuhan Dalian
Chongqing Hangzhou
The Chinese economy is expected to grow 9.6% in 2011 and 9.5% in 2012. (IMF) 300m people expected to move from rural areas to cities in the next fifteen years.
An estimated 5.1Mm2 of office space has been constructed in Shanghai since 2001 and a further 1.8Mm2 is expected to be delivered in the next two years. Office rents have risen, though Shanghai still remains good value versus other major cities. However, there is evidence of speculative froth in the residential property market. The property market is a particular source of risk. - World Bank, April 2011
PBOC has increased base rates and bank reserve requirement ratios. Minimum down-payments for residential properties have been increased. Shanghai & Chongqing have implemented annual property value taxes. Property developer anti-profiteering rules are currently under consideration. In the beginning of 2011, further restrictions on sales and property tax introduced in Shanghai and Chongqing depressed the market once again. - Shui On Land Annual Report
Property Law
The state owns all urban land. Agricultural collectives own rural land. The state sells land use rights (a leasehold), which is limited at 40yrs for commercial use and 70yrs for residential use. Anyone involved in land-related projects in China should be aware that the right under PRC law to use any plot of land in the PRC can be legally revoked at any time with very short notice. - Freshfields Bruckhaus Deringer
Insolvency Law
Court-led process modelled upon US Chapter 11 and Chapter 7 legislation. However, China lacks competent judges and local courts are heavily-influenced by CCP members. - Sonnenschein Nath & Rosenthal In recent times, China has been awash with re-IPO financing and leveraged structures, such as convertible bonds and preference shares, where the debt is offshore and the assets in China. Without any security onshore, they rank as equity holders below creditors, and have no prospect of returns in bankruptcy if the debtor is insolvent.- PricewaterhouseCoopers
Historical Financials
Revenue & Earnings
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 40% 60% 80% 100%
20%
Revenue
Net Income
Capital Structure
Item Cash Restricted Cash Total Cash Loans from associates & related parties Loans from Minority Shareholders Loans from Minority Shareholders Current Bank Debt Net Short-term Debt Loans from Minority Shareholders Non-current Bank Debt Notes Convertible Bonds Total Net Debt Equity Market Capitalisation Enterprise Value Borrower Jurisdiction Amount EBITDAx LTV % -4905 -3.0 -10% -1885 -1.1 -4% -6790 -4.1 -14% Unsecured Interest-free On demand 124 0.1 0% Unsecured 105% PBOC On demand 462 0.3 1% Unsecured Interest-free < 1yr 300 0.2 1% Secured Various < 1yr 1644 1.0 3% -4260 -2.6 -9% Unsecured 110% PBOC Undetermined 1653 1.0 3% Secured Various Various 11539 7.0 23% Unsecured 6.88% 2013 2945 1.8 6% Unsecured 4.50% 2015 2117 1.3 4% 13994 8.4 28% 15223 9.2 31% 29217 17.6 59% Security Interest Maturity
China China China China China China Hong Kong Cayman Islands
On 26 January 2011, SOD issued RMB3,500 million senior notes with a maturity of four years due on 26 January 2015 (the 2015 Notes). The 2015 Notes are denominated in RMB and settled in US dollars, and bear coupon at 7.625% per annum payable semi-annually in arrears. Security includes: Investment properties (RMBm17,091); Properties under development for sale (RMBm6,065); Bank deposits (RMBm1,885); and equity interests in certain subsidiaries.
Convertible bonds are external to China, are structurally, contractually & term subordinated, and are unsecured.
6,321
9,285
993
Return on Equity
FY07
FY08
Occupancy (LHS)
Outlook
Shui On Land plans to increase output by 118% in FY11 & 24% in FY12. Key competitors plan to grow sales by an average of 45% in FY11. Shui On Land expects to spend RMB32.9 on capex & working capital in the next two years. The working capital requirements of this growth require an estimated net RMB22.3bn in external financing. Assuming this funding is debt-financed, leverage is expected to rise from 28% LTV to 47% by FY12.
Msqm
FY07
FY08
FY09
FY10
FY11E
FY12E
Residential Properties
Commercial Properties
Shui On Land, and all its main competitors, are accelerating their growth as the Chinese government begins to tighten policy.
Security Valuation
Trades at a 3% discount to fair value. Trades at-the-money. Convertible bond is RMBdenominated but settles in USD. Callable and puttable at par from Sept-2013. Little yield advantage common stock currently pays 3.18%.
Coupon Maturity Duration Yield to Maturity Yield to Worst Conversion Price Current Share Price Parity Premium/(Discount) to Parity Delta Current Bond Price Bond Floor Premium to Bond Floor Fair Value Premium/(Discount) to Fair Value
4.5% Sep-15 4.04 3.22% 2.67% 4.87 3.43 71.9% 46.4% 0.45 104.75 97.68 7.75% 107.99 -3.00%
Summary
The company has a strong track record and owns some leading real estate developments in Shanghai. Rental yields, occupancy levels and returns on equity have all been trending down in the last few years as prices have risen. Signs of a bubble developing in the residential property market. The Chinese authorities have taken steps to slow down the property market. A record amount of floorspace is due to be delivered over the next few years, both by Shui On Land, and by the major competitors. The business is cash flow negative existing creditors rely on property price appreciation and new investors to repay upcoming debt maturities and committed capital expenditures. Convertible bond is an offshore, HoldCo, unsecured, subordinated instrument. Creditor rights in insolvency likely to be limited. The company has no formally disclosed capital structure policy. Leverage expected to increase significantly in the next two years.