Category Archives: China Construction

With Fed Rate Rise, Will Hong Kong’s Red Hot Real Estate Finally Cool?

The impact of the Federal Reserve’s rate rise will be far reaching.  With the Hong Kong dollar pegged to the greenback, the HIBOR base rate continues to rise.

HIBOR 2

Although not in strict tandem, short term rates have finally begun to rise.

HIBOR 1

Despite the inexorable rise in short-term rates, Hong Kong lenders held steadfast until August 8, when HSBC, Hang Seng Bank, Standard Charter and Citibank adjusted their prime rate to an effective rate of 2.25%.  This was the first change since 2008.  Typically, Hibor linked mortgages revert to prime when a rise in Hibor makes prime-linked mortgages cheaper.

The pain will shortly be felt, as new borrowers have been forced into variable-rate mortgages as banks prepared for the rise.

Hong Kong New Mortgages

While Hong Kong banks may adjust to the risk with variable rate loans, developers have less room to avoid the pain.  Thanks to the rise in Hong Kong property prices, along with the weaker yuan, and restrictions on mainland development in tier one cities, mainland developers have joined the feast in Hong Kong, but may have come to the table late and without a full menu.  Prices and volume appear to have peaked.

Hong Kong Property Prices Chart

Source: Midland Realty

Two of the largest mainland developers, Country Garden, HK 2007 and China Evergrande, HK 3333  bought land at the peak and are therefore vulnerable to a fall.

Mainland developers [are] in a more vulnerable position to any price corrections in the Hong Kong residential market. Their projects in Hong Kong may struggle to break even, or potentially run into losses, if prices decline by more than 15 per cent or 20 per cent,” said Cindy Huang, an analyst at S&P Global Ratings.

UBS has predicted Hong Kong home prices will tumble as much as 10 per cent from this month to the end of 2019, while Citibank forecast a 7 per cent fall in the second half this year.

That is roughly when Evergrande and Country Garden plan to start selling thousands of units now under construction in Tuen Mun and Ma On Shan.

In January, Evergrande Group paid the highest amount per square foot – about HK$8,300 – ever recorded in Tuen Mun, when it bought a site that is expected to be developed into a 1,982-unit project on 8 Kwun Chui Road from Henderson Land Development for about HK$6.5 billion (US$830 million). Henderson reaped an 80 per cent profit on the deal for the land that it bought in June 2015.

Adding in construction costs and interest expenses, the total investment cost for Evergrande’s Tuen Mun project will be about HK$14,410 per square foot.

That means Evergrande will need to sell flats in the development at about HK$16,600 per square foot to generate a reasonable profit of about 15 per cent. However, used homes at a nearby development, Wheelock Properties’ Napa, have been selling for about HK$14,200 per square, which means Evergrande is vulnerable unless home prices continue to climb.

Wheelock Properties, a Hong Kong developer, benefited from buying land early. In 2013, it paid HK$1.39 billion – or just HK$3,683 per square foot – for the Napa site. In 2017, its average flat sold for HK$11,500 per square foot, giving Wheelock a 67 per cent profit, after adding in construction and other costs.

One mainland developer may escape the “late penalty”. Vanke Property (Hong Kong) bought a parcel for HK$3.8 billion in 2015, or HK$4,541 per square foot. That gives it more room to still make a profit if profits begin sliding. To achieve a 15 per cent profit margin, Vanke would only need to price its Le Pont flats at about HK$11,790 per square foot.

“[Vanke Property (Hong Kong)] bought the land relatively early when land in the area was sold at around HK$4,000 per square foot,” said Alvin Lam, director at Midland Surveyors, who added the developer may escape from any possible market downturn as its land price is relatively low.

Like Evergrande, Country Garden also got in late.

Last September, Country Garden paid about HK$2.44 billion, or HK$10,498 per square foot, for a 60 per cent stake in a plot in Ma On Shan owned by Wang On Group.

For Country Garden to net a 15 per cent profit, the 547-unit project would need to sell its flats at about HK$18,219 per square foot.

In contrast, Henderson Land achieved a profit margin of 68 per cent at its nearby Double Cove project by just selling its flats at about HK$15,000 per square foot. It had bought the land there in 2009 for HK$3,253 per square foot.

“These mainland developers have responded to this challenge by slowing down their land purchases in Hong Kong this year, due to expectations of thin margins and tightened financing conditions,” said Huang of S&P Global ratings. “Refinancing pressures continue to hamper mainland developers [however]. This lower rate of land acquisition in Hong Kong is likely to continue.”

Quote Source: South China Morning Post

With the rising prices, Hong Kong has grown to be among the least affordable markets in the world.

Housing Affordability Hong Kong

Developer stocks, which have seen explosive growth on both the Mainland and Hong Kong have finally been declining, along with the indexes thanks to both the creeping interest rates and the US China trade war.  The majority have fallen close to 20% from their peak. There is most likely more pain to come.

Property Developers Hong Kong Mainland

 

 

 

 

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China Vanke Shoots For New Board, No Barbarians Allowed

Embattled China Vanke, hk 2202, has finally set a meeting to vote for a new Board, the current term having expired in March of 2017.Vanke Board

Source: Hk Filings, latest

Out: Wang Shi, Vanke founder, China Re Representatives & Blackstone. In: SZMC with equal representation to Vanke.  The board also appears to have some new diversity with non-related representatives.

What’s Missing: Baoneng, Anbang.

The major reason for the delay in the new vote was to ensure Vanke executives maintain control, or at least split it with an entity of their choosing, despite their minority ownership interests.  They’ve been aided in their quest from outside sources.

  • China Re, which owned 15.3%, agreed to transfer them to Shenzhen Metro, SZMC.
  • China Evergrande, 3333 hk, a competing developer which had been stockpiling shares, volunteered transferring its voting rights to SZMC.
  • Evergrande officially sold the shares, at a loss to its original cost, to SZMC.  (No, Evergrande isn’t a charity – they are pursuing a back-door listing in Shenzhen which will very possibly be aided by this gesture).
  • Other heavy owner & tagged a barbarian, Baoneng, was prohibited from selling certain insurance products and its Chairman was prohibited from insurance for 10 years.
  • Vanke started a lawsuit in February, 2017, to invalidate Baoneng’s shares based on its use of leveraged products to acquire them.

Despite all these visible moves, the fact remains that Baoneng still holds 25.4% of the company’s shares and would be assumed to have a legitimate reason to expect Board representation.  The executives from Vanke’s side own a minor percentage of shares. Another insurance company, Anbang, also owns a significant amount of shares.

Baoneng Owner

Source: HK filings

The June Meeting, Friday the 30th of June, should be an interesting one.  Although the stock has been rising on the news, it’s still too early to know if the proposal will get the 2/3 majority needed.

 

 

 

 

High Flyer BBMG Announces Net Profit Growth Over 100%

bbmg stock up

Data Source: Bloomberg

BBMG 2009 HK, announced 4/11/2017 at 21:27 a positive profit to net shareholders in the range of 380 Million rmb to 450 Million rmb for the first quarter.  The first quarter net profit to shareholders was at 150 Million rmb, indicating a rise of 152% to 199%.

No revenues, shares outstanding or eps estimates were given.  The company stated that the rise was due to an increase in booked GFA in its property sector as well as better pricing on cement and clinker.   As shown  here,  property development profits dropped by 48% in the annual statement.  In that same article, it mentions caution needed since the incorporation of Jidong cement has greatly increased both assets, liabilities and leverage.

BBMG rose over 42% last week, after the surpise weekend announcement of a new economic zone, Xiongan New Zone, an area where BBMG dominates in the building material segment.

BBMG Building Materials Company Up 34.7% Thanks to Economic Zone Frenzy

bbmg stock

Data source: Bloomberg

Three magic words sent a boring cement company up 34%. The three magic words were: Beijing, Tianjin and Hebei. (aka Jing-Jin-Ji).

The rocketing rise for this 2009, hong kong listing was definitely not due to its latest earnings report.   (It’s Shanghai listing didn’t move thanks to a mainland holiday). Following its earnings announced on 3/29/17, the HK listing actually fell slightly from 3.39HK$ to 3.24hk$.  (Shanghai went from 4.83rmb to 4.66rmb and had barely budged year to date.)

Ruling out the earnings and a lack of other news – the sole blame is the frenzy created by the PRC’S weekend announcement of a new economic zone: Xiong’an New Area.  (Less catchy than Shenzhen but maybe there is a reason for that Xi.)

Per Caixin,

The Xiong’an New Area, located about 130 kilometers (80 miles) to the south of Beijing and Tianjin, forms essentially an equilateral triangle with the two municipalities. It consists mainly of three counties in Hebei province and initially covers 100 square kilometers. The plan is to ultimately expand it to 2,000 square kilometers.

Xinhua said the Xiong’an New Area is the first to be of the same national significance as the Shenzhen SEZ and the Shanghai Pudong New Area, the first national new area, which was opened 25 years ago. It didn’t explain the difference between a SEZ and a national new area.

The new area’s mission is to deepen institutional reform, explore ways to build smart and ecologically friendly cities, develop better infrastructure and efficient transportation networks, and pursue further opening-up in a comprehensive way, Xinhua said. Non-governmental functions of Beijing will be moved into an appropriate part of the zone, Xinhua said.

The details are vague and reportedly surprising.  Nonetheless, it appears to have convinced the market that BBMG is poised for an outsize benefit.

BBMG isn’t a growth company.  It’s an enormous, state-controlled company producing a commodity product in an acknowledged over-capacity industry.  Thanks to a recent forced absorption of less “profitable”, (read lower losses), company Jidong, it has increased its work force as well as its assets and liabilities with undocumented synergies.  Indigestion in the form of lower margins, higher debt payments and unwieldy employment costs from this recently absorbed acquisition is sure to follow.

BBMG Overview

BBMG is primarily a cement producer in an over-capacity sector which does a side business in property development and management.  While it showed an increase in revenue of about 16.6%, its net before taxes and various extraordinary, non-operating items rose only 1.5 %. (Even with a drop in business taxes of 28%, unexplained).  It’s a behemoth of a company, majority owned and controlled by the state, which has grown from 28,619 employees to 49,721, thanks to the forced integration of Jidong. Meanwhile, its gross margins have shrunk.

bbmg income.PNG

As the above shows, operating profit only increased by about 1.5% despite a revenue increase of 16.6%.  Despite the increase in most operating items, business tax and surcharges actually declined by 28%.  The announcement fails to address this difference but without it, there would have been a decline in operating revenue.

Other Income: Subsidies  

The company met its impressive 38% growth in profit thanks mainly to non-operating income items, (which it partly classified as operating, I’ve re-organized).  Although no real details are given on the fair value increases or investment gains, subsidies continue to be a given. (From its annual results announcement).

bbmg other

Cement Volume Sales

As noted, revenue increased by 16.6% for 2016.  During that time, BBMG reported to selling 28.9% more cement and 14.1% concrete.  Segment results from the annual are condensed as follows:

bbmg segment annual

While the increase in revenues in cement is notable, the profits for this segment were a fraction of the revenues, reflecting the overall pressure on price.  The more profitable sectors of property development and property investment showed an alarming decline. These segments taken separately and combined present weak evidence for investing based on profits and growth.

Asset Quality

As can be seen in the segment reporting above, assets in the cement segment have increased by more than 190% while liabilities have surpassed that change with a 274% increase.  The asset quality is also under pressure and opaque.

bbmg bal sheet.PNG

Once again, there is little detail on either Goodwill or Intangibles, which have grown significantly.

Asset quality in terms of receivables, showed an increase in bad debt and maturities.

bbmg receivables

While the economic zone designation could help BBMG in terms of increased demand for that region, it is a national player which has had marginal growth and minimal margins. The overnight rise smacks of speculation and is unwarranted.

 

Developer China Evergrande’s Backdoor Listing May Have Hit a Speed Bump

 

China Evergrande Stock

China Evergrande, 3333 hk, may have hit a speed bump on its race to its backdoor listing in Shenzhen.  In a brief, 2 page Hong Kong exchange announcement, Evergrande stated that the original agreement from December, 30, 2016  would be amended to change an intended strategic advisor’s legal entity and amount to be invested.  While on the surface it appears innocuous, the change indicates that since this investor would be raising its investment as part of the 30 Billion rmb capital injection, ($US 4.3 Billion), another investor would be potentially decreasing its investment.

The original agreement with 8 investors included the following:

Evergrandes Capital Raising orig

With the revision, assuming all pre-existing investors maintain the original investment amount, the capital to be raised would be 30.5 Billion rmb.

Evergrande Capital Raising new

China Evergrande has reason to expect this backdoor listing to occur, since on 3/16/17 it transferred its 14.1% voting rights in China Vanke, 2202 hk, to Shenzhen Metro Group, sacrificing its voting rights to augment Shenzhen Metro’s voting rights from 15.3% to 29.3% to surpass barbarian Baoneng’s 25.4% shares. (No mention of money changing hands for the transfer, although Evergrande was able to use the shares as collateral  for financing with Citic Securities).  Shenzhen is both a major entity in the Evergrande capital raise and the China Vanke controlling shareholder changes.

Although China Evergrande appears to have done everything necessary to seal its backdoor listing, this latest change implies it may not go as smoothly as it hoped.

China Evergrande, 3333hk, chart

Evergrande Chart

Chart Source: Bloomberg

Dalian Wanda Names Last Day to Trade

Wanda A Shares

Dalian Wanda,  3699 hk, will stop trading on the Hong Kong Exchange on September 13, 2016.  The stock resumed trading after the de-listing approval, and closed at 52.5 hkd, just .3 below the offer price made by a consortium put together by Wanda.

In the meantime, it’s working on its A share listing, which it promised within 2 years from the Hong Kong de-list, giving the consortium buyers liquidity and itself improved access to capital markets. The original A share listing was submitted in July of 2015, with a 1 year extension approved in August, 2016.  As shown above, this would equate to about 56.16/share hkd vs. the accepted offering price on the H shares of 52.8 hkd.

Originally the total shares proposed were 300,000.  That dropped to 250,000 in August, 2015 while the projected proceeds of 12 Billion rmb remained unchanged.  Additionally, the extension request stated that the listing would be on the Shanghai Exchange while the original offered either the Shanghai or the Shenzhen.

The proceeds were earmarked for the following:

Wanda A share proceeds

The A-share request was submitted to the CSRC in November of 2015 but has yet to be confirmed.

Wanda and its 60 year old Chairman, Wang Jianlin, has a lot riding on the approval besides the needed proceeds.  It has reportedly guaranteed an annualized 12% return to domestic investors and 10% to overseas investors if the listing doesn’t happen by 8/31/2018 via promised buyback.

 

 

Wanda Wins Thanks to No Shows

 

 

Wanda Final Vote

Dalian Wanda,  3699 HK,  won its fight to de-list, thanks to low voter turnout.  Wanda showed that it got more than the 75% votes needed to de-list its H-shares. The against votes were also less than the needed 10% to defeat. However, the “For” votes only represented 58% of the eligible Independent votes, which would have been well below the 75% needed assuming those absent voted either against or abstained.  The missing 217,357,004 of eligible voters represents a whopping 34% of the shares.  Makes you wonder why they didn’t vote.  No mail or internet?  No flights to Beijing? (Also makes me feel a little better about what I wrote here.)

The shares, which closed at 51.2 hkd prior to suspension on 8/16/2016, will resume trading on 8/16/16.  The offer price was 52.8, hkd.  Dalian Wanda will be filing for the listing withdrawal.  The H shares represented just 14.4% of the total shares of the company or about $4.4 Billion US of the $30.8 Billion US market cap based on the offer per share.  Of that $30.8 billion US, about $17 Billion US is currently owned by Jianlin Wang and Wanda directors.

Next Up: the A share listing.  The extension of the A share listing was approved by 99% of the total shares and will be pursued.

Current Ownership

Here are the owners as presented at the date of the meeting.

wanda a and h owners

i Ms. LIN Ning is the spouse of Mr. WANG Jianlin
.ii Mr. DING Benxi, Mr. QI Jie, Mr. ZHANG Lin and Mr. YIN Hai are directors of Dalian Wanda Group.Mr. LIU Zhaohui is a director of the Company and the vice president of Dalian Wanda Group.Mr. QU Dejun is a director of the Company and the president of a wholly-owned subsidiary of Dalian Wanda Group.
iii Dalian Wanda Group is controlled by Mr. WANG Jianlin through Dalian Hexing. which in turn controls approximately 99.76% of the voting rights in Dalian Wanda Group.The remaining 0.24% voting rights in Dalian Wanda Group is controlled by Mr. WANG Jianlin directly.
iv This includes the shareholding of one Director.In respect of the Domestic Shares, Mr. WANG Zhibin, an executive Director, held 1,600,000.Domestic Shares.In respect of the H Shares, Mr. QI Daqing, an independent non-executive Director, held 20,000 H Shares.
v CICC is the financial advisor to the Joint Offerors and relevant members of the CICC group
vi The limited partners of WD Knight VIII are PA Investment Funds SPC II and PA Investment Funds SPC III,and all the management shares.in both companies are owned by Ping An of China Securities (Hong Kong) Company Limited, a subsidiary of Ping An Insurance (Group) Company of China, Ltd.Certain group members of Ping An Insurance (Group) Company of China, Ltd, hold in aggregate 505,561 H Shares.All such H Shares are not proprietary interests of PA Investment Funds SPC II and PA Investment Funds SPC III,
vii One of the limited partners of WD Knight IX is Guotai Junan Finance (Hong Kong) Limited.Guotai Junan Securities (Hong Kong) Limited is a fellow subsidiary of Guotai Junan Finance (Hong Kong) Ltd.
viii All these Domestic Shareholders who hold H Shares have abstained from voting on the resolution in relation to Delisting in the EGM and in the H Share Class Meeting.
ix The percentage numbers of total Shares in issue in the above table add up to only 99.99% due to rounding
x This means H Shares held by the Independent H Shareholders, being H Shareholders other than theOfferers and persons acting in concert with any of them.Such Joint Offerors and persons acting in concert with any of them do not include relevant members of CICC.group, Ping An Insurance (Group) Company of China, Ltd., Guotai Junan Securities (Hong Kong) Limited whichholding of interests. H Shares are non-discretionary and not their proprietary owned.