Junk Bond Exit Quickens, Property Stocks Fall: Evergrande Update

(Bloomberg) -- A pullback by some of the biggest investors in China’s junk property bonds accelerated last month, as firms cut holdings by around $1 billion in par value against the backdrop of a record selloff in global fixed income.

April saw many of the top 20 institutional investors including BlackRock Inc. reduce positions in China’s high yield dollar bond sector, led by Fidelity International Ltd., data compiled by Bloomberg show. Investment managers may have reallocated more of their funds to stronger developers while cutting positions in weaker and widely-held firms, Bloomberg Intelligence analysts Andrew Chan and Daniel Fan wrote in a report. 

A Bloomberg Intelligence gauge of property stocks fell 1.5%, while China high-yield dollar bonds were largely steady. 

Key Developments:

• Big Investors Further Pare Bets on China Property Junk Bonds
• Funds Trim China’s Weaker Junk Bond Exposures and Reallocate
• China Property’s Trough Has Passed for Sales, Bonds: Barings
• China Property Rally Needs More Policy Aid to Last: Taking Stock

China Vanke A Shares Reinstated Buy at GuoSen; PT 23.95 yuan (4:00 p.m. HK) 

GuoSen Securities Co. reinstated coverage of China Vanke Co.’s A shares with a buy call. Its price target was set at 23.95 yuan. The developer reported quarterly earnings and sales that topped estimates on April 28.

Big Investors Further Pare Bets on China Property Junk Bonds (12:35 p.m. HK)

A pullback by some of the biggest investors in China’s junk property bonds accelerated last month, as firms cut holdings by around $1 billion in par value against the backdrop of a record selloff in global fixed income.

April saw many of the top 20 institutional investors including BlackRock Inc. and Fidelity International Ltd. reduce positions in China’s high yield dollar bond sector, data compiled by Bloomberg show. That’s after such firms that publicly file their holdings trimmed sector exposure in March for the first time in months. 

Investment managers may have reallocated more of their funds to stronger developers while cutting positions in weaker and widely-held firms, Bloomberg Intelligence analysts Andrew Chan and Daniel Fan wrote in a report. Fidelity and BlackRock did not immediately respond to Bloomberg requests for 

Funds Trim China’s Weaker Junk Bond Exposures and Reallocate (9:50 a.m. HK)

Investment managers may have taken advantage of the recent China junk bond liquidation and reallocated more of their money to stronger developers such as Country Garden Holdings Co. and CIFI Holdings Group Co. while cutting their positions in weaker and widely-held names such as Shimao Group Holdings Ltd. and Kaisa Group Holdings Ltd., Bloomberg Intelligence said in a report. This may indicate there is underlying demand for stronger developer bonds, it added. 

China Developers’ Devastating April Sales Risk More Covid Pain: BI (8:20 a.m. HK)

An average 57% slump in April-contracted sales for Chinese developers tracked by Bloomberg Intelligence suggests Covid-19 outbreaks and weaker economic outlook threaten to deepen the housing market slowdown and delay recovery for the sector’s liquidity, according to analyst Kristy Hung. Policy stimulus may do little to turn around near-term sales, with Agile Group Holdings Ltd., Shimao Group Holdings Ltd. and Sunac China Holdings Ltd. leading the plunge in April.

China Property Managers’ M&A Can Be a Bulwark for Profit Margins: BI (8:10 a.m. HK) 

Country Garden Services Holdings Co. and other leading Chinese property managers could give their profit margins greater backbone by acquiring third-party projects, opening up powerful shortcuts to greater economies of scale, according to Bloomberg Intelligence Analyst Yan Chi Wong. China Resources Mixc Lifestyle Services Ltd. and Sunac Services Holdings Ltd. may seek a profitability boost by expanding their high-margin commercial operations. 

China Property’s Trough Has Passed for Sales, Bonds: Barings

“The trough has passed” for China’s property sector regarding both bond technicals and the physical market, even though broad policy support is unlikely and more defaults are possible, said Omotunde Lawal, Barings’ head of emerging-market corporate debt.

Some pent-up housing demand could be released once Covid-related lockdowns end, she told Bloomberg. Meanwhile, comparisons will ease in coming months as sales declines started in mid-2021, she said. 

Barings prefers in its portfolio large, national developers with diversified and low-cost landbanks as well as onshore/offshore access to the debt and equity capital markets, she said. 

China Property Rally Needs More Policy Aid to Last: Taking Stock (8:05 a.m. HK)

Developer shares advanced after China’s top leaders in the Politburo last week called for the stable and healthy development of the property market, as part of a pledge to bolster an economy hit by the worst Covid outbreak since 2020.

But analysts are uncertain about how far leaders will go in aiding the sector. One thing policy makers could do is to ease requirements that firms keep some of their pre-sales proceeds in escrow accounts, which lock up more than a quarter of developers’ cash. But a significant relaxation isn’t expected as the government wants the companies to set aside funds to ensure new homes are completed and delivered to buyers, Jefferies analysts including Stephen Cheungwrote in a note.

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