JPMorgan Says Shimao Deal Is ‘Red Flag’ Amid Liquidity Concern
(Bloomberg) -- A transaction between a subsidiary of Shimao Group Holdings Ltd. and a sister company is raising a “corporate governance red flag” amid tight liquidity for the Chinese developer, according to JPMorgan Chase & Co.
Shanghai Shimao Co.’s announcement Monday that it will sell property management assets to Shimao Services Holdings Ltd. underscores increasing market worries that property managers are being used as a “financial tool” by developers, JPMorgan Chase analyst Karl Chan wrote in a note to clients.
“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,” Chan wrote, downgrading Shimao Group and Shimao Services to underweight from overweight, and slashing their target prices by at least 69%.
A sudden plunge in Shimao’s bonds and shares has triggered renewed concern over China’s property sector. A Bloomberg gauge of Chinese real estate stocks dropped as much as 3% Tuesday to its lowest since Nov. 10, as Shimao lost more than 20% over two days. Agile Group Holdings Ltd. slumped as much as 11% and China Evergrande Group dropped 8.7% to a record low.
While government policies are headed toward easing, there isn’t a “180-degree change,” Chan wrote. The property sector could stay range-bound in the near term and a meaningful rebound is unlikely until there’s “proof of significant policy easing” and “a major turnaround in contracted sales,” he added.
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