Chinese Builder Sunac Sees Financial Worries Rise to the Surface

(Bloomberg) -- Sunac China Holdings Ltd. is under heightened market scrutiny amid questions over its financial health, at a time when concerns about the nation’s developers are being amplified by China Evergrande Group’s cash crunch.

Some of Sunac’s dollar bonds have posted negative returns approaching 20% in September, among the worst performers in an index of such high-yield notes in China, according to Bloomberg-compiled data. Shares this week reached their lowest level since 2017 and have lost nearly half their value this year, though they rebounded 12% Thursday.

What’s the company?

Sunac China was founded in 2003 and property development made up more than 90% of revenue from external customers in the first half of this year, according to its interim report. The company says on its website it’s the country’s largest owner and operator in both the cultural and tourism industry as well as of conference and exhibition properties.

The Hong Kong-listed firm met two of the “three red lines” metrics set by Beijing to cap leverage in the sector, with its 76% reading on liabilities to assets falling short of the 70% target. Companies have until mid-2023 to meet the guidelines. 

What’s happening?

The latest market weakness came as a letter from a Sunac China subsidiary to a local government surfaced late last week. The document contained a request for Shaoxing authorities to offer “special policy support” as operations there had been hit by tighter housing policies and that the Sunac group broadly had “run into big hurdles and difficulties in terms of cash flow and liquidity.”

The company on Tuesday said it hadn’t requested government aid and that the group’s operations were healthy, sending Sunac China’s dollar bonds and shares higher. The firm added the letter was only a draft and “accidentally” sent to a chat group outside the developer. The document was written by a local executive for verbal communication with Shaoxing officials, said Sunac China.  

Calls to Sunac China’s investor relations manager went unanswered Thursday, and the office didn’t immediately reply to an email seeking comment on the company’s credit health and debt repayments.

Why does it matter?

China’s efforts to cool its property market, both in the amount of developers’ debt and in terms of home prices, have led some to worry that the push may go too far and possibly hurt the country’s economy. 

There have been broad concerns about the current state of Chinese developers, many of whom indulged on debt-fueled growth and have been impacted the past year by the “three red lines” effort. Some builders have struggled to sell fresh debt, and the sector has fueled a record amount of Chinese corporate bond defaults this year. 

Evergrande Crisis Highlights Funding Risks for Developers

However, the state-run Economic Daily said in a commentary this week that tighter policies shouldn’t be loosened simply because some developers have run into trouble. The pressure facing the sector has pushed yields on Chinese junk-rated dollar bonds above 15% for the first time in about a decade, according to a Bloomberg index.

What does the company say?

Sunac China reported 24% revenue growth in its interim report. It also said while “the overall real estate sales market is expected to be relatively stable,” recent regulatory changes and other impacts have resulted in property buyers’ expectations changing. “The divergence between cities will intensify, with possible downward pressure on sales in some.” 

What do analysts say?

The Beijing-based builder is one of China’s higher-rated developers among major international credit assessors, with grades no more than three steps below investment-grade territory. Moody’s Investors Service has a positive outlook on its Ba3 rating, and early this month highlighted the builder’s “well-known brand name and strong sales execution,” as well as its “good liquidity.” 

But it also cited Sunac China’s “material exposure to nonstandard borrowings associated with high funding cost and heavy reliance on partnerships with joint ventures and associates, which might weaken corporate transparency.”

Research firm CreditSights Inc. published a report this week which pointed out the builder’s first-half release omitted some previously reported details about debt levels. Its analysts wrote that the firm didn’t disclose a notes payable line after reporting 22.8 billion yuan ($3.5 billion) of them to end 2020.

What are traders watching for next?

Sunac China has $7.8 billion of dollar bonds outstanding, according to Bloomberg-compiled data, with the next maturity a $600 million note in June 2022. Separately, unit Sunac Real Estate Group Co. has $4.1 billion of yuan-denominated bonds yet to mature, including one on Oct. 9. It has $774 million outstanding on two separate onshore notes coming due next May and June.

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With assistance from Bloomberg