Shares of the second major Chinese real estate developer fell on Tuesday after the sale of one of the structural units. Chinese media reports on the cancellation of agreed real estate transactions.
The real estate sector is letting down China's economy again on the eve of the release of reports
Shares and loan securities of Chinese developer Shimao Group fell sharply on Tuesday after the sale of one of its enterprises. Markets were also shaken by a state media report on the cancellation of agreed apartment sales, prompting investors to focus on bond payments next month.
The shares of the Shimao Group of companies, which last year was one of the ten largest housing construction companies in China and had an investment rating until October of this year, experienced the worst day in history since the IPO, showing a drop of 20%. The situation was worsened by the decline in the value of the conglomerate's bonds.
Concerns about the company arose over the weekend - after local media reported that home buyers who bought real estate from a developer in Shanghai were unable to register ownership rights since the apartments had already been transferred to a trust.
Today, state-run Chinese media CCTV reported that Shanghai Shimao will now "stop" these sales.
Interestingly, the company's statement says that it was operating normally, without any significant negative changes and there were no negative events that could affect its ability to pay debts or pay interest on its bonds.
However, a subsidiary of the Shanghai Shimao conglomerate yesterday published news that it had sold its real estate management business to a subsidiary of Shimao Services for 1.7 billion yuan ($267 million), which raised questions about the valuation of the entire group as a whole.
So, after the sale, the Shanghai Stock Exchange published a statement questioning the sale of these real estate management assets.
The fact is that the sale price is 16 times higher than the expected price-to-profit ratio of the property this year, which is much higher than 10-14 times the average for recent M&A transactions in the Chinese real estate sector. This may indicate asset management fraud within the group.
JP Morgan analysts also assessed the events: "We think that this transaction with related parties not only implies strict liquidity conditions for Shimao but also is a red flag of corporate governance since it transfers funds from the property manager to the developer level." Shimao Group and Shimao Services received a rating for a decrease, which, is a recommendation to sell.
UBS published data that Shimao has local market bonds, international bonds, and syndicated loans totaling $4.4 billion maturing next year. Perhaps this is what pushed the group's leaders to withdraw assets from the structure.
Analysts say that it will be difficult to refinance these obligations, even with the state support provided by the Chinese government to developers, if the company does not receive support or does not restore access to international loans, which are closed to local developers.
"We think this may affect Shimao's image and future sales contracts, especially in a weak real estate market," UBS said in a report. "The key point to watch will be the maturity of the company's bonds in January. If Shimao misses a payment, we believe it will have negative consequences for the sector."
It also became known that Shimao is negotiating with Guotong Trust. It is planned to issue annual bonds. Very cautiously, we can assume that the sale of the company is connected with the planned listing.
Markets react
Scandals overpayments by another Chinese developer Evergrande have already undermined the confidence of investors who are afraid of a repeat of the history of Lehman. Of course, a mortgage in China is not the same as a mortgage in Europe. However, the problems of the industry, acquiring the serial factor, cannot but attract attention.
The lack of liquidity shaking the sector could harm China's GDP. The value of the shares of developers in China fell today to the lowest level since the beginning of 2017, and the shares of China Evergrande Group fell by 9.3% to a record low.
Shares of Chinese firms listed in the United States fell again on the premarket of the New York Stock Exchange by at least $ 0.03.
However, this is not a reason for everyone to sell.
According to Goldman Sachs Group Inc., China's weakened stocks represent a buying opportunity as most of the obstacles facing the country's economy are now factored into the price.
"Although the risks associated with the growth prospects in China remain due to the policy of zero tolerance for COVID-19 and stricter regulatory requirements, Chinese stock markets already reflect some of these risks, offer attractive valuations, and are still underinvested," Goldman Sachs strategists say.
Their opinion echoes a statement by strategists at JPMorgan Chase & Co., which this week raised China's stock prices, saying they expect a "serious" recovery in offshore Chinese stocks next year.
Economic activity in China probably slowed in November due to the worsening downturn in the real estate sector and the still low level of consumption.
Growth in fixed investment probably slowed last month due to sluggish real estate investment, according to the average estimate of a survey of economists before the release of data to be published on Wednesday morning.
But Chinese analysts promise just a restructuring of investments.
"We will see that money will flow from real estate investments to investments in capital markets," said Xiaofeng Zhong, chairman of Amundi's division in the Greater China region. "The government encourages the inflow of funds to the financial market."
This is quite a controversial point, but China's economy is far from exhausted.
Nevertheless, while the main manufacturing province of China is being shaken by an outbreak of coronavirus, it is too early to talk about the recovery of the Chinese economy.