Chinese property stocks yesterday plunged for a third day, after a deal between two units of Shimao Group Holdings Ltd (世茂集團) heightened corporate governance concerns in an industry already grappling with a liquidity crisis.
Shimao’s shares sank 20 percent yesterday, their biggest drop ever, after plunging 12 percent a day earlier. A gauge of property developer stocks fell to the lowest since early 2017, and China Evergrande Group’s (恆大集團) shares dropped as much as 9.3 percent to a record low.
A connected-party acquisition announced by the developer late on Monday “not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flag,” JPMorgan Chase & Co analysts wrote as they downgraded both stocks.
Last week’s burst of optimism that the worst might be over for China’s embattled property sector is quickly fading as investors race for the exits once again.
Steep losses in Shimao Group’s shares and bonds have been particularly unnerving, given that the company was until recently considered among the sector’s strongest players — able to withstand the funding stress that led to defaults by China Evergrande Group (恆大集團) and Kaisa Group Holdings Ltd (佳兆業集團).
Shimao Group has blamed the sell-off on unspecified “rumors,” but the company’s sparse public comments on its financial health have only added to speculation that it faces growing liquidity stress.
The Monday announcement that Shimao’s services unit had agreed to buy another unit of Shimao Group for 1.65 billion yuan (US$259.4 million) was taken as a sign by some analysts that the developer is shifting money from stronger to weaker parts of the business.
The deal’s valuation was higher than usual, suggesting Shimao Group “is essentially transferring the cash from property manager to developer level,” JPMorgan analysts wrote.
Equity investors are increasingly worried about publicly listed property managers being used as a “financial tool” by developers that share the same owners, they wrote.
Property services companies — including Sunac Services Holdings Ltd (融創服務控股) and Country Garden Services Holdings Ltd (碧桂園) — plunged by at least 10 percent.
Shimao Group, founded by billionaire Hui Wing Mau (許榮茂), said in an e-mailed reply to questions from Bloomberg that the company hired Cushman & Wakefield to advise on the deal.
The valuation took into consideration factors including liquidity and a control premium, Shimao Group said.
Separately, a Shimao Group unit told Bloomberg yesterday that it has prepared funds to repay a 30 million yuan bond maturing on Friday.
Ranked 13th among Chinese developers by contracted sales, Shimao Group poses a much smaller systemic risk to Asia’s largest economy than does Evergrande. However, the former company’s woes have undermined hopes that higher-rated developers would be able to weather the Chinese government’s crackdown on the real-estate industry.
Shimao Group had passed all of the so-called three red lines — metrics introduced to curb borrowing among developers — according to Bloomberg-compiled data, including first-half results. That would typically suggest a more robust financial position and easier access to debt markets.
Yet liquidity concerns have persisted even after a recent share placement, the company’s pledge of its Shanghai headquarters for financing and a flurry of regulatory measures designed to contain the fallout from the property crackdown.
Shimao Group and its subsidiaries need to refinance or repay US$2.5 billion in bond maturities through next year.
That includes the 30 million yuan repayment on a 4.5 percent local bond due on Friday and a 2 billion yuan note due next month, data compiled by Bloomberg showed.
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