Investors Scrutinize Builder China South City’s State Links

​- Firm’s bonds sold off as concerns emerged on builder Greenland

- China South City has $1.2 billion of bonds due in rest of 2022

June 9, 2022, 6:30 AM GMT+8

By Lorretta Chen

Investors in Chinese developers have until recently viewed builders that have even minority ownership stakes by state entities as relatively safe, but that calculation has been growing more complicated in the past few weeks.

Few builders illustrate that trend better than China South City Holdings Ltd., which counts a major commercial development in the technology hub of Shenzhen among its key projects. The company was among the first in China’s troubled property sector to get a state bailout, which was completed in May. But its dollar bonds have been among the most volatile relative to peers in recent weeks.

The drama began when another partially state-owned developer, Greenland Holdings Corp., shocked investors in late May by proposing to delay payment on a dollar bond. That dented confidence in such ownership structures, and put China South City in the spotlight as investors reassess firms with similar arrangements.

What’s the company?

Founded in 2002, Shenzhen-headquartered China South City focuses on the development of large-scale business logistics platforms.  

The firm on New Year’s Eve unveiled a deal in which a unit of Shenzhen’s local state-asset regulator would buy a 29% equity stake. Some dollar bonds roughly doubled that day as the deal signaled the company would be able to pay near-term debt in the midst of the property sector’s cash crunch.

The firm in January obtained investor approval to postpone repayment of two dollar notes. 

What’s happening?

China South City offshore notes maturing later this year fell to below 80 cents on the dollar after Greenland, also partially owned by government entities, asked holders to back a bond-repayment extension. The request came despite government officials stepping up efforts to support the real-estate sector, especially homebuilders, as firms default on dollar bonds at a record pace amid plunging contracted sales.

Its offshore notes have since recovered ground, rising Wednesday in the wake of a report on the firm’s refinancing plans. But they remain below their levels before Greenland’s proposal.

Why does it matter?

Property companies which aren’t fully controlled by the government but have some state ownership have been viewed as safer than private-sector builders. 

But questions about state support “signals quasi state-owned developers aren’t immune to a liquidity crisis caused by prolonged Covid-zero lockdowns and heightened refinancing pressure due to market shutdown for weak developers,” Bloomberg Intelligence analysts Dan Wang and Daniel Fan recently wrote.

What does the company say?

China South City Chairman Cheng Chung Hing said the firm’s operations became difficult by the end of 2021, highlighting in a December interim report both the liquidity woes facing the property sector and a financing environment which had “deteriorated sharply.” After paying off an onshore bond in April, the company said it would continue to optimize its debt structure and cut financing costs “to strengthen the foundation for future development.”

A spokesperson for China South City told Bloomberg News relevant plans are underway for the company to get refinancing to repay maturing bonds this year.

What do analysts say?

Chinese regulators and banks are increasingly scrutinizing developers’ financial health and state links, Wang and Fan wrote in a separate report. Meanwhile, government investment into China South City and a pending deal involving Central China Real Estate Ltd. “are based on the companies’ strategic importance to their local governments and are unlikely to be widely replicated,” said Lucror Analytics senior credit analyst Leonard Law.

China South City not having a high asset-turnover model has allowed it to avoid the degree of cash crunch seen by builders reliant on presales, CCB International analysts wrote in a research note. But they added that because about one-third of China South City’s debt consists of dollar bonds, “it still faces refinancing pressure.”

What are traders watching for next?

The company’s results for the year ended March 31 are due in the next few weeks. China South City faces $970.5 million of maturing dollar bonds the rest of this year, according to data compiled by Bloomberg. The key month is August, when the first of those three notes come due along with a combined 1.39 billion yuan ($208 million) of onshore bonds.

— With assistance by Shuiyu Jing