Special Report on Chinese Real Estate: Times Property Holdings Bonds

Background

Established in 1999, listed on the Hong Kong Stock Exchange since 2013, Times Property Holdings Limited (TPHL) is a Chinese residential property developer based in Guangdong province. The developer develops property in 60 locations in Guangdong province. During 2011, it develops into the neighbourhood province of Hunan. It currently has 2 projects in Changsha city. At end-June 2017, the developer held land bank of about 14.5 million sqm, with total assets of RMB 85.74 billion, and total equity of RMB 23.89 billion. Revenue from sales of properties represents over 95% of the company’s total revenue. TPHL is rated B+/B1/B+ by Fitch/Moody’s/S&P with outlooks of Positive/Positive/Stable. The developer’s senior unsecured bond ratings are B+/B2/B by the three international rating agencies respectively. The company is 68.62% owned by Mr Shum Chiu Hung and Ms Li Yi Ping, the chairman and spouse.

Key Credit Strengths

  • Good market position in property development in the more affluent province of Guangdong
  • Good operating track record
  • Very strong liquidity position

Concentrated Business Profile

The strength of the company’s business profile is its good market position in the more affluent province of Guangdong province in China. In particular, the company has good track record in residential development in the cities of Guangzhou and Foshan. It currently has 62 projects under construction, of which 60 are in the Guangdong province, and 2 in Changsha, Hunan province’s capital city. The developer has a good foothold in its home base in the Guangdong province and has only ventured into Changsha in 2011. These 2 projects currently contribute a small amount to the company’s overall business profile. This evidences the company’s cautious stance in its expansion outside of areas that are less known to management.

During 1H2017, contracted sales from Guangzhou and Foshan represents 71.4% of the company’s total. The balance is contributed from Zhuhai, Changsha, Qingyuan, Dongguan and Zhongshan. For future development, the company’s land bank in Guangzhou and Foshan represents 33% of the total. These cities are close to the company’s home base where it has good knowledge of the market in these local areas. In addition, the company’s products targets the mass market, therefore is less affected by slower sales permit approvals by authorities at city level.

During Jan-Oct 2017, the company recorded gross contracted sales of RMB31.6 billion, of which about 80% (RMB25.3 billion) is attributable to the company. It has achieved its 2017 target of RMB 32.5 billion. This represents approximately 30% growth year-on-year. Year to date, the company has acquired new land of about RMB12.5 billion, about 39% of contracted sales and is considered prudent. A measured pace of expansion puts less stress on the company’s leverage and financial profile as it grows. The  company’s revenue grown from RMB3.2 billion in FY2012 to RMB16.2 billion in FY2016 on the back of strong growth in the industry during this period.

Balanced Financial Profile

The developer has profitability with gross margin and EBITDA margin at 26.4% and 19.3%, respectively. This is comparable to other Chinese property peers with gross margin averaging between 20%-30% although margin squeeze has been a trend. The company is considering increasing its land acquisition from redevelopment of urban projects to lower its land costs to maintain margin over the medium term.

Financial leverage of the developer is moderate with adjusted Debt/EBITDA stood at 8.7x in 1H2017 (1H2016: 6.4x). Adjusted total debt to total capital was maintained at a good level of 60.2% (1H2016: 65.4%), that is strong relative to other “B/B+” rated peers. Debt serviceability of the company is good with EBITDA cash interest cover maintained at above 2x over the past 4 years. EBITDA cash interest cover has dipped under 2x for 1H2017 partly due to seasonality, and we expect this to recover to over 2x. The US$300 million bond issued on 22 Nov 2017 is expected to be used for refinancing of high cost debt paying 11.56% that is callable Mar 2018. This may push FY2017 leverage level higher temporarily, but is not of concern. An increasing leverage trend is expected over the medium term given the developer’s plan to increase its scale. We take comfort that the developer has a good track record of prudent financial management. The increasing leverage at a measured pace is partly mitigated by its good liquidity management.

TPHL’s credit profile is supported by its strong liquidity position. At end-June 2017, the company had RMB 10.61 billion, covering short-term debt of RMB2.6 billion (8.8% of total debt) by more than 4.3x. Although the company has an onshore bond puttable in July 2018 of RMB2 billion, there are sufficient cash to cover the repayment of the bond after repaying short-term debt of RMB2.45 billion. Furthermore, the developer has adequate financial flexibility. Despite its small size, a good level of leverage at about 60% with good quality assets, the developer would have adequate access the banking market onshore and offshore subject to market liquidity. According to Bloomberg, apart from short-term debt stated above, the company’s next capital market debt is maturing onshore on 26 Oct 2018 of RMB 3 billion. There is no offshore capital market debt maturing until 2020.

Conclusion

We initiate coverage of Times Property Holding Limited (TPHL)’s issued US$300 million bond TPHL 6.6% due 2023 NC 2020 with a Buy recommendation. TPHL is a small-to-medium sized Chinese residential property developer ranked 43 by contracted sales during Jan-Oct 2017. The developer’s credit profile is supported by its good market position in the Guangdong province, good operating track record, and its strong liquidity position. These strengths are balanced by it high geographic and product concentration in the Guangdong province and development of residential properties. Of the company’s land bank of 14.5 million sqm at end-June 2017, 33% are located in Guangzhou and Foshan and 71.4% of its contracted sales recorded in1H2017 were from properties sales in the two cities. We take comfort from the good economic growth in China and Guangdong.

We continue to hunt for safe and secured yield for our clients from the very best of overlooked companies. For risk averse investors looking for yield, Times Property Holding Limited USD issue may be suited to your portfolio.