Chinese property stocks have been a no-go zone for investors ever since Beijing started its forced deleveraging of the sector in August 2020. But real-estate plays have seen a little life of late, with speculation rampant that the government will step in to bail out one of the most-important industries in the country.
The Hong Kong-listed Chinese developers are the ones to follow, and that are accessible to international investors. All the most-prominent property companies have a Hong Kong listing, so typically only penny-share property companies are purely mainland-listed.
Those better at least be penny shares in U.S. dollar rather than yuan terms. The Shanghai and Shenzhen exchanges delist companies that see their shares trading below C¥1 per share for 20 straight trading days. That's very much a reality for the developers demonstrating the greatest levels of distress.
A delisting could be disastrous for these companies for a host of reasons. The bottom line is that it is likely to scupper chances of negotiating with creditors, and sustaining the company as a going concern.
S&P Global Ratings tracks 11 companies (I'll list them below) that risk delisting for their equities, a disaster that would surely follow through to cause problems if not default on the US$21 billion worth they have issued in bonds, both onshore and offshore. S&P's research shows that bond investors normally get 2 to 4 cents on the dollar (or 2% to 4%, in other words) for their holdings in the case of a liquidation.
Liquidation is even worse for equity holders, of course, who are totally wiped out. And it's a disaster for the company itself, which typically gets forced out of business, and also for homebuyers who have put down deposits on apartments that are yet to be built. They're at significant risk of never getting those homes, unless the projects are deemed worthy of salvaging by another developer.
"This is the worst outcome for most," S&P Global Ratings senior writer Jasper Moiseiwitsch states in a note on the topic.
Restructuring is a far better route. But delisting complicates any negotiations with creditors, and raises the specter of the worst coming to pass.
Delisting virtually rules out any possibility of a debt-for-equity swap, since no bond creditor will accept shares that aren't tradable. It also gives company founders less incentive to remain with the company, since their equity is now virtually worthless. An out-of-court restructuring, though, gives key executives an excellent reason to stay around, and turn the company around.
Most recently, the Shanghai Stock Exchange on Tuesday delisted Sichuan Languang Development (SH:600466). It has around US$2.7 billion worth of bonds outstanding.
Delisting also shakes confidence that there's any prospect of a turnaround, which makes creditors less likely to pursue an out-of-court restructuring, since they may start thinking that recouping the 2% to 4% they're likely to get in a liquidation is their best (or only) option.
Companies may also have been using cash to buy back shares and avoid delisting by driving the price higher, with a smaller free float. If that strategy doesn't succeed, it leaves the company with less cash to service debt.
"Delisting adds strain to a sector that has had a really difficult couple of years," S&P Global Ratings credit analyst Esther Liu says. "The event closes options for Chinese developers to recover, and for investors to get their money back."
Those 11 companies at risk of delisting include a couple of notable names.
Best-known among them are Shanghai Shimao (SH:600823), which has a Hong Kong listing under Shimao Group Holdings (HK:0813), and Oceanwide Holdings (SZ:000046), which has a Hong Kong-listed subsidiary China Oceanwide Holdings (HK:0715).
Shanghai Shimao does have shares trading at C¥1.24, so it's technically in the clear so long as it maintains that price. The shares are down 48.3% this year, with a particularly sharp fall since the end of April. Many of the other troubled developers are, however, down around 80%.
Shimao first defaulted on its debt in July 2022, and became the first major developer to attempt an out-of-court deal with creditors. It last August proposed a two-class restricting plan in which it would pay back the US$11.8 billion it owes to offshore creditors over 3-8 years. Creditors don't like the two-tier treatment of debt, and are worried cash may leave the group through its offshore entities, with the Hong Kong arm for instance attempting to sell the 1,219-room Sheraton hotel it owns near the Hong Kong airport.
But talks proceed. It seems likely Shimao will stay in business in some shape or form.
Oceanwide Holdings are trading below the delisting threshold, at C¥0.98, and have made several recent breaks above that level. One of its creditors filed to a Beijing court in April to force a restructuring, and the court has initiated a "pre-restructuring" process that should facilitate its communication with creditors and any potential investors. Some survival plan may therefore emerge.
The troubled group also include China Calxon Group (SZ:000918), Guangzhou Yuetai Group (SH:600393), Jiangsu Zhongnan Construction Group (SZ:000961), Jinke Property Group (SZ:000656), Myhome Real Estate Development Group (SZ:000667), RiseSun Real Estate Development (SZ:002146), Sundy Land Investment (SH:600077), the Tahoe Group (SZ:000732), and Yango Group (SZ:000671).
As of Wednesday, among that group only Jiangsu Zhongnan Construction, Jinke Property Group and RiseSun Real Estate Development have shares trading above C¥1.
An out-of-court restructuring or reorganization would be preferable for all concerned. Court-ordered reorganizations can take years to wend through the Chinese legal system, and creditors are unlikely to see much out of their holdings in the end.
S&P cites the example of Goocoo Investment, which defaulted in 2018. Its court only approved a bankruptcy restructuring in December 2021, which gives senior unsecured creditors only 5% of their money but getting equity in a debt-equity swap as well. Or creditors can opt for a 50% haircut to get cash and assets.
If no out-of-court or court-ordered restructuring can be agreed, it's likely the company will enter liquidation. That benefits neither the company nor the creditors.
"Issuers and creditors are trying to salvage the best of the China property sector," Moiseiwitsch notes. "Both parties have strong incentives to return firms to solvency, and back as a going concern."
