FIXED INCOME WEEKLY China Property Bonds: Who are the Higher Quality Issuers?

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1 FIXED INCOME WEEKLY China Property Bonds: Who are the Higher Quality Issuers? Differentiate Between Strong and Weak Developers The spike in yields across Chinese property developers is currently presenting attractive investment opportunities. To help investors differentiate between the stronger and weaker property developers, we highlight some of their financial ratios, giving us a gauge of who faces lower risks of default. High Liquidity The cash ratio measures the amount of cash or cash equivalents held by the company over its shortterm liabilities. The higher the amount of liquid assets it holds, the greater the ability for the company to meet bond payments on time and avoid defaults. Healthy Liquidity The CFO-to-Debt ratio is a measure of how the liabilities are covered by the cash flow generated from a company s operation. The higher the amount of operating cash flow generated from its core businesses, the lesser the reliance on the borrowing, and the greater the financial flexibility for the company to meet bond payments. Low Leverage With lower levels of net debt-to-equity ratio, tightened liquidity or access to credit should be less of a concern to these companies. Strong Solvency Interest coverage ratio is measured by operating income (or earnings before interest and tax) over interest expense. A stronger level of solvency means firms have greater ability to avoid bankruptcy and repay their debt obligations. Who are the Strong Property Developers? We calculate a composite score by combining the aforementioned ratios via a standardisation method to provide a quick measure of the developer s overall credit quality relative to its peers. The z-score serves as a quick assessment on the relative credit risk and enables us to compare and rank developers within the industry

2 FIXED INCOME WEEKLY China Property Bonds: Who are the Higher Quality Issuers? Selloff in Property Developer Bonds Chinese property developer bonds plunged in the past week. Here are key reasons to explain the property developers selloff: 1. Default cases Solar cell manufacturer Chaori Solar became the first company to default on its publicly offered bond in China s onshore market on 7 Mar 2014, breaking China s history of zero bond defaults since The message is clear that the government will no longer provide implicit guarantee on investment products. Property developer Zhejiang Xingrun Real Estate collapsed on 18 Mar 2014 and may default on RMB3.5b worth of debt, held mainly by banks and also individual investors. The size of the default is not negligible and this is the largest property developer at risk of bankruptcy in recent years. 2. Property market risks heightens Property sales fell 3.7% year-on-year in January and February, underscoring weak demand which will put pressure on developers Home price growth decelerated in all three tiers cities decelerated in February, versus January. More bond defaults should not be ruled out but we do not see systemic risks on the horizon. The spike in yields across Chinese property developers is currently presenting attractive investment opportunities. To help investors differentiate between the stronger and weaker property developers, we highlight some of their financial ratios, giving us a gauge of who faces lower risks of default. (Please note that we do not offer bonds issued by all of the mentioned property developers. These bonds may be placed on our platform at a later date, nevertheless.) High Liquidity: Who has cash to meet its debt payments? ed by cash ratio, Table 1 shows the companies who have the highest liquidity. The cash ratio measures the amount of cash or cash equivalents held by the company over its short-term liabilities. The higher the amount of liquid assets it holds, the greater the ability for the company to meet bond payments on time and avoid defaults, which sometimes arise when issuer cannot get cash in time. Table 1: Property Developers ed by Cash Ratio (In FY 2013) Company Name Top Five Developers Cash & Cash Equivalents to Total Current Liabilities 1 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 1.00* 2 CHINA MERCHANTS LAND LTD 招商局置地 0.57

3 3 SOHO CHINA LTD SOHO 中國 CHINA SOUTH CITY HOLDINGS 華南城 CHINA OVERSEAS GRAND OCEANS 中海宏洋 0.41 Bottom Five Developers 1 KAISA GROUP HOLDINGS LTD 佳兆業 GREENLAND HONG KONG HOLDINGS 綠地香港 0.12* 3 HOPSON DEVELOPMENT HOLDINGS 合新創展 0.10* 4 SHANGHAI INDUSTRIAL URBAN DE 上實城市開發 0.10* 5 GLORIOUS PROPERTY HOLDINGS 恆盛地產 0.04* Source: Company Data, Bloomberg and ifast Compilations *Data as at 1H 2013 Healthy Liquidity: Who has cash generated from its core business to meet its debt obligations? ed by operating cash flow to total liabilities ratio, Table 2 shows the companies who have the healthiest liquidity. The CFO-to-Debt ratio is a measure of how the liabilities are covered by the cash flow generated from a company s operation. The higher the amount of operating cash flow generated from its core businesses, the lesser the reliance on the borrowing, and the greater the financial flexibility for the company to meet bond payments. Table 2: Property Developers ed by CFO-to-Debt Ratio (In FY 2013) Company Name Top Five Developers Operating Cash Flow to Total Liabilities 1 CHINA SOUTH CITY HOLDINGS 華南城 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 5.61* 3 LONGFOR PROPERTIES 龍湖地產 5.12* 4 CHINA RESOURCES LAND LTD 華潤置地 5.07* 5 C C LAND HOLDINGS LTD 中渝置地 2.97* Bottom Five Developers 1 CHINA SCE PROPERTY HOLDINGS 中駿置業 -7.01* 2 AGILE PROPERTY HOLDINGS LTD 雅居樂 -7.72* 3 FRANSHION PROPERTIES 方興地產 -9.43* 4 CHINA OVERSEAS GRAND OCEANS 中海宏洋 GEMDALE PROPERTIES AND INVES 金地商置 Source: Company Data, Bloomberg and ifast Compilations *Data as at 1H 2013

4 Low Leverage: Who is least dependent on debt? ed by net debt-to-equity ratio, Table 3 shows the companies who have relatively low leverage versus their peers. With lower levels of debt, tightened liquidity or access to credit should be less of a concern to these companies. Table 3: Property Developers ed by Low Net Gearing Ratio (In FY 2013) Company Name Top Five Developers Net Debt to Shareholder Equity 1 CHINA MERCHANTS LAND LTD 招商局置地 SOHO CHINA LTD SOHO 中國 CHINA OVERSEAS LAND & INVEST 中國海外 C C LAND HOLDINGS LTD 中渝置地 CHINA SOUTH CITY HOLDINGS 華南城 Bottom Five Developers 1 POLY PROPERTY GROUP CO LTD 保利地產 CHINA AOYUAN PROPERTY GROUP 中國奧園 GREENLAND HONG KONG HOLDINGS 綠地香港 FANTASIA HOLDINGS GROUP CO 花樣年 GUANGZHOU R&F PROPERTIES - H 富力地產 Source: Company Data, Bloomberg and ifast Compilations *Data as at 1H 2013 Strong Solvency: Who has strong earnings to cover interest expenses? ed by interest coverage ratio, Table 4 shows the companies who have a stronger level of solvency, meaning they have greater ability to avoid bankruptcy and repay their debt obligations. Interest coverage ratio is measured by operating income (or earnings before interest and tax) over interest expense. Table 4: Property Developers ed by Interest Coverage Ratio (In FY 2013) Company Name Top Five Developers EBIT to Interest Expense 1 EVERGRANDE REAL ESTATE GROUP 恆大地產 * 2 LONGFOR PROPERTIES 龍湖地產 CHINA OVERSEAS GRAND OCEANS 中海宏洋 CHINA OVERSEAS LAND & INVEST 中國海外 AGILE PROPERTY HOLDINGS LTD 雅居樂 * Bottom Five Developers 1 GREENLAND HONG KONG HOLDINGS 綠地香港 3.30* 2 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 2.48*

5 3 YUZHOU PROPERTIES CO 禹洲地產 1.86* 4 SHANGHAI INDUSTRIAL URBAN DE 上實城市開發 1.76* 5 GEMDALE PROPERTIES AND INVES 金地商置 1.20 Source: Company Data, Bloomberg and ifast Compilations *Data as at 1H 2013 Who are the Strong Property Developers? We calculate a composite score by combining the aforementioned ratios via a standardisation method to provide a quick measure of the developer s overall credit quality relative to its peers. Standardisation or z- score is a way to convert all indicators to a common scale. A z-score of 0 means the score is the same as the mean. It can also be positive or negative, indicating whether it is above or below the mean and by how many standard deviations. Table 5: Property Developers ed by weighted average Z-score Credit Rating Company 5-Year USD Bond Ask YTM (Maturity Date) Z-score 1 SHENZHEN INTL HOLDI-PARALLEL 深圳控股 Baa3/BBB % (Apr 2017) CHINA MERCHANTS LAND LTD 招商局置地 A % (Dec 2018) EVERGRANDE REAL ESTATE B % (Oct 2018) 恆大地產 GROUP SOHO CHINA LTD SOHO 中國 BB % (Nov 2017) CHINA OVERSEAS GRAND OCEANS 中海宏洋 BBB % (Jan 2019) CHINA OVERSEAS LAND & INVEST 中國海外 BBB % (Mar 2018) LONGFOR PROPERTIES 龍湖地產 BB 6.655% (Oct 2019) GEMDALE PROPERTIES AND INVES 金地商置 BB % (Nov 2017) CHINA SOUTH CITY HOLDINGS 華南城 B 7.745%* (Jan2019) CHINA RESOURCES LAND LTD 華潤置地 BBB 4.332% (Feb2019) FRANSHION PROPERTIES 方興地產 BB % (Oct2018) C C LAND HOLDINGS LTD 中渝置地 AGILE PROPERTY HOLDINGS LTD 雅居樂 BB %* (Feb2019) CENTRAL CHINA REAL ESTATE 建業地產 BB %* (Jun 2018) ROAD KING INFRASTRUCTURE LTD 路勁基建 B %* (Sep 2017) KWG PROPERTY HOLDING LTD 合景泰富 B %* (Jan 2019) POWERLONG REAL ESTATE HOLDIN 寶龍地產 B %* (Jan 2018) YUZHOU PROPERTIES CO 禹洲地產 B %* (Jan 2019) SHIMAO PROPERTY HOLDINGS LTD 世茂房地產 BB %* (Mar 2018) CHINA SCE PROPERTY HOLDINGS 中駿置業 B %* (Nov 2017) SINO-OCEAN LAND HOLDINGS 遠洋地產 GREENTOWN CHINA HOLDINGS 綠城中國 B 9.324%* (Mar 2019) HOPSON DEVELOPMENT HOLDINGS 合新創展 CCC %* (Jan 2018) SHUI ON LAND LTD 瑞安房地產 SHANGHAI INDUSTRIAL URBAN DE 上實城市開發 B POLY PROPERTY GROUP CO LTD 保利地產 % (May 2018) -0.33

6 27 COUNTRY GARDEN HOLDINGS CO 碧桂園 BB % (Feb 2018)* KAISA GROUP HOLDINGS LTD 佳兆業 B % (Mar 2018)* SUNAC CHINA HOLDINGS LTD 融創中國 B % (Apr 2018)* YUEXIU PROPERTY CO LTD 越秀地產 BBB % (Jan 2018)* CHINA AOYUAN PROPERTY GROUP 中國奧園 B % (Jan 2019)* GLORIOUS PROPERTY HOLDINGS 恆盛地產 CCC % (Mar 2018)* FANTASIA HOLDINGS GROUP CO 花樣年 B % (Jan 2019)* GUANGZHOU R&F PROPERTIES - H 富力地產 BB % (Jan 2019)* GREENLAND HONG KONG BB % (Jan 2018) 綠地香港 HOLDINGS Source: ifast Compilations Data As at 28 March 2014; Ask YTM does not exclude accrued interest, processing fee and the estimated platform fee *Yield-To-Worst (YTW) is the lowest yield an investor can expect to receive when investing in a callable Bond Investors should note that the z-score above only serves as a quick assessment on the relative credit risk and enables us to compare and rank developers within the industry. The score, however, is not an absolute measure of the firm s credit quality. In other words, the negative score does not necessarily mean a bad credit profile and developers in the bottom quartile are not meant to face a high default risk. Also, the z-score does not take into account other factors including the earnings prospect, the business diversity and the financial management. To conclude, as mentioned in our previous article FI Investment Ideas 1Q14 - Strategic Outlook of China's Real Estate Bonds, the slowdown in China s property markets is mainly attributable to the slowdown in two and third-tier cities, as developers have cut prices to clear inventory. However, we don t believe a broad-based correction in the Chinese housing market as the new starts are still struggling to catch up with demand in tier 1 cities and in some tier 2 cities. While the government will no longer provide implicit guarantee, a large scale default may spark a systemic crisis which is something they will most definitely want to avoid. Thus, we believe the impacts of the property price correction and the recent bankruptcy case on most of the rated developers are still manageable, as most of them have multiple funding channels and good liquidity buffers. We are more optimistic on large-sized property developers. Those who have a portfolio across different cities should be able to withstand the headwinds better.

7 Disclaimer and Risk Warning This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any bonds. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the bond. The price of the bond may fall as well as rise. Opinions expressed herein are subject to change without notice. Information and opinions presented in this publication have been obtained or derived from sources believed by ifast Financial (HK) Limited (IFHK) to be reliable, but IFHK makes no representation as to their accuracy or completeness and IFHK accepts no liability for loss arising from the use of the material presented in this publication unless such liability arises under specific statutes or regulations. This publication is not to be relied upon in substitution for the exercise of independent judgment. IFHK may have issued other publication that are inconsistent with, and reach different conclusions from, the information presented in this publication. Bonds are mainly for medium to long term investment, not for short term speculation. Bond investments are not bank deposits and involve risks, including the possible loss of all principal amount invested. It is the issuer s responsibility to pay interest and repay the principal of bonds. If the issuer defaults, the holder of bonds may not be able to receive the interest and principal invested. The holder of bonds bears the credit risk of the issuer. All pricing is indicative only and bond prices do fluctuate when market changes which may cause loss of principal, and that there may not be a secondary market for bonds. Factors affecting market price of bonds include, and are not limited to, fluctuations in interest rates, credit spreads, and liquidity premiums. Investors investing in bonds denominated in non-local currency should be aware of the risk of exchange rate fluctuations which may cause a loss of principal. Investors should refer to the respective Credit Rating Agencies (Moody s, S&P or Fitch or others as the case may be) for their rating definitions, methodology in evaluating the creditworthiness of the issuers and how the ratings are assigned. Rating agencies may change their ratings at short notice. A change in rating may affect the price of securities outstanding. Each prospective investor should consult independent professional advisers before making any investment decision based on your particular circumstances, in particular, in determining the suitability and accessing the investment risks of any securities or other financial instruments. Key risks of investing in bonds Credit risk - bonds are subject to the risk of the issuer defaulting on its obligations. It should also be noted that credit ratings assigned by credit rating agencies do not guarantee the creditworthiness of the issuer; Liquidity risk - some bonds may not have active secondary markets and it would be difficult or impossible for investors to sell the bond before its maturity; and Interest rate risk - bonds are more susceptible to fluctuations in interest rates and generally prices of

8 bonds will fall when interest rates rise. Key risks of investing in high-yield bonds Higher credit risk - since they are typically rated below investment grade or are unrated and as such are often subject to a higher risk of issuer default; Vulnerability to economic cycles - during economic downturns such bonds typically fall more in value than investment grade bonds as (i) investors become more risk averse and (ii) default risk rises. Bonds with special features Some bonds may contain special features and risks that warrant special attention. These include bonds: That are perpetual in nature and interest pay-out depends on the viability of the issuer in the very long term; That have subordinated ranking and in case of liquidation of the issuer, investors can only get back the principal after other senior creditors are paid; That are callable and investors face reinvestment risk when the issuer exercises its right to redeem the bond before it matures; That have variable and/or deferral of interest payment terms and investors would face uncertainty over the amount and time of the interest payments to be received; That have extendable maturity dates and investors would not have a definite schedule of principal repayment; That are convertible or exchangeable in nature and investors are subject to both equity and bond investment risk; and/or That have contingent write down or loss absorption feature and the bond may be written-off fully or partially or converted to common stock on the occurrence of a trigger event.