Evergrande Real Estate Group Limited (BB- (s)/b2 (m)) EVERRE 9¼ 01/19/16 EVERRE 16 Guangzhou Evergrande: The Champions of Asia The Dim Sum substitute: Synthetic Renminbi Bonds Unlike dim sum bonds, synthetic renminbi bond is settled in USD. A synthetic renminbi bond is designed to replicate the cash flow and performance of a bond denominated in Chinese-yuan. No Chinese-yuan settlement is actually involved in the synthetic renminbi bond transaction. Interest and principal payment will be determined by the future exchange rate and settled in USD Guangzhou Evergrande: The Champions of Asia Evergrande Group is one of the largest developers of residential property projects in different cities across China. As of the end of June 2013, Evergrande had 262 large property development projects in 140 main cities throughout China, ranking number one in terms of land reserve and ranking top three in terms of sales amount in China for three consecutive years Maintaining Profitability and Improving Debt Profile Evergrande Group has reduced its net debt ratio to 58.4%, a 37.7 percentage points decrease compared with last year, through strengthening the sales and collection of sales proceeds and strategic selling of investment properties. In addition,the net profit margin of major businesses of Evergrande Group reached 11.1% and total cash amounted to RMB41.97 billion, a 69.6% increase from the same period of last year Short Investment Horizon and Attractive Yield Riding on CNY Appreciation EVERRE 16 has a relatively short investment horizon with 2.2 years left to maturity and is currently trading at $102.53, as at 22 November and its yield-to-maturity (YTM) at 7.9%, as at 22 November.
BOND HIGHLIGHT - EVERRE 9¼ 01/19/16 Table 1: Information Summary Issuer Name EVERGRANDE REAL ESTATE GROUP LITD Announcement Date 01/13/2011 Currency USD (Synthetic RMB Bond) Issuance Size CNY 3,700,000 M Issuance Price 100.00 Minimum Investment amount CNY 1,000,000 Incremental Amount CNY 10,000 Maturity Date 01/19/2016 Years to Maturity 2.2 Call Schedule N/A Call Price N/A Coupon Date January 19/ July 19 Rating at Issuance BB-(s)/B2(m) Source: ifast Compilations COMMENTARY The Dim Sum substitute: Synthetic Renminbi Bonds The progressive internationalization of the RMB will facilitate growth of RMB denominated bonds in Hong Kong. As pointed out in the previous Fixed Income weekly, the rapidly expanding volume of Hong Kong s deposits and of trade settlements in RMB has driven growth in the RMB denominated bond markets. Denominated in Chinese yuan and issued in Hong Kong, dim sum bonds are attractive to investors who desire exposure to yuan-denominated assets. However, RMBdenominated dim sum bonds do not meet the needs of all investors. Unlike dim sum bonds, synthetic renminbi bond is settled in USD. A synthetic renminbi bond is designed to replicate the cash flow and performance of a bond denominated in Chinese-yuan. No Chinese-yuan settlement is actually involved in the synthetic renminbi bond transaction. Interest and principal payment will be determined by the future exchange rate and settled in USD. Synthetic renminbi bond is an attractive alternative to investors who want to capture the potential CNY appreciation but have no CNY on hand. Compared to dim sum bonds, synthetic renminbi bonds do not require investor to open a renminbi accounts nor to hold large amounts of renminbi for trade settlement. Among the six actively traded synthetic renminbi bonds, we pick EVERRE 16 as our highlighted bond this week. Guangzhou Evergrande: The Champions of Asia Guangzhou Evergrande Football Club was has made history as the Chinese Super League champions completed a domestic and Asian double. Being crowned the champions of Asia, Evergrande became the first Chinese football club to win the Asia Champions Leagues and an Asian title in 23 years, and has also won China s Super League for the last three years in a row. Evergrande s ascent to becoming Asia s top club took just three years. Real estate billionaire Xu Jiayin, owner of Evergrande Real Estate Group, bought the club in 2010. Evergrande Group, listed on the Hong Kong Stock Exchange, is an integrated residential developer that operates in property development, investment, management, and other related services. Founded in Guangzhou in 1996, Evergrande Group is one of the largest developers of residential property projects in different cities across China. As of the end of June 2013, Evergrande had 262 large property development projects in 140 main cities throughout China, ranking number one in
terms of land reserve and ranking top three in terms of sales amount in China for three consecutive years. In the first half of 2013, Evergrande recorded RMB274.59 billion of total assets and realized a total turnover of RMB41.95 billion, the highest among all real estate developers in China. Maintaining Profitability and Improving Debt Profile In the first half of 2013, Evergrande has acquired new land reserves of 14.566 million square metres, projects located in China s first and second-tiers cities accounted for 38.2%, representing an increase of 10.6% as compared with the 2012. Moreover, Evergrande has reduced its net debt ratio to 58.4%, a 37.7 percentage points decrease compared with last year, through strengthening the sales and collection of sales proceeds and strategic selling of investment properties. In addition,the net profit margin of major businesses of Evergrande Group reached 11.1% and total cash amounted to RMB41.97 billion, a 69.6% increase from the same period of last year. Short Investment Horizon and Attractive Yield Riding on CNY Appreciation As a synthetic renminbi bond, EVERRE 16 is denominated in USD but replicate the cash flow and performance of a bond denominated in Chinese-yuan. It has a relatively short investment horizon with 2.2 years left to maturity and is currently trading at $102.53, as at 22 November. Over the past six months, the bond price for EVERRE 16 has dropped 11.15% from its one-year high of $105.2 on 9 May to 93.48 on 8 July and recovered since. In the same period, its yield-to-maturity (YTM) has spiked 81.6bps to 7.9%, as at 22 November. As such, we believe investment value exists in EVERRE 16. This shorter term synthetic renminbi bond issued by a reputable company with a stable financial position is a very attractive investment option for investors that wish to ride on the potential Chinese-yuan appreciation.
Table 2: Summary of Financials and Ratios 1H 2013 1H 2012 Change Income Statement (RMB 000) Revenue 41,952,314 37,041,343 13.26% Gross Profit 11,452,017 10,598,376 8.05% Operating Profit 11,182,621 10,449,181 7.02% Net Profit 6,514,634 5,620,754 15.90% Balance Sheet (RMB 000) Non-Current Assets 46,888,973 38,446,924 21.96% Current Assets 227,697,792 200,543,627 13.54% Current Liabilities 162,593,960 150,377,800 8.12% Net Current Assets 65,103,832 50,165,827 29.78% Total Assets less Current Liabilities 111,992,805 88,612,751 26.38% Key Ratios Net Debt Ratio 58.4% 84.2% (25.8 pp) Sales Growth 13.26% -5.46% - Net Debt to EBITDA 3.29 3.41 - Total Debt to Total Assets 56.66 59.11 - Source: Evergrande Group and ifast Compilations
Table 3: Summary of Bond Covenants Key covenants/clauses Interest Payments - The Notes will bear interest at a rate of 9.25% per annum, payable semi-annually in arrear on January 19 and July 19(subject to adjustment) of each year Final Redemption - Redemption at par. Unless previously redeemed or purchased and cancelled, the Notes will mature and become payable at their principal amount (CNY 10,000 per calculation amount) on 19 January 2016 Status - The Notes constitute dated subordinated (13 January 2011) obligations of the Issuer, ranking pari passu without any preference among themselves - Claims will rank in priority to the rights and claims of holders of subordinated liabilities which by their terms rank in right of payment junior to the Notes and all classes of equity securities of the Issuer, including holders of preference shares, if any. Form and Denomination - The Notes are issued in registered form in denominations of CNY1,000,000 each and integral multiples of CNY10, 000. Payments - All payments of principal and interest by the Issuer will be made free and clear of, and without withholding or deduction for any taxes or duties, unless such withholding or deduction is required by law. Governing Law - The trust Deed and the Notes and any non-contractual obligations are governed by English law, except that the provisions of the Notes and the Trust Deed relating to subordination shall be governed by Hong Kong law. The Notes - 9.25% Subordinated Notes due 2016 Source: Evergrande Real Estate Group Limited and ifast Compilations
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 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.