Real Estate

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Sunac China Holdings Ltd. looks to have got more than it bargained for from Dalian Wanda Group Co. The Chinese developer is inheriting not only Wanda's tourism properties, but its political problems, too.

Shares of Sunac plunged as much as 13 percent in Hong Kong on Tuesday after Chinese media outlet Jiemian reported that banks are reviewing the Tianjin-based company's credit risk following its agreement to buy $9.3 billion of assets from Wanda. Its bonds also slumped.

One irony of the latest regulatory twist for the nation's indebted real estate sector is that China Evergrande Group, based in Guangzhou and until recently the most leveraged of all, is starting to look like a relatively safe bet.

The Sunac report, coupled with news that China's banking regulator told some lenders to lower returns on wealth-management products, overshadowed data showing home prices surged in the nation's smaller cities in June. Less lucrative rates on wealth products may mean fewer financing deals for high-yield developers. Real estate companies on the MSCI China Index slipped 1.6 percent as of early afternoon in Hong Kong, the most among industry groups.

Sunac bore the brunt. The shares dropped the most since July 2015 at their morning nadir, while the company's 2019 dollar bond tumbled more than 4 percent, breaking par for the first time in almost two years.

Sunac Credit Questioned
Sunac's 2019 bond yield soared since the $9.3 billion Dalian Wanda deal
Source: Bloomberg

It's not the first sign that Sunac may have come into the cross hairs of regulators. The Shanghai Stock Exchange rejected the developer's bid to issue a 10 billion yuan ($1.5 billion) onshore bond, The Standard, a Hong Kong-based newspaper, reported last Thursday.

Sunac shares are especially sensitive to sentiment from the mainland. About one-quarter of its stock is owned by investors across the border from Hong Kong who bought through the local exchange's trading link with Shanghai. By comparison, less than 3 percent of Evergrande's shares are held this way.

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Sunac's shares are highly sensitive to mainland investor sentiment
Source: Hong Kong Exchanges & Clearing

Last weekend's National Financial Work Conference delivered an unambiguous message: Deleverage, prevent systemic risks and promote the real economy. Sunac is walking in the exact opposite direction, so it should be no surprise if this has offended the government. After the Wanda deal, Sunac's net gearing may be boosted to 300 percent from just over 208 percent at the end of last year,  CIMB Securities Ltd. estimates.

Evergrande, meanwhile, is looking like the good kid on the block. Evergrande has brought its net gearing down to 240 percent from a whopping 432 percent a year ago, Nomura Holdings Inc. estimates. Unlike Wanda and other conglomerates that have been the target of increased scrutiny from the banking regulator, it hasn't been on an overseas acquisition spree.

More importantly, it's playing to the government's interests. In June, Evergrande sold a 14 percent stake in developer China Vanke Co. to Shenzhen Metro Group Co., a large state-owned enterprise, swallowing a loss of more than $1 billion on the $4.3 billion deal.

The bond market is certainly placing its bet on Evergrande right now. The company's record $4.7 billion 2025 dollar bond has been trading well after the initial shock of an offering that was more than twice the size of the usual debt sale for a Chinese developer. It recovered to par value recently and is now yielding 8.89 percent.

It's not hard to see why investors like this bond. The yield compares with 9 percent for the 2024 security of Kaisa Group Holdings Ltd., a much smaller company that became the first Chinese developer to default on a dollar note in 2015. The yield on Sunac's 2019 security, meanwhile, has ballooned to 9.44 percent from below 6 percent in May.

Reading the political tea leaves is an essential business skill for all substantial Chinese enterprises. Sunac could perhaps take a lesson from its rival.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net