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.

(Updated )

Pinch me. Kaisa Group Holdings Ltd. is waking from the dead.

Shares of the Shenzhen-based home builder soared 41 percent in Hong Kong trading last week to a record, bringing their gain for this year to more than 300 percent and the company's market value to more than $5 billion. (They dropped as much as 18 percent in morning trading Monday amid a broad-based slump in Chinese property stocks.)

Back From the Dead
Kaisa shares soared 326 percent this year
Source: Bloomberg

It's a remarkable turnaround for a company that in 2015 became the first Chinese developer to default on an offshore bond. The shares resumed trading in March after a two-year suspension, having collapsed by more than 50 percent in late 2014.

Never mind that Kaisa has reported three consecutive years of losses and had a net debt-to-equity ratio of 349 percent at the end of June (albeit reduced from more than 500 percent in 2015). When the music's playing in China real estate, even Lazarus has to get up and dance.

The National Reform and Development Commission said last week that it aims to finish infrastructure planning for the so-called Greater Bay Area in southern China. This is a cluster of 11 cities including Guangzhou, Shenzhen and the special administrative regions of Hong Kong and Macau. 

This is the new urbanization model for China: The commission aims to improve connections by building more railway lines between hub cities and smaller satellites.

The plan is a godsend for Kaisa. As of the end of June, about 55 percent of the company's land bank was in the Greater Bay Area, the second-highest ratio among Hong Kong-listed Chinese developers. These holdings arguably could see a sizable revaluation.

Hidden Riches
Kaisa could be re-rated if China speeds up development of the so-called Greater Bay Area
Source: Company filings, Morgan Stanley

Land reserves have been a more important factor than earnings or indebtedness for developer valuations this year, as I noted last week. A 20 percent jump in Kaisa shares on Thursday in part reflected investors marking to market the value of its land bank.

Also boosting confidence in Kaisa's prospects is support from the family of Joseph Lau, the billionaire chairman of Hong Kong's Chinese Estates Holdings Ltd. Kaisa sold $805 million of bonds on Sept. 20, with about $600 million taken up by a group led by Lau's wife, according to Hong Kong's Ming Pao newspaper.

Lau is a long-time backer of China Evergrande Group, another mainland developer that has seen parabolic growth despite stratospheric debt levels.

Investors jumping on the Kaisa bandwagon may be hoping that the company will morph into another version of its Guangzhou-based rival. Evergrande is no longer cheap, trading at 3.2 times book value after soaring more than 500 percent this year. Kaisa's price-to-book ratio is a more reasonable 2 times.

Kaisa's financials have also improved. In the first half, its gross profit more than doubled to 2.9 billion yuan ($434 million). More importantly, the builder has greatly extended the maturity profile of its debt compared with two years ago. More than 60 percent of its 31 billion yuan of bonds aren't due until 2024.

Bond investors certainly appear more comfortable with the company's debt these days. Kaisa's 9.375 percent, seven-year bond, issued three months ago, has risen 1.8 percent since.

Kick That Can
Kaisa lengthened the maturity of its debt after defaulting on dollar bonds in April 2015
Source: Bloomberg

However, it hasn't deleveraged. At the current rate, Kaisa still needs roughly 20 years of operating income to pay off its net debt. Its net debt-to-Ebitda ratio was 39 times at the end of the first half.

Look Behind You
Kaisa's net debt-to-equity ratio has crept up again after a 2015 restructuring
Source: Bloomberg

While market concern over Chinese property firms' leverage has eased, the overhang remains. Evergrande and Sunac China Holdings Ltd., the two most indebted, both pledged during the second-quarter earnings season to lower their levels. Evergrande plans to bring its net debt-to-equity ratio to around 70 percent by June 2020, while Sunac promised a reduction to less than 80 percent by the end of 2018.

What's Kaisa's plan? In its semi-annual filings, all the company said was that it would "explore more channels for low-cost financing" and improve its "debt structure." In other words, there's no plan to deleverage.

Kaisa has already made its investors sit through one horror movie. Its resurrection makes for a heart-warming story, but investors jump on this bandwagon at their own peril. It could yet end the same way.

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

(Adds Kaisa's Monday trading in the second paragraph.)

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