This May Be China's Most Debt-Strapped Developer

  • Core loss almost doubles from year earlier, CIMB says
  • Sunac acquisition spree included buying Wanda theme parks

Inside Sunac's 1,683% Profit Surge

Sunac China Holdings Ltd. shares fell as investors focused on the struggle by China’s most-leveraged developer to control its debt, instead of a surge in net income that was fueled by unrealized gains from acquisitions.

Excluding one-off gains, Sunac recorded a core loss of 530 million yuan ($81 million) in the first half, almost double the loss of 283 million yuan a year earlier, CIMB Securities Ltd. estimated. Sunac reported core profit of 1.4 billion yuan, a figure that included some one-off gains, while saying its first-half net income surged 1683 percent to 1.3 billion yuan.

“It is a set of very disappointing results,” CIMB analyst Raymond Cheng wrote in a note. Gearing jumped to “an alarming level,” he said.

Net gearing soared to 394 percent -- the highest among key listed companies in Hong Kong -- from 208 percent a year earlier, if the firm’s perpetual bond securities are treated as equity, according to CIMB. Sunac shares in Hong Kong rose to a record on Friday before slipping 3.2 percent as of 11:14 a.m. The stock has gained about 250 percent this year.

Tianjin-based Sunac is on its most aggressive expansion spree yet, agreeing last month to spend $6.6 billion on Dalian Wanda Group Co. assets including theme parks. While mainland investors cheered the deal, it triggered debt concerns at rating companies. Short sellers who targeted Sunac have pared back bets against the company after a bond sale helped to alleviate funding concerns and billionaire Chairman Sun Hongbin pledged to reduce leverage.

At a media briefing in Hong Kong on Friday, Vice President Gao Xi said the company had suspended land acquisitions for the rest of the second half and had a timetable for reducing debt levels.

Higher interest expenses, including for perpetual bonds, were among factors that dragged down core profit from a year earlier, according to CIMB.

The results included:

  • A 3.2 billion yuan increase in the category of “gains from business combination”
  • An increase in gross profit margin to 19.6 percent
  • An impairment provision of 1.11 billion yuan for an investment in the cash-strapped LeEco group

Sunac’s net debt-to-equity ratio has topped that of China Evergrande Group, formerly China’s most-indebted developer.

— With assistance by Emma Dong, and Wai Yi Shawna Kwan

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