Shui on Land Ltd Finances

8/6/2019 Shui on Land Ltd Finances

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Shui On Land Ltd

A leading property developer in China,responsible for the renowned ShanghaiXintiandi development.

Cayman Islands-incorporated with shareslisted on Hong Kong Stock Exchange withmarket capitalisation of US$2.3bn and EVof US$4.5bn.

Previously focused solely on the Shanghaimarket but has now expanded toChongqing, Hangzhou, Dalian, Wuhan andFoshan.

Operating income is generated from the

rental of the commercial property portfolio(23%) and from the sale of new residentialproperties (77%).

Investment portfolio is 45% office; 54%retail and 1% serviced apartments (by floorspace).

70%

10%

11%

9%1%

9%

7%

34%

19%

30%

Geographical Split, by Floor Area

Outer Chart: Investment Portfolio; Inner Chart: Work-in-Progress

Shanghai Wuhan Chongqing

Foshan Dalian Hangzhou


2/10

Positive economic outlook The Chinese economy is expected to grow 9.6% in 2011 and 9.5% in 2012. (IMF)

300m people expected to move from rural areas to cities in the next fifteen years.

The property market has grown strongly An estimated 5.1Mm2 of office space has been constructed in Shanghai since 2001 and a

further 1.8Mm2 is expected to be delivered in the next two years.

Office rents have risen, though Shanghai still remains good value versus other major cities.

However, there is evidence of speculative froth in the residential property market.

The property market is a particular source of risk. -World Bank, April 2011

Government is now trying to slow the property market

PBOC has increased base rates and bank reserve requirement ratios. Minimum down-payments for residential properties have been increased.

Shanghai & Chongqing have implemented annual property value taxes.

Property developer anti-profiteering rules are currently under consideration.

In the beginning of 2011, further restrictions on sales and property tax introduced in

Shanghai and Chongqing depressed the market once again. - Shui On Land Annual Report
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:22502137~pagePK:1497618~piPK:217854~theSitePK:318950,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:22502137~pagePK:1497618~piPK:217854~theSitePK:318950,00.html


3/10

Chinese Legal System

Property Law The state owns all urban land. Agricultural collectives own rural land.

The state sells land use rights (a leasehold), which is limited at 40yrs forcommercial use and 70yrs for residential use.

Anyone involved in land-related projects in China should be aware that the rightunder PRC law to use any plot of land in the PRC can be legally revoked at any

time with very short notice. - Freshfields Bruckhaus Deringer

Insolvency Law

Court-led process modelled upon US Chapter 11 and Chapter 7 legislation.

However, China lacks competent judges and local courts are heavily-influenced by

CCP members. - Sonnenschein Nath & Rosenthal

In recent times, China has been awash with re-IPO financing and leveragedstructures, such as convertible bonds and preference shares, where the debt isoffshore and the assets in China. Without any security onshore, they rank asequity holders below creditors, and have no prospect of returns in bankruptcy if the

debtor is insolvent.- PricewaterhouseCoopers
http://www.pwc.com/gx/en/banking-capital-markets/journal/journal-0709-chinas-enterprise.html%20http://www.chinalawandpractice.com/Article/1692632/Channel/9930/Revocation-of-Land-Use-Rights-in-China.htmlhttp://www.pbi.org/resources/extras/pli_extras/documents/1400_Lin_000.pdfhttp://www.pwc.com/gx/en/banking-capital-markets/journal/journal-0709-chinas-enterprise.html%20http://www.pwc.com/gx/en/banking-capital-markets/journal/journal-0709-chinas-enterprise.html%20http://www.pbi.org/resources/extras/pli_extras/documents/1400_Lin_000.pdfhttp://www.chinalawandpractice.com/Article/1692632/Channel/9930/Revocation-of-Land-Use-Rights-in-China.html


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Historical Financials

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

EBITDA/Cash Interest 2.2x 1.2x 1.1x 4.4x 5.9x 0.8x 4.6x 2.0x

Loan to Value 65% 31% 48% 7% 17% 22% 18% 28%

Net Debt/EBITDA 24.0x 16.4x 16.9x 0.5x 1.9x 10.9x 2.0x 8.4x

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Revenue & Earnings

Revenue Net IncomeFY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

0%

20%

40%

60%

80%

100%

Revaluations and Other Gains

Diluted NAV per share +26% per annum since FY05

Volatile credit metrics


5/10

Capital Structure

Convertible bonds are external to China, are structurally, contractually& term subordinated, and are unsecured.

Item Borrower Jurisdiction Security Interest Maturity Amount LTV %Cash -4905 -3.0 -10%Restricted Cash -1885 -1.1 -4%Total Cash -6790 -4.1 -14%Loans from associates & related parties China Unsecured Interest-free On demand 124 0.1 0%Loans from Minority Shareholders OpCo China Unsecured 105% PBOC On demand 462 0.3 1%Loans from Minority Shareholders OpCo China Unsecured Interest-free < 1yr 300 0.2 1%Current Bank Debt OpCo China Secured Various < 1yr 1644 1.0 3%Net Short-term Debt -4260 -2.6 -9%

Loans from Minority Shareholders China Unsecured 110% PBOC Undetermined 1653 1.0 3%Non-current Bank Debt China Secured Various Various 11539 7.0 23%Notes Hong Kong Unsecured 6.88% 2013 2945 1.8 6%Convertible Bonds Cayman Islands Unsecured 4.50% 2015 2117 1.3 4%Total Net Debt 13994 8.4 28%Equity Market Capitalisation 15223 9.2 31%Enterprise Value 29217 17.6 59%

EBITDAx

OpCo

OpCoOpCoFinCo

HoldCo

On 26 January 2011, SOD issued RMB3,500 million senior notes with a maturity of four years due on 26 January 2015 (the 2015 Notes). The

2015 Notes are denominated in RMB and settled in US dollars, and bear coupon at 7.625% per annum payable semi-annually in arrears.Security includes: Investment properties (RMBm17,091); Properties under development for sale (RMBm6,065); Bank deposits (RMBm1,885); andequity interests in certain subsidiaries.


6/10

High Historical Cash Consumption

Significant Future Cash Requirements

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10Profit Before Income Tax (RMBm) 189 1,758 878 2,785 3,687 2,725 3,894 4,367Losses/(gains) on sales of fixed assets (RMBm) 0 0 0 0 0 0 0 -23Losses/(gains) on sales of investments (RMBm) 0 0 0 -582 -845 -1,883 0 0

Investment write-downs/(ups) (RMBm) -63 -1,687 -607 -145 -577 -382 -536 -2,711Other asset write-downs/(ups) (RMBm) 0 0 0 0 -80 0 -6 0Losses/(gains) on fair value of derivative contracts (RMBm) 0 0 0 500 0 0 0 0Net interest charge (RMBm) 54 110 167 118 125 133 89 -42Depreciation & Amortisation (RMBm) 14 15 23 27 28 51 53 66

194 195 461 2,703 2,338 644 3,494 1,657-518 -1,621 -2,581 -1,744 -1,696 -351 -1,329 -3,792

-15 4 -91 -215 -312 -780 -339 -745-88 -165 -402 -616 -398 -833 -766 -827

-450 -391 -2,005 -1,300 -1,109 -2,113 -2,973 -3,241-877 -1,979 -4,618 -1,172 -1,177 -3,433 -1,913 -6,948

EBITDA (RMBm)Change in working capital (RMBm)Cash tax (RMBm)Cash interest (RMBm)Capital Expenditure (RMBm)Free Cash Flow (RMBm)

Total 5yrs13,153 1,614 6,321 4,225 9932,115 2,1152,945 2,945395 395462 462

19,070 2,471 6,321 9,285 9934,6739,906

33,649

Bank Borrowings (RMBm)Convertible Bonds (RMBm)Notes (RMBm)Due to Related Companies (RMBm)Due to Non-Controlling Shareholders of Subsidiaries (RMBm)Total (RMBm)Development costs for investment properties (RMBm)Development costs for properties held for sale (RMBm)Total Cash Requirements (RMBm)

JP Morgan estimate a total cash shortfall of RMBm22,285 in FY11 & FY12


7/10

Falling Occupancy, Yields & Returns

FY04 FY05 FY06 FY07 FY08 FY09 FY100%

5%

10%

15%

20%

25%

30%

35%

40%

Return on Equity

As Reported As Adjusted

FY06 FY07 FY08 FY09 FY1060%

65%

70%

75%

80%

85%

90%

95%

100%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Rental Yields & Occupancy

Occupancy(LHS)

Yield (RHS)


8/10

Outlook

Shui On Land plans to increase outputby 118% in FY11 & 24% in FY12.

Key competitors plan to grow sales byan average of 45% in FY11.

Shui On Land expects to spend

RMB32.9 on capex & working capital inthe next two years.

The working capital requirements of thisgrowth require an estimated netRMB22.3bn in external financing.

Assuming this funding is debt-financed,leverage is expected to rise from 28%

LTV to 47% by FY12.

Shui On Land, and all its main competitors, are accelerating their growth

as the Chinese government begins to tighten policy.

FY07 FY08 FY09 FY10 FY11E FY12E

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Shui On Land Business Plan

ResidentialProperties

CommercialProperties

Msqm


9/10

Security Valuation

Trades at a 3% discount to fairvalue.

Trades at-the-money.

Convertible bond is RMB-

denominated but settles in USD.

Callable and puttable at par fromSept-2013.

Little yield advantage common

stock currently pays 3.18%.

Valuation doesn't reflect any risk of a near-term funding shortfall.

Key Security MetricsCoupon 4.5%Maturity Sep-15Duration 4.04Yield to Maturity 3.22%Yield to Worst 2.67%Conversion Price 4.87

Current Share Price 3.43Parity 71.9%Premium/(Discount) to Parity 46.4%Delta 0.45Current Bond Price 104.75Bond Floor 97.68Premium to Bond Floor 7.75%

Fair Value 107.99Premium/(Discount) to Fair Value -3.00%


10/10

Summary

The company has a strong track record and owns some leading real estate

developments in Shanghai. Rental yields, occupancy levels and returns on equity have all been trending down in

the last few years as prices have risen.

Signs of a bubble developing in the residential property market.

The Chinese authorities have taken steps to slow down the property market.

A record amount of floorspace is due to be delivered over the next few years, both byShui On Land, and by the major competitors.

The business is cash flow negative existing creditors rely on property priceappreciation and new investors to repay upcoming debt maturities and committedcapital expenditures.

Convertible bond is an offshore, HoldCo, unsecured, subordinated instrument. Creditorrights in insolvency likely to be limited.

The company has no formally disclosed capital structure policy.

Leverage expected to increase significantly in the next two years.

Shui on Land Ltd Finances

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