Chinese Property Developer Shui On Land Faces A Liquidity Squeeze

Posted on 14/06/2011

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As you may have seen from my Twitter feed yesterday, I learned that I didn’t get (yet another) job that I recently interviewed for.  However, the upside of this is I can now share the presentation that I made at the second round of the interview process.  I was asked to perform a credit analysis on Shui On Land Ltd, a Chinese property developer listed on the Hong Kong Stock Exchange (under symbol HK:0272) and to present my findings in a ten-page Powerpoint presentation.  As I’ve previously discussed here, there are a number of indicators that currently suggest the Chinese property market may be a bubble.  My analysis of Shui On Land provides further evidence that this is the case.  The company has been haemorrhaging cash for many years, relying upon customer deposits, new bank debt and gains on property asset sales to finance its operations.  Returns on equity have fallen sharply, including or excluding the gains on property sales, despite the enormous boom currently underway in the Chinese property market.  It has huge commitments for debt repayments and capital expenditure in the next few years that are very unlikely to be met from operating cash flow, and is – along with its competitors – embarking on a massive growth binge just as the Chinese authorities begin to try to slow the property market.  An abrupt slow-down will likely leave Shui On Land with no means of meeting its obligations and many properties it is unable to sell.  Already it has been forced into the international convertible bond market as Chinese banks have refused to extend further straight debt.  The company will need to raise significant financing in the next few years if it is to survive, even if the property market continues to grow.  Equity holders will likely need to put-up further cash or face significant dilution from further convertible bond issues.  The full presentation is embedded below:

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Posted in: My Thoughts