The company plans to list a commercial real estate investment trust in Shanghai, making it Hong Kong’s first developer to issue a C-REIT on a Mainland stock market

Key Takeaways:

• New World Development’s application to issue a C-REIT in Shanghai has received a notice of acceptance from the Shanghai Stock Exchange
• The struggling Hong Kong developer expects to receive net proceeds of up to 3.2 billion yuan from the listing

By Lau Chi Hang

History is repeating itself in Hong Kong’s real estate market that, in many ways, has defined the city’s economic cycles over the last century.

That reboot is playing out in one of Hong Kong’s top property companies, New World Development Co. Ltd. (0017.HK). In the 1980s, the company’s second-generation successor, Henry Cheng, took the reins from his father, Cheng Yu-tung, and embarked on an aggressive acquisition spree in his bid to one-up his famous father.

But a property market correction in the late 1980s, coupled with a towering debt load from expanding too quickly, soon caught up with the younger Cheng, forcing his father to come out of retirement. The patriarch ultimately offloaded the company’s assets on a massive scale to deleverage, steering the conglomerate through a period of recovery before its return to financial health.

Now, more than three decades later, third-generation heir Adrian Cheng is providing a repeat trip down the road his father took. After taking the helm at New World, he aimed to surpass both his father and grandfather by aggressively expanding the empire. His efforts included heavy investment to build the K11 brand across Hong Kong and across the border in Mainland in China. That building spree is highly visible today in multiple shopping malls in both Hong Kong and on the Mainland, crowned by a massive HK$20 billion ($2.55 billion) bet on the 11 SKIES development at Hong Kong International Airport.

But then Adrian’s grandiose dreams began to follow in the footsteps of his father, as both the Hong Kong and Mainland property markets began to slump after 2020, dragging down New World's property sales and shrinking the value of its assets. Making matters worse, two towers the company was building in 2021 in Hong Kong’s Tai Wai district failed to meet concrete strength standards, forcing a demolition and reconstruction that ultimately cost the company HK$1.5 billion.

Adding to the company’s woes, the U.S. Federal Reserve began hiking interest rates in 2022, compounding the burden on the already highly leveraged New World. Henry Cheng had no choice but to take back control from his son. Taking a page from his own father, the older and wiser Cheng immediately embarked on a deleveraging campaign to try to undo some of the damage done by his son.

REIT to the rescue

The most practical way to reduce debt is by selling off assets, which is what Henry Cheng has been doing. Last week, New World announced its latest move in that direction by unveiling a plan to spin off some of its assets as a commercial real estate investment trust (C-REIT), which would be listed across the border on the Shanghai Stock Exchange. The company said it has submitted its application to the China Securities Regulatory Commission (CSRC) and the Shanghai Stock Exchange, and received a notice of acceptance from the latter.

New World said it will hold 20% of the C-REIT and will receive net proceeds of 3.24 billion yuan ($483 million) from the spinoff. The C-REIT's underlying assets consist mostly of New World’s K11 properties in Hong Kong and Shanghai, with a total floor area of 130,000 square meters. The REIT is also noteworthy as it would be the first from a Hong Kong property developer listed in Shanghai, which has become popular for new REIT offerings by domestic developers struggling under heavy debt loads.

That spinoff may be just the beginning of New World’s new cash-raising drive. The day after the announcement, rumors surfaced that the company was in talks with Singapore's UOL Group to sell 50% of its Hyatt Regency hotel in Hong Kong’s busy Tsim Sha Tsui commercial district for HK$1.5 billion.

Debt reduction measures

Such asset sales conform with New World’s plan to reduce its debt using seven measures, which it rolled out last year. These include selling off projects under development, advancing asset disposal plans, unlocking opportunities presented by its land holdings, boosting returns on its investment properties, improving its returns on capital and operational spending, suspending dividend payouts and perpetual bond interest distributions, and better managing its treasury.

By the end of June last year, the company had secured HK$88.2 billion in financing agreements. Last November, it launched an offer for nearly HK$20 billion of its perpetual bonds and guaranteed notes, which succeeding in slashing its debt by HK$9.1 billion.

Extending debt repayment periods has also offered temporary relief, though the company’s debt burden remains quite high. Its net debt fell from HK$130.8 billion at the end of June 2023 to HK$120.1 billion by June last year, representing an improvement, albeit modest. But then the figure began to grow again, rising to HK$122.7 billion by the end of last year.

Now, the core strategy still appears to be selling off the family jewels to lower debt to more manageable levels. Whether these assets can be successfully unloaded for the values New World is seeking ultimately hinges on the fickle property markets in Hong Kong and across the border in Mainland China.

Hong Kong rebound

The Mainland property market remains largely in the doldrums, but Hong Kong has shown recent signs of improvement. The city’s residential price index compiled by its Rating and Valuation Department climbed from 287.2 in January 2025 to 321.5 this July, up 11.9% over that time.

A recovery for housing prices is crucial for New World. Most importantly, such a reversal would end its shrinking asset values, helping it avoid further asset impairment write-downs. Also important, such a reversal would create more activity from home buyers, many now sitting on the sidelines over concerns that values will keep falling.

On the commercial property front, an economic rebound in Hong Kong, paired with a recent jump in tourism from Mainland China, has brightened the city’s retail landscape and boosted occupancy rates in shopping malls. Aside from generating higher rental income for its shopping malls, the trend paves the way for New World to stop taking further asset impairment charges on its commercial property portfolio.

But none of that addresses New World’s exposure to a Mainland housing market that remains stubbornly anemic, despite a steady stream of government stabilization measures. Still, its destocking efforts on the Mainland are gradually bearing fruit, and a nascent recovery in domestic consumption is allowing the company to securitize its mall assets into C-REITs, allowing it to cash out like it’s doing now.

In summary, Hong Kong’s property market appears to be stabilizing, helping with New World's agonizing task of selling off vital assets to pay down debt. That means the company is likely to weather this latest storm, though its status as one of Hong Kong’s leading developers may take longer to recover.

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The property developer received regulatory approval this month to issue a commercial real estate investment trust, or REIT

Key Takeaways:

• Seazen plans to raise funds through a real estate investment trust whose main assets will comprise two of its shopping malls
• The plan, which has been approved by the Chinese securities regulator, is expected to raise 1.5 billion yuan in much-needed funds

By Lau Chi Hang

Call it a timely lifeline from the same government that sent China’s property developers into crisis when it abruptly cut off their access to easy credit with its “Three Red Lines” policy in 2020.

In a strategic effort to stabilize the market, Beijing has been aggressively advocating development of real estate investment trusts (REITs) to help debt-stricken developers raise much-need cash. The program allows developers to monetize their existing properties by securitizing them as REITs, then using the cash raised to alleviate their heavy debt obligations. REITs also offer another option for investors still wishing to bet on the property sector, paying out their profits as regular dividends.

Since the milestone launch of the program in 2021, some 80 new REITs have helped companies raise a massive 220 billion yuan ($32.8 billion) in combined funds. One of the latest is Seazen Group Ltd. (1030.HK), which this month announced plans for a new REIT anchored by two of its large shopping malls.

$230 million fundraising

The two malls are Seazen’s Qidong Wuyue Plaza and Tianning Wuyue Plaza, both located in East China’s Jiangsu province, according to its announcement. The pair of properties have gross floor areas of 80,353 square meters and 123,394 square meters, respectively. The company expects to issue 500 million fund units, with a target of raising about 1.54 billion yuan ($230 million).

The appointed REIT manager has obtained a formal “no-objection” letter for the listing from the Shanghai Stock Exchange, as well as an official registration approval from China’s securities regulator. Seazen said fundraising activities will commence within the next six months, with the company holding 34% of the overall offering.

When compared to other heavily indebted developers, Seazen's situation is far better. Most importantly, its debt burden is considerably lower than its peer.

Seazen’s latest financial results show its net debt-to-equity ratio stood at a manageable 57.1% at the end of June this year. With short-term liabilities amounting to 10.8 billion yuan and 7.85 billion yuan in cash, the company's immediate funding gap is less than 3 billion yuan. That means the fresh 1 billion yuan it expects to raise from the REIT should be useful in helping to meet its short-term financial needs.

Misappropriated funds

Seazen's on-balance sheet debt doesn’t look bad on the surface, but some investors may remain concerned about potential undisclosed problems. That wariness owes in no small part to past related-party transactions between the company and its property management subsidiary, S-Enjoy Service Group (1755.HK).

The event that raised eyebrows traces back to March last year, when S-Enjoy abruptly delayed the publication of its financial results and saw its shares suddenly suspended from trading. Alarming discrepancies were subsequently revealed across five of its corporate bank accounts, involving massive intercompany lending totaling about 7 billion yuan improperly provided to Seazen.

In response, S-Enjoy executive director Yang Bo resigned from all his positions at the company. Later, three other non-executive directors resigned as well.

Investors suspect that Seazen had run into severe cash flow constraints, which led it to hit up its own property management arm in a desperate bid to ease its mounting financial pressure. While Seazen subsequently returned the funds, the broader market's confidence in management was significantly undermined, raising doubts about the company’s true financial health and accuracy of its past financial statements.

Falling property sales

Like its peers, Seazen's situation continues to deteriorate in lockstep with China’s sputtering property market. The company’s revenue sank 20.2% year-over-year to 17.69 billion yuan in the first half of 2026, while its profit fell 12.1% to 608 million yuan.

Seazen has tried slashing operating costs to stabilize its ship. Its corporate sales and marketing expenses fell by nearly 32% year-on-year to 670 million yuan in the first half of this year, and its administrative costs fell 12.7% to 1.18 billion yuan. Without such cuts, the company’s falling profitability would have been even worse.

Seazen’s core residential property business continues to decline. In the first seven months of this year, its total contracted sales plunged 40% to 7.22 billion yuan from 11.98 billion yuan a year earlier. Over that period, the gross floor area of its sales also dropped 25% to 1.17 million square meters from 1.55 million square meters the previous year.

The company emphasizes that revenue from its commercial property operation is growing, reaching 7.11 billion yuan in the first half of this year, up 2.4% year-over-year. That part of its business now accounts for more than half of its revenue, a sharp reversal as the commercial property market fares comparatively better than the residential market that used to be Seazen’s biggest breadwinner.

In the first half of this year, its shopping mall portfolio expanded to 181 properties, up by seven from the 174 properties it had a year earlier. But revenue from those commercial properties rose by less than 3% year-over-year, suggesting actual average revenue per mall definitively declined this year.

While the company’s REIT spinoff, combined with its nearly 8 billion yuan in cash, is roughly enough to service its short-term debt obligations, the fact remains that Seazen still holds a massive 44.63 billion yuan in outstanding long-term borrowings. On the one hand, the company currently operates nearly 200 completed shopping malls that could potentially be used as assets for new fundraising. But it’s impractical to think it will be able to keep spinning off more of those as REITs over the short term.

What’s more, the value of its real estate assets continues to shrink, forcing it to record a valuation loss of 203 million yuan in the first half of this year. Such write-downs are likely to continue in the current market where prices continue to fall due to oversupply, even as the central and local governments take new steps to support prices. If that continues, which seems inevitable, the company's net debt-to-equity ratio – currently its pride and joy among its peers – is bound to creep upward.

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Latest earnings figures show the real estate conglomerate remains mired in a liquidity crisis, while facing a court test and an impending payment crunch

Key Takeaways:

• At end of June, Agile had nearly $6.25 billion in borrowings due within one year
• The value of Agile’s property pre-sales fell by more than a quarter in the first half, while its net loss widened by 10%

By Lee Shih Ta

After six years of property crisis, some of China’s distressed developers are starting to claw their way out of danger by restructuring their debt. But Agile Group Holdings Ltd. (3383.HK) is still trying to strike a deal with offshore creditors, leaving its long-term survival in doubt.

The real estate conglomerate’s half-year earnings report highlights the scale of the challenge, with shrinking sales, a widening loss and a pressing debt load, with borrowings due within one year approaching 42 billion yuan ($6.25 billion).

Meanwhile, the firm faces a critical test in mid-October when it returns to court to fight a wind-up order filed by one of its creditors.

The firm’s total borrowings stood at 44.98 billion yuan at the end of June, down 1.82 billion yuan from a year earlier, but current debt borrowings with near-term maturities accounted for more than 90% of the total. Cash and bank balances had fallen about 19% to 4.51 billion yuan, with cash and cash equivalents at just 3.29 billion yuan and another 1.22 billion yuan classified as restricted cash. The company’s net gearing ratio also rose to 364.9% from 229.6% at the end of last year.

The company also disclosed that principal and interest payments on certain bank borrowings, other borrowings and senior notes had not been made on their scheduled dates, triggering cross-defaults. As a result, Agile acknowledged material uncertainties over its ability to continue as a going concern, with its future hinging on debt restructuring, loan renewals, property sales and asset disposals.

Agile’s debt crisis intensified in 2024 when it failed to pay interest on $483 million of 6.05% senior notes due in 2025 after a grace period expired. A sweeping debt restructuring process was launched after the default but more than two years later the company is still negotiating with major offshore creditors. It now aims to formulate a restructuring plan for their approval in the second half of this year.

Legal jeopardy

The court proceedings are adding to the time pressure. In December last year, Agile received a winding-up petition filed by Melco (Zhongshan) Business Management Co. Ltd. with the Hong Kong High Court over an ill-fated theme park venture. Agile said it would fight the claim for outstanding payments of $18.59 million and 2.35 million yuan while accelerating its debt restructuring. A court hearing was adjourned in June until Oct. 12.

Agile’s business is not generating enough cash to ease the debt pressure. First-half revenue fell 20% to 10.86 billion yuan, while the firm’s net loss widened 10% to 8.83 billion yuan. The gross loss also swelled to 2.05 billion yuan from 919 million yuan a year earlier, while the property development business logged an operating loss of 5.28 billion yuan.

More critically, the sales that Agile relies on to replenish its cash flow kept shrinking. Its first-half pre-sold value fell 26.5% year on year to just 3.8 billion yuan, while pre-sold gross floor area declined 26.1%. Recognized revenue from property development also fell 37.7% to 3.81 billion yuan. To tackle the problems, the company has proposed measures including accelerating pre-sales, collecting receivables, refinancing and disposing of non-core assets, although cash collected from property sales remains its main source of improving liquidity.

But Agile’s first-half pre-sales are dwarfed by its 41.97 billion yuan in short-term borrowings. And the fall in its sales over the six months was steeper than the roughly 14% to 16% drop for China’s top 100 developers overall. Among other distressed developers, Country Garden (2007.HK) reported a roughly 15% decline in contracted sales in the first half, while Sunac China (1918.HK) posted an outsized drop of more than 50%. Agile’s decline was not the biggest but was enough to put its recovery prospects under pressure when coupled with its debt woes.

Delayed debt restructuring

Agile is lagging some of its distressed peers on debt restructuring, with an approved plan still pending, while Sunac China has finished restructuring its offshore liabilities and Country Garden’s process is ongoing.

Agile can take some comfort in the relatively stable revenue from property management, which slipped just 5.7% to 6.04 billion yuan in the first half, accounting for 55.6% of group revenue and surpassing revenue from property developing. The segment recorded an operating profit of 429 million yuan, but gross floor area under management declined 4.6%, leaving the business unable to offset the drag on earnings from property development.

Chinese government data showed that sales of newly built homes nationwide fell 13.1% by value in the first seven months of this year, while investment in property development dropped 19.2%. Agile’s performance was even weaker, with pre-sales in the first seven months totaling just 4.29 billion yuan, down 24.6%. Pre-sales in July alone amounted to just 490 million yuan.

Any upturn in the property market is unlikely to rescue Agile from its woes in the short term. Its shares have fallen another 40% this year to HK$0.16, for a price-to-sales ratio of just around 0.03, a similar multiple to Country Garden’s. The immediate focus for investors is the October court hearing. But the best case scenario for Agile, even with eventual progress on debt restructuring, looks to be a prolonged period of balance-sheet contraction and deleveraging.

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"With things like this in China, there's always an element of surprise to some extent simply because the system is so opaque that nobody knows what's going on." – on the sudden legal actions in the Evergrande case

Key Takeaways:

• Chinese state subsidies driving the humanoid robot sector are likely to prompt protectionist steps in the West
• The coordinated liquidation of Evergrande and sentencing of its founder reflect Beijing's priority of maintaining social stability

By Rene Vanguestaine and Doug Young

We're currently witnessing two very different, yet equally telling, chapters of China's state-managed economy playing out simultaneously. On one hand, Beijing is heavily subsidizing a futuristic humanoid robot industry, utilizing a familiar playbook that has previously upended global markets. On the other, the government is finally closing the book on fallen real estate titan Evergrande (3333.HK), liquidating it after years of careful, behind-the-scenes management. These two developments perfectly illustrate how the Chinese government pulls the levers of its economy to manufacture technological dominance while engineering social stability.

A recent eye-opening report from the Financial Times revealed exactly who is buying up many of the dancing and leaping humanoid robots suddenly coming out of China. Unsurprisingly, it turns out the answer is the government. A sizable portion of these companies' revenues comes from government-owned training centers. These centers buy the robots, generate vast amounts of operational data using them, and send that data back to the manufacturers to rapidly improve their performance. In one case, a company called Leju received 45% of the revenue for its flagship humanoid model last year directly from these government centers.

In China's humanoid robot industry, this kind of comprehensive state support undeniably works. Chinese companies receive substantial subsidies at the central, provincial, and local government levels. Throwing such substantial amounts of money directly and indirectly at these efforts helps to build a highly efficient supply chain and ecosystem. Inevitably, some companies thrive in this environment and decide to conquer the world, armed with highly competitive prices.

But this common refrain isn't going to make robot makers outside of China very happy. We've seen this exact Chinese playbook unfold in the solar and EV industries. Western governments repeatedly complain about unfair state support, even if it isn't always the most efficient use of capital. In response to this new wave of robots, we expect to see inevitable pushback. Governments in the U.S., Europe, and Japan will likely take belated measures to protect their domestic manufacturers, such as Tesla (TSLA.US) with its Optimus humanoid, from total obliteration.

Despite the glitzy videos of kung fu robots and machines breaking human running records, the reality is less glamorous. Away from the hype, these robots may still be very prone to making mistakes. There's not a whole lot of use for a kung fu robot in daily life. We believe the industry will split into two paths: industrial and personal use. On the industrial side, there are plenty of applications that can tolerate occasional, or even multiple, failures because the risk of harming humans is incredibly low.

However, on the personal usage front, we're far from mass adoption. All it will take is one spectacular incident — we wouldn't call it an accident, but an incident — where a robot beats up an elderly person in a hospital bed, for the industry to face massive trouble. We shouldn't forget how the Segway at the turn of the century was supposed to revolutionize the world. Similarly, the low-altitude economy of flying machines lost its momentum the moment a small plane crashed into a building in Beijing. Visionaries will always promise that technology will make life entirely peachy, but the safeguards simply aren't there yet for mass adoption.

A carefully orchestrated end for a real estate giant

Moving from the industries of tomorrow to the problems of yesterday, we're also watching the final act of a long-running saga in China's suffering property sector. In late August, Chinese courts suddenly found Hui Ka Yan, the founder of Evergrande, guilty of massive fraud and financial mismanagement, sentencing him to life in prison. Almost immediately after, a Chinese court accepted a bankruptcy petition to liquidate Evergrande — a move the company's creditors have been requesting forever.

Many are speculating that the close timing of these two events isn't a coincidence. With things like this in China, there's always an element of surprise because the system is so opaque that nobody truly knows what's going on behind the scenes. But in reality, everyone should have expected Hui to end up in serious trouble eventually.

Evergrande defaulted back in 2021 after years of growing skepticism in Western financial markets regarding the health of its finances. The real estate sector's troubles actually began before Covid, when the central government tightened borrowing rules to rein in companies that were building endlessly with cheap money in a market where everyone believed prices would always rise. When order comes to a bubble, it typically crashes.

Over the last five years, the government has slowly worked to stabilize the sector. Because the overriding concern in China is always potential social impact, Beijing never moves aggressively. Instead, the government took its time progressively transferring domestic assets to domestic creditors, local governments, and unfinished housing projects. Now, it appears the government feels the fallout has been contained enough to let the system work. This means forcing shareholders, certain creditors, and banks to absorb the remaining losses. Government-owned banks at various levels, of course, have less visible back-door channels to absorb these hits.

From a political and public relations standpoint, orchestrating the liquidation alongside Hui's sentencing makes perfect sense. It ensures that any remaining victims, such as those still waiting for their apartments, see that this isn't the government's fault. They can pin it all on the "bad guy." As detailed in previous reports on Evergrande's liquidation, this marks the first time Chinese courts have accepted a liquidation petition for such a major company. Will this trigger a wave of liquidations for other big companies like Country Garden (2007.HK) or Vanke (2202.HK; 000002.SZ)? We think there will have to be some more, but it's going to be a very slow process. The government's primary concerns remain employment and local tax revenues. Some companies will be cleaned up if the social impact is deemed nil, but others, we're afraid, will be kept on life support to maintain stability.

Its onshore and offshore bonds now restructured, the developer must still navigate its massive bank debt, likely requiring more asset liquidations

Key Takeaways:

• Several creditor banks may be moving to seize a key Hong Kong property owned by Shimao, whose short-term debt approached 120 billion yuan at the end of last year
• The property developer’s stock has plummeted to an all-time low, dragging down its market cap by 99% from its peak

By Cheng Shui Tong

The Sheraton Hong Kong Tung Chung Hotel and Four Points by Sheraton was a crowning jewel for Shimao Group Holdings Ltd. (0813.HK) at its opening in 2020, showcasing the developer’s move beyond the Mainland China property market. Boasting over 1,200 rooms, the property overnight became the second-largest hotel in Hong Kong by room count.

Fast forward six years, when new reports say that Shimao, caught up in China’s prolonged property slump, has defaulted on a HK$4.5 billion ($5.77 million) bank loan. And a consortium of lenders behind that loan — including HSBC, BOCHK and Bank of East Asia — has reportedly entered discussions to seize the trophy Hong Kong property.

Incredible shrinking company

Things were far different when the Tung Chung hotel complex opened in 2020. Shimao's Hong Kong-listed stock was trading at record levels, propelling its market capitalization past HK$150 billion. But as the company’s debt crisis began in 2021, its stock went into a devastating tailspin. Now relegated to penny status, the company's market cap sits at a paltry HK$800 million, down more than 99% from its peak.

This precipitous collapse stems from the company’s mounting debt crisis and lackluster property sales, mirroring the fate of many developers being hammered by a prolonged downturn in China’s property market. Like its peers, Shimao’s difficulties have left it with insufficient financial resources to service its massive liabilities.

While the company’s 2025 financial report boasted a return to the black with a 14.47 billion yuan net profit, the feat was mostly an accounting mirage made possible by a 69.5 billion yuan gain from its offshore debt restructuring.

Its underlying operations remained dismal, as its revenue for the year tumbled 53% to just 28.4 billion yuan. Contracted sales clocked in at 24 billion yuan, down 30% year-over-year. The new year hasn’t been any better, with sales deteriorating further to 5.73 billion yuan in the first four months of 2026, off 36.8% from the same period last year.

By the end of 2025, Shimao’s total liabilities stood at 182.3 billion yuan. While that was a 69.8 billion yuan improvement from the previous year, a closer look reveals a looming threat in the form of 118.6 billion yuan in short-term debt coming due in the next 12 months. The company had accumulated 92.5 billion yuan in missed loan payments through the end of last year. And, with just 12.1 billion yuan in its coffers, it looks severely ill equipped to cover its massive upcoming near-term obligations.

Its auditor issued a disclaimer of opinion regarding Shimao's ability to continue as a going concern. It also warned that a myriad of pending lawsuits and arbitration cases against the company casts a shadow of uncertainty over its broader viability.

Striking gold in Hong Kong equities

Shimao founder Hui Wing Mau was born in South China’s Fujian province in 1950. After moving to Hong Kong in the 1980s, he claims to have made his first fortune in the local stock market. He later funneled that bounty back to his hometown to invest in textile factories and real estate. By the 1990s, Hui had pivoted to luxury residential and commercial property development. In the 2000s, he built landmark luxury projects like Shimao Riviera Garden in Shanghai, famously enlisting Hong Kong movie star Tony Leung for a promotional campaign — a marketing coup that became the talk of the town.

Shimao subsequently went national, with contracted sales topping the 300 billion yuan mark at its peak in 2020. That same year, the company splashed out to acquire Fujian Fullsun Group, a financially distressed developer also from Fujian. That purchase ultimately proved toxic, as Shimao found itself dragged down by Fullsun's massive hidden debts — quietly laying the groundwork for its own demise.

When China rolled out a series of draconian financing constraints aimed at reining in debt-happy property developers in 2021, Shimao's highly leveraged business took a severe beating, leading to rumors of an imminent default that year. In March 2022, its auditor at the time, PricewaterhouseCoopers, abruptly resigned, delaying the release of its financial results. That kicked off a punishing 16-month trading suspension of its Hong Kong shares, as the company officially spiraled into default.

As it struggled with its debt load, Shimao embarked on a protracted restructuring to sort out its billions of dollars in offshore and onshore financial obligations. In early 2024, it finalized a restructuring plan backed by 79% of its offshore creditors. The landmark agreement formally relieved it of $11.5 billion in offshore debt along with $1 billion in accrued interest, which was cleanly converted into $8 billion in new notes with maturities of 6 to 8.5 years, combined with $4.5 billion in one-year mandatory convertible bonds.

Back at home, Shimao successfully negotiated with creditors in late 2025 to secure substantial maturity extensions for its 23.8 billion yuan in onshore obligations, rolling some deadlines back as far as 2035.

Dodging immediate liquidation

All told, Shimao may have temporarily dodged the bullet of immediate liquidation through its sweeping debt overhauls. Still, the overarching pressure it faces has far from dissipated. Adding to its headaches, China's property market remains mired in its slump, weighing on Shimao's sales. Lacking capital, the company has little or no cash to replenish its land bank for future projects, effectively mortgaging its future as it tries simply to survive in the present.

In its scramble to avert collapse, the company has had no choice but to start liquidating its investment properties. This year, it offloaded six floors at The Center, a prime office building in Hong Kong’s Central financial district, to DBS Bank, pocketing HK$2.62 billion. It also shed a single floor at the Lippo Centre in Hong Kong's Admiralty district for HK$253 million — taking a nearly 50% haircut on both sales compared with what it originally paid.

What’s more, the Shenzhen Longgang land parcel that Shimao secured in 2017 — originally envisioned as the site for China's tallest skyscraper — stalled entirely due to lack of funds. The plot was ultimately sold to state-owned China Resources Land (1109.HK) earlier this year.

The potential seizure of the Tung Chung hotel is also just the latest chapter for that property. Shimao commissioned agents to quietly shop the asset as early as 2023. But even after the asking price was slashed from HK$6 billion to HK$4.5 billion, the massive asset has yet to attract a buyer, leaving it vulnerable to the reported seizure.

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The debt-laden property developer’s latest annual results show it returned to the black in a big way with a profit of more than 3.2 billion yuan last year

Key Takeaways:

• Country Garden reported a return to the black last year, though its entire profit stemmed from non-cash gains as part of its debt restructuring
• The developer recorded a gross loss of 43.1 billion yuan on its core property sales business last year

Lau Chi Hang

Country Garden Holdings Co. Ltd. (2007.HK), the property developer once teetering on the brink of bankruptcy, is seeing some glimmers of daylight after its near-death experience. Its latest annual results show it posted a surprising profit of 3.26 billion yuan ($472 million) last year, marking a huge leap forward from its 32.8 billion yuan loss in 2024.

While that headline profit looks good at first glance, the improvement was entirely devoid of any new growth, owing instead to non-cash gains of 82.1 billion yuan from its debt restructuring. In effect, the restructuring delivered purely paper profits, not a turnaround in its core operations. The reality is that property sales remain very sluggish, with revenue from property sales plunging 38.7% year-on-year to 154.9 billion yuan last year. And after including 44.5 billion yuan in impairment provisions for properties under construction and completed properties held for sale, the company reported a gross loss of 43.1 billion yuan for the year.

Independent auditor Zhonghui Anda CPA also got in its own two cents by issuing a disclaimer of opinion in the latest report. It pointed out that 107.6 billion yuan of the company’s 148 billion yuan in borrowings were classified as current liabilities, while the company’s cash and cash equivalents stood at just 18.7 billion yuan.

It said those factors, combined with several others, including pending litigation, “indicate the existence of material uncertainties which may cast significant doubt on the group’s ability to continue as a going concern and, therefore, that the group may not be able to realize its assets and discharge its liabilities in the normal course of business.”

Re-inclusion in global indexes

While last year's results suggest Country Garden is far from out of the woods just yet, the threat of creditor actions and winding-up petitions against it has eased for now. That follows the passage of a restructuring plan by the end of last year for all $17.7 billion of the company’s offshore debt and nine onshore bonds totaling 13.77 billion yuan. Country Garden's borrowings have also decreased from 253.5 billion yuan to 148 billion yuan as of the end of last year.

The restructuring of most of its debt has caused the investment community to start taking a fresh look at Country Garden. Global ratings compiler MSCI reinstated the company into its MSCI China Small Cap Index in February, making it the sole property stock among 21 new additions. In March, FTSE Russell also included Country Garden in its indexes, making it the only Chinese property developer with that distinction.

Inclusion in global indexes means numerous funds worldwide will acquire Country Garden shares based on index weightings, boosting the stock’s liquidity and potentially lifting its price. That’s particularly significant since shares are a key component of Country Garden's restructuring plan, which involves convertible bonds. Thus, being added to major indexes provides a substantial vote of confidence in the company and its outlook.

Rehiring veterans

On the operational front, reports surfaced last month that Country Garden is reaching out to some veteran employees laid off in recent years, seeking to bring them back into the fold. The company said it’s targeting only a few specific, critical rehires to fill gaps. But the mere act of any hiring is a positive signal, potentially indicating the restart of stalled projects whose revival would improve the company's cash flow.

Actively recruiting also signals the company now has the resources to use for new tasks, and isn’t just letting headcount dwindle through natural attrition to save money. Such hiring is also hardly the behavior of a company on the verge of collapse, showing Country Garden's liquidity constraints have eased at least somewhat after being in a state of crisis over the last two years.

Policy tailwinds are also supporting the property market. The Government Work Report issued during this year's annual meeting of the National People’s Congress in March emphasized the need to focus on stabilizing the real estate market, and systematically promoting city-specific policies to control incremental volume, reduce inventory and optimize supply. In fact, the central government has been rolling out new measures nearly nonstop since last year to try to stabilize the housing market, with many regions easing home-buying restrictions.

Concurrently, the government has also refined a “whitelist” mechanism that makes it easier for developers to get financing via bank loans once their projects are included on the list. Bank loans for whitelisted projects can not only be extended but can also have their principal repayment deferred. Moreover, banks don’t need to classify such loans as non-performing assets in the short term. Such terms significantly lighten the debt repayment pressure on developers, allowing them to focus on project completion and delivery that can help to ease their liquidity pressure.

The whitelist also serves to boosts confidence in property developers, putting home buyers at greater ease when making purchases. Seeing such government backing, these companies’ creditors may also become more willing to discuss debt restructuring.

Phoenix awaiting rebirth

Country Garden's property sales, while still far below their peaks, have, upon closer examination, begun to stabilize. A review of its regular reports shows its monthly sales have consistently remained within the 2.2 billion yuan to 2.7 billion yuan range over the last four months.

Some may still complain that the company’s current sales are less than one-tenth of their peak of 46.65 billion yuan in February 2021. But the more important reality is that the company has managed to stabilize its sales despite all the current factors working against it, indicating its business may have begun to bottom out.

It goes without saying that China’s property stocks will follow the future direction of the real estate market. The government is currently promoting policies to stabilize that market, and a growing number of property developers are successfully restructuring their debt. While sales have yet to rebound, there are still initial signs that a bottom could be near.

While more time will be needed for a true recovery, Country Garden, having restructured its debt, has both significantly reduced its debt burden and lowered its interest expenses. At the same time, extension of its debt maturities has given it time to reorganize its business. If things continue to go smoothly, Country Garden may, like the phoenix in its corporate logo, rise once more from the ashes as the Chinese property market gradually warms.

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The conglomerate warned that impairment provisions tied to its real estate investments, along with other charges, caused its net loss to balloon last year

Key Takeaways:

• Fosun lost up to 23.5 billion yuan last year, as it took major impairment provisions on its real estate holdings and intangible assets related to some non-core businesses
• The warning reveals that despite years of downsizing, Fosun remains vulnerable to China’s prolonged property downturn

By Warren Yang

Fosun International Ltd. (0656.HK) has been busy downsizing these last three years, shedding non-core businesses after an aggressive overseas expansion push plunged it into a high-profile liquidity crisis in 2022 and 2023. Unfortunately for Fosun, the assets it retained still include sizable Chinese real estate holdings, and it’s paying a hefty price for remaining exposed to one of the most vulnerable spots in the country’s economy right now.

Last Friday, billionaire Guo Guangchang’s conglomerate warned that it expects to report a staggering net loss of as much as 23.5 billion yuan ($3.3 billion) for 2025, far larger than its 4.35 billion yuan loss for 2024. It attributed the massive loss to asset impairments.

For starters, it wrote down its properties and booked related impairment charges as China’s never-ending real estate downturn continues to take its toll on home and commercial building values.

“During the 2025 financial year, the real estate industry has continued in a downward cycle with overall weak market demand, exerting pressure on the group’s real estate business segment,” Fosun said. “In accordance with the principle of prudence, the company has made substantial asset impairment provisions for certain real estate projects with impairment indicators.”

Fosun subsidiary Shanghai Yuyuan Tourist Mart (Group) Co. Ltd. (600655.SH) — whose vast operations span more than 10 segments, including jewelry, fashion and real estate — accounts for about 55% of Fosun's provisions, according to a Bloomberg report citing unnamed people familiar with the situation. Last month, Yuyuan flagged a net loss of 4.8 billion yuan for 2025 in its own profit warning. That led Citi to slash its target price for Fosun’s stock by 16% to HK$5.60, still well above the company’s Tuesday close of HK$3.84.

Fosun also wrote down goodwill and intangible assets related to some non-core businesses. Basically, that means the company conceded that those assets may never generate expected returns that can justify premiums it paid when it acquired them during its buying binge in the 2010s.

Fosun didn’t provide the exact size of all its provision charges. But the magnitude of its annual loss means they must be massive enough to not only wipe out the 661 million yuan net profit it made in the first half of last year, but then push it more than 20 billion yuan into the red. Put differently, the company’s projected loss for 2025 amounts to more than a quarter of its total revenue for the first six months of the year.

Property exposure

Fosun’s real estate exposure that was a major factor behind its 2025 loss includes residential and commercial properties, which are both grappling with falling sales and values.

A contracting population and weak economy in an uncertain employment environment are suppressing housing demand, keeping inventory at high levels. Fitch Ratings expects new residential property sales in China to decline another 7% to 8% in 2026, while S&P Global is even more bearish, forecasting a 10% to 14% drop.

Things are equally dire for commercial real estate. Supply far exceeds demand after a long construction boom, resulting in high vacancy rates for office and retail spaces. Making matters worse, companies are consolidating offices in their drive to cut costs. Retail property owners are grappling with a shift to online shopping that is reducing foot traffic and in-store purchasing.

Yuyuan is vulnerable to all of these changes as its portfolio is comprised of retail, office and mixed-use properties across China. The fact that Fosun recorded huge impairment charges for properties tied to Yuyuan and other subsidiaries suggests that their values have fallen sharply over several years, prompting the company to write them down.

But property exposure isn’t Fosun’s only problem. The company remained profitable in the first half of last year, but its net profit shrank by about 9% year-on-year as its revenue dropped more than 10%. During the six months, the company’s "happiness" segment, its biggest revenue generator that includes Yuyuan's jewelry business, along with Club Med and other consumer assets, swung to a loss from a profit a year earlier.

Fosun’s intelligent manufacturing segment, which produces steel and new materials, and provides factory automation services, saw a revenue decline of more than a quarter in the first half of last year, partly due to sales of some businesses in the aftermath of its debt crisis. Fosun lost 974.8 million yuan from asset management services during the six-month period, although the figure is smaller than the unit’s loss in the first half of 2024.

The company’s health segment, which encompasses drug and medical device makers, as well as healthcare service providers, was the only notable bright spot in an otherwise downbeat report, delivering a 48.3% net profit increase, even though its revenue slipped.

Not surprisingly, investors initially dumped Fosun shares the next trading day after its profit warning. But a pre-market announcement that same day of a pledge by controlling shareholders and senior executives to purchase stock worth up to HK$500 million ($72.6 million), on top of a previously unveiled HK$1 billion share buyback program, triggered a rebound. Even after the dust settled, Fosun stock still trades at a measly price-to-sales (P/S) ratio of 0.15, well below the unimpressive 0.79 for CK Hutchison Holdings (0001.HK), another conglomerate whose portfolio also includes large real estate holdings.

The question now is whether Fosun’s grand asset write-down represents simply some short-term pain that it needs to face just this once as part of its post-crisis rebuilding. But the problem with many diversified conglomerates is that they contain many different parts across a range of sectors, and a particularly weak performance by just a few of those can sometimes drag down a company’s bottom line like what happened to Fosun in the first half of last year.

While its pharmaceutical assets look promising, tourism, which Fosun is exposed to through Club Med, is susceptible to global economic cycles. Yuyuan’s jewelry and retail operations are exposed to weak consumption in China. And while the latest property write-downs have probably brought those assets down to current market values, it’s quite likely that more write-downs will be needed in the future until the sector finally stabilizes.

Fosun has certainly done some needed streamlining following its debt crisis, improving its balance sheet. But its slimmed-down version still contains many pieces that could create problems for the company in a weak Chinese economy.

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The regional developer is leveraging its luxury residential project in Hong Kong to stay afloat as it works to resolve its $4.66 billion in defaulted overseas debt

Key Takeaways:

• KWG Group has reached a preliminary debt restructuring agreement with a group of major creditors, which includes links to a luxury project in Hong Kong
• The developer's contracted sales in January totaled just 325 million yuan, down over 30% from the same month in 2025

Lee Shih Ta

After nearly three years of a liquidity crisis and protracted negotiations, an end game could finally be in sight for KWG Group Holdings Ltd. (1813.HK), one of China’s many regional property developers struggling under mountains of debt and sinking sales.

Late last month, the company announced it reached a preliminary agreement with creditors holding about 25.8% of its offshore debt on key terms of a comprehensive restructuring plan. The breakthrough marks the first time a specific framework for resolving its offshore debt has emerged since the company's 2023 default.

Based in South China’s affluent Guangdong province, KWG was one of the many private regional developers that thrived during the country’s decades-long real estate boom, ranking as a member of the “100 billion yuan sales club.” But all that changed with the bursting of the real estate bubble starting around 2021. Like many of its overleveraged peers, KWG defaulted on its domestic debt in 2023, triggering cross-defaults on multiple offshore dollar notes involving about $4.66 billion in aggregate principal.

Reached after multiple rounds of negotiations, the new preliminary agreement includes debt reduction, equity conversion, and asset-linked instruments. Creditors have two options, both requiring them to take a substantial haircut.

Under the first option, debt holders can get a scant $0.87 in cash for every $100 in principal they hold. Another $29 will be converted into zero-coupon exchangeable notes linked to the company’s Corniche residential project in the Ap Lei Chau (ALC) area of Hong Kong. An additional $20 will be converted into zero-coupon mandatory convertible bonds (MCBs), while the remainder – or just over half the principal – will be directly written off.

Under the second, more straightforward option, 100% of the debt will be converted into zero-coupon mandatory convertible bonds with a conversion price of HK$1.55 per share, automatically converting within two years at the latest. Based on the company’s current share price of about HK$0.183, the immediate recovery rate under that plan is only about 11% to 12%, meaning creditors would effectively lose nearly 90% of their investment.

While the first option appears better on the surface, it contains significant complexities. The notes linked to the Corniche residential complex are “exchangeable” for shares in a special purpose vehicle (SPV) that will hold the project's equity interests — not directly convertible into listed company shares. Recovery is therefore highly dependent on the project's actual sales performance and monetization capability.

The Corniche, located at 66 Lee Nam Road in Ap Lei Chau, was jointly developed with equal ownership interests by KWG and Logan Group (3380.HK), a former Hong Kong Island land king. Consisting of six residential towers with approximately 295 units, the project was completed in 2022.

Better than nothing

Media reports indicate that 121 units at the Corniche had been purchased as of last September, meaning approximately 174 remained unsold. Excluding a few ultra-luxury units and assuming an average unit price range between HK$40 million ($5.12 million) and HK$70 million, the unsold inventory is roughly worth an estimated HK$7 billion to HK$12 billion. That would make KWG's share of the unsold inventory worth between HK$3.5 billion and HK$6 billion.

However, the company will also arrange about $60 million in mezzanine financing secured against the Corniche to cover cash consideration payments and related restructuring costs. That mezzanine loan carries senior repayment priority, meaning the financing must first be repaid before any distributions backed by Corniche sales go to holders of the Corniche-backed notes.

In short, the first option superficially avoids an immediate write-off of nearly 90%, but also concentrates creditor risk on a single project. Given that luxury properties tend to sell slowly, such an approach may not necessarily be safer than the equity conversion alternative. Notably, only up to $1.38 billion can choose the first option of the debt restructure. Should claims exceed that cap, adjustments will be made through reallocation mechanisms.

The new restructuring plan holds some appeal as KWG continues to face liquidation pressure from its creditors and its operational fundamentals keep deteriorating. In January, the company's contracted sales totaled just 325 million yuan ($47 million), down over 30% year-on-year. Such a low figure underscores the severity of KWG’s liquidity constraints.

According to its latest financials for the first half of 2025, the company had total assets of about 151 billion yuan at the end of last June against total liabilities of about 143.5 billion yuan, leaving a mere 7.5 billion yuan in net book value. Within this, equity attributable to shareholders of the parent company was only about 2.49 billion yuan. Even in a liquidation scenario, after discounting asset sales and prioritizing repayments for other higher-ranking creditors, recovery rates for offshore creditors would be even lower than what’s currently being offered. That makes the current proposal look better than receiving nothing.

Market reaction suggests stock investors – who are at the bottom of the list to recover money from such a failing company – are far from optimistic about recouping their losses. KWG’s shares fell about 3% over three trading days to HK$0.183 after the plan's announcement. That shows that even if the restructuring succeeds, the company's finances will remain fragile absent a significant recovery in China’s property market.

A successful agreement would substantially reduce KWG’s offshore debt and the accompanying interest burden, putting off a forced liquidation for now. That would also buy the company time to keep selling its properties and dispose of other assets to keep funding its operations.

But even if it reaches a final agreement, the company will be far from out of the woods, as its balance sheet looks set to remain in a state of contraction as it sells down inventory over the next one to two years. Any genuine turnaround will hinge on a sales recovery, which inevitably will require a market turnaround that everyone is waiting for but has yet to arrive.

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Liquidators of the failed developer are seeking buyers for its property management arm, Evergrande Property, with several companies reportedly showing interest

Key Takeaways:

• Guangdong Provincial Tourism Holdings and PAG have expressed interest in bidding for the property management arm of failed developer Evergrande, according to media reports
• Evergrande Property’s latest financials revealed it was owed as much as 3 billion yuan it may not be able to collect, much of that from its parent, which is being liquidated

By Lau Chi Hang

Real estate developer China Evergrande Group has been ordered into liquidation, but that process has been slow because most of its assets are in the complex China market. But the situation is more straightforward for Evergrande’s property management arm, Evergrande Property Services Group Ltd. (6666.HK), which is listed in Hong Kong and could be sold off in its existing form. What’s more, the property management arm still holds some value, leading the liquidators to focus on finding potential buyers.

Evergrande’s liquidators invited interested parties to conduct due diligence on the property management arm in January, and asked them to submit proposals by the end of the month, Evergrande Property announced last month.

Following the announcement, several potential buyer names began to circulate, including Citic Capital affiliate Trustar Capital, as well as rival property management firms like China Overseas Property (2669.HK), China Resources Mixc (1209.HK), Poly Property Services (6049.HK), Yuexiu Services (6626.HK), China Merchants Property Operation & Service (001914.SZ) and Onewo (2602.HK), to name a few.

Company denials

China Overseas Property and China Resources Mixc immediately denied the rumors. The former said only that it had no specific details on the matter, while the latter directly refuted the rumors as untrue. The other parties did not respond. But most are hardly in ideal position for such acquisitions, given the current weak state of China’s real estate market. On top of that, Evergrande Property itself is fraught with numerous problems and is quite large, meaning an acquisition by one of its rivals could be difficult.

Two other candidates to recently emerge, which are less hamstrung by ties to the property market, are private equity company PAG and Guangdong Provincial Tourism, which are both engaging with the liquidators, according to a report last week in Caixin. Some suspect Guangdong Tourism could be the bidder cited in previous reports that said a certain state-owned enterprise in Guangdong was eyeing Evergrande Property. Both Evergrande Property and Guangdong Tourism are based in Guangzhou, capital of South China’s Guangdong province.

PAG focuses on the Asia-Pacific region, with more than $55 billion in assets under management. It is widely known in China for its investment in Dalian Wanda Commercial Management, the property management arm of real estate major Wanda. Guangdong Tourism is owned by the Guangdong provincial government, focusing on tourism and scenic spot operations. Its assets include Guangdong China Travel Services, as well as the White Swan Hotel, Baiyun Hotel, and Asia International Hotel, all in Guangzhou. Both parties declined to comment on potential interest in Evergrande Property.

Parental drag

The biggest problem facing any acquisition attempt stems from Evergrande Property’s failed parent, which was crushed under billions of dollars in debt. Evergrande Property held 5.88 billion yuan ($847 million) in trade receivables as of last June, according to its latest midyear report from last year. But uncertainty about its ability to collect all of that led the property manager to take an impairment charge of 3.04 billion yuan during the period, with about 2.2 billion yuan of that tied to its exposure to China Evergrande.

At the same time, the liquidating China Evergrande continues to require services from its property management arm for its underlying real estate assets, even though many of those assets remain vacant and uncompleted. The property manager incurred about 228 million yuan in expenses to provide such services in the first half of last year, even though it has been unable to collect payment.

Beyond undermining the property manager’s finances, the liquidation of China Evergrande has also eroded Evergrande Property’s positioning when it comes to competing for new property management contracts. This shows up in its waning effectiveness in activities like bid solicitation and tender submissions, new customer acquisition initiatives and renewal negotiations with existing clients, undermining the company’s brand and pricing power.

Compounding the situation, China Evergrande often offered multi-year property fee waivers to new buyers in the past to boost sales, depriving its property management arm of an important income source. That means Evergrande Property must now absorb those waived fees as a cost. It could also attempt to recover some of the money from property owners, though those waivers are well documented and authenticated, meaning Evergrande Property is unlikely to get much money through that channel.

China Evergrande also previously sold wealth management products backed by its own business directly to property owners through the Evergrande Property platform. The vast majority of those products have since defaulted or become non-performing. And with China Evergrande disavowing liability for those defaults, owners of the wealth management products have directed attempts to reclaim their money towards Evergrande Property.

The many factors working against it, mostly related to its liquidating parent, have also weakened Evergrande Property’s ability to collect management fees from a growing segment of increasingly worried homeowners at properties it manages. That’s put its trade receivables on an upward trajectory, with collection cycles growing longer, further pressuring the company's cash flow and liquidity.

Stable operations, manageable debt

Despite its many challenges, Evergrande Property's own core operations look relatively solid. Its revenue rose 6.9% year-on-year in the first half of last year to 6.65 billion yuan, while its profit fell by a relatively mild 5.6% to 472 million yuan. Its gross profit margin for the latest reporting period stood at 18%, and its net margin was 7.4%. Such figures look strong compared with China Overseas Property's 17% gross margin and 6% net margin, and Onewo's 13% gross margin and 4.6% net margin during the same period.

Evergrande Property once made a 13.4 billion yuan guaranty payment on behalf of its parent, although that money was subsequently forfeited. But the property manager has already completely written off the amount in its financial records. As of the middle of last year, Evergrande Property had 2.78 billion yuan in cash and reported zero interest-bearing bank borrowings.

Despite its 518 million yuan in net current liabilities at the middle of last year, the company’s independent auditors said Evergrande Property should be able to continue as a going concern after implementing various measures to bolster its liquidity. Now, the company’s acquisition by a deep-pocketed buyer could further restore market confidence, firming Evergrande Property’s chances for a rebirth under new ownership.

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“You're going to need a spark. And you're going to need one company to get into serious trouble and then everybody's going to start paying attention, including the government.”

Key Takeaways:

• China’s office sector is facing extreme oversupply and rising vacancy rates, yet government support for developers is staving off major bankruptcies
• Fast-growing dumpling chain Yuen Kee offers a promising value play for investors despite potential challenges in exporting its model

By Doug Young & Rene Vanguestaine

China’s economy currently presents a stark dichotomy between its infrastructure ambitions and the daily realities of its consumers. On one side, we see an ailing property market with a massive glut of office space. On the other, we see the resilience of the low-cost dining sector, exemplified by a dumpling chain hoping to become the fast-food answer to the hamburger. One grappling with past overbuilding while consumers hunt for value.

We start with the commercial property sector, which is often overlooked due to its smaller size compared to the massive residential market. Like its residential counterpart, the office market has been massively overbuilt over the last two decades. This is most evident in the southern boomtown of Shenzhen, where the supply-to-demand ratio soared to 2.7 to 1 last year.

The slowing economy is certainly partly to blame. The net absorption rate — a measure of the net change in occupied office space — has dropped from a peak of 3.34 million square meters in 2021 to just 1.1 million to 1.2 million square meters in each of the last three years. Despite these growing vacancies, new glass towers continue to rise.

In a Western market, such a situation would typically lead to a halt in new building lasting years, or even a decade. Market discipline would force developers to stop. However, in China, many office developers are owned or supported by central, provincial, or municipal governments. These entities often feel they have the "wind in their sails" to build continuously to support economic growth.

Consequently, we haven't seen any high-profile bankruptcies in this sector yet. We believe there is a mechanism at play here that doesn't exist in freer markets like Europe or the U.S. Governments can support these developers by forcing their other state-owned companies to abandon older buildings and move into newer ones. While this artificial support helps, the dreaded rise of AI and its potential to reduce workforces looms as a future cloud over office demand. Eventually, just as with the residential sector, we suspect a "spark" could cause a crisis, forcing the government to step in and freeze development activity.

The ‘McDonald’s of dumplings’

While office towers sit empty, the business of feeding China’s 1.4 billion people remains robust, specifically at the value end of the spectrum. This brings us to Yuen Kee, a dumpling chain that filed this month to list in Hong Kong. Founded in 2017, the company has quickly become China’s dumpling king with 4,266 stores as of last September.

We view Yuen Kee as a potential winner in the current climate. As consumer sentiment remains weak, diners are constantly looking for value. Yuen Kee operates with a level of scalability and efficiency comparable to McDonald’s (MCD.US), offering a popular basic food in a clean environment.

The chain is also looking abroad, having opened its first store outside China in Singapore in 2024, growing to 10 stores there. However, we believe global expansion poses a challenge. We have seen this with hotpot chain Haidilao (6862.HK) when they expanded to the U.S.

At first, there was a lot of excitement. Now the excitement is still around — but they don't have the buzz that they used to.

While dumplings are a hit within ethnic Chinese communities globally, getting non-Asians to move past initial curiosity is a different issue. We believe Yuen Kee would be smart to focus on Southeast Asian markets like Indonesia and Malaysia, where there are big ethnic Chinese communities and standards of living align with their pricing model.

Ultimately, whether it’s filling empty offices or selling dumplings, the key lies in discipline. For the property sector, it requires a halt to the "build and they will come" mentality. For Yuen Kee, it means growing measurably without destroying its reputation for quality.

“In China, bankruptcy is inextricably linked to the concept of ‘face’.”

Key Takeaways:

• Vanke has secured a temporary reprieve on repayment of its foreign debt, as a full bankruptcy reorganization remains unlikely
• Pet hospital operator Ringpai is seeking a Hong Kong listing despite a difficult path to profitability caused by high operational costs and consumer caution

By Doug Young & Rene Vanguestaine

We’re looking at two distinct corners of China’s economy this week that tell similar stories of adjusted expectations and financial endurance. First, we examine the latest reprieve for embattled property developer Vanke (2202.HK; 000002.SHE), which is battling to stay solvent in a liquidity crisis. We also turn our attention to the consumer sector to discuss Ringpai, a pet hospital operator lining up for a Hong Kong IPO that looks like a bit of a barker — no pun intended.

The long, slow grind for Vanke

Vanke, like many of its peers, has fallen on hard times after once booming in tandem with the Chinese real estate market. The company has been gradually taken over by its hometown government in the southern boomtown of Shenzhen, yet even that state backing hasn't guaranteed its future as creditors line up.

In the latest twist, a group holding maturing Vanke bonds worth about 3.7 billion yuan, or more than $500 million, granted the company a 30-day grace period from a previous Dec. 28 deadline. This is just the latest delay in a string of similar moves as the company attempts to reorganize its massive debt.

What’s interesting to us is that Vanke and its peers seem intent on a strategy of "death by 1,000 cuts" rather than taking the more obvious route of declaring bankruptcy to work things out under court protection. We believe this aversion to bankruptcy is largely cultural. In China, bankruptcy is inextricably linked to the concept of "face." When a company goes bust, the immediate assumption is management failure. It is extremely rare for senior executives — founders, chairmen or CEOs — to admit they did something wrong.

While we could debate whether the current debacle stems from management recklessly growing too fast or from regulatory interventions that distorted the market, the outcome remains the same.

There is also a political dimension. The Shenzhen government, through Shenzhen Metro, is a major shareholder. They previously came to Vanke's rescue with money and power, leading many to believe the developer would survive unscathed. However, the government recently indicated it would not throw good money after bad, signaling that Vanke must navigate these difficult times on its own.

We think the reluctance to file for bankruptcy also stems from the unique "human dimension" of China’s real estate sector. Unlike a factory producing steel rods, a developer’s collapse affects individuals who have paid for apartments that are not yet delivered. Many of these people are paying mortgages on homes they do not possess. In a Western-style Chapter 11 reorganization, a company is protected from creditors. But in China, these would-be homeowners are creditors. We doubt the Chinese legal system would allow a bankruptcy proceeding to say these individuals have no claim.

Consequently, while foreign creditors have petitioned courts in Hong Kong to seize assets outside the Mainland, the vast majority of Vanke's assets remain inside China, largely untouchable by foreign entities. Domestic investors, meanwhile, may be pressured to give the company breathing space rather than rock the boat.

A dog-eat-dog world for pet hospitals

Switching gears to the consumer market, Ringpai has become the latest in a long list of companies trying to seize on Hong Kong’s hot IPO market. As China’s second-largest operator of pet hospitals, Ringpai boasts 548 centers in 70 cities. Despite its scale, the company was losing money until recently, reporting only a small profit in the first half of last year.

We see a company hamstrung by high costs. Ringpai relies heavily on expensive equipment and imported pet drugs because China lacks many domestic alternatives for animals. Furthermore, the sector faces a high talent cost to keep veterinarians happy in a hyper-competitive market. The company’s rapid growth through acquisitions has also come with significant associated costs, which we believe is a primary reason they have struggled to maintain sustainable profitability.

This situation reflects a classic "consumer story" in China that has lost some of its shine. Years ago, investors were enchanted by the math: 1.4 billion people with growing discretionary income equals a massive pet market. However, that growth story has hit a wall of reality.

China’s post-Covid recovery has been slow, and consumer sentiment is weak. People have become very cautious, focusing on saving money due to uncertainties about life. We suspect that many who wanted pets have decided the timing is unfavorable.

While some still spend ridiculously on premium food and pet toys, the reality of ownership — specifically the big cost of healthcare — is daunting. Without the health insurance available to humans, treating a sick pet can become horribly expensive very quickly. Pet owners are often at the mercy of veterinarians, and we have noted dissatisfaction among consumers who feel services and drugs are overpriced.

Ultimately, whether it’s a property giant or a pet hospital chain, the economic narrative is similar: rapid expansion and high expectations are now facing a period of painful adjustment.

The developer’s new offshore debt restructuring eases its most urgent default risk, but it must still restore its cash flow and repair its operations

Key Takeaways:

• CIFI Holdings concluded an offshore debt restructuring that took effect on Dec. 29, marking the legal conclusion of a three-year default overhang
• The company’s cash decreased by nearly 8% in the first half of 2025, while its total debt contracted by less than 3%

Lee Shih Ta

For embattled property developer CIFI Holdings (Group) Co. Ltd. (0884.HK), the end of 2025 was not just an ordinary time marker. The company announced that its offshore debt restructuring officially took effect on Dec. 29, ending a drawn-out process mirrored across China’s battered real estate sector. The restructuring saw all of CIFI’s U.S. dollar-denominated senior notes and senior perpetual capital securities canceled on the same day, with associated listed bonds scheduled for delisting in early 2026. The development was highly symbolic for the company, ending an offshore debt default risk that has dogged it for the past three years.

The milestone marks a major break for CIFI since its liquidity crisis erupted in 2022. Since then the developer has slogged through numerous rounds of creditor negotiations, as China’s real estate market continued to worsen.

In terms of outcome, the offshore restructuring wasn’t simply an extension of debt maturities, which would just kick the can down the road. Instead, the original U.S. dollar debt was exchanged for multiple new instruments, including new notes, mandatory convertible bonds, and new loans, accompanied by equity adjustments and changes to the governance structure of CIFI’s board. For creditors, the deal represented a shift from simply holding fixed coupons to becoming stakeholders in the company’s future. For CIFI, it secured some breathing room to try and rebuild its cash flow and broader operations.

That context is helpful to understanding the board changes included in the announcement. Two non-executive directors nominated by the creditor group formally joined the board and will not receive the usual director pay, symbolizing the transition of creditors from claimants to overseers. The new arrangement is more a forced marriage than a romantic one. But under the circumstances, it aligns more closely with expectations for the new role the company’s creditors will assume in assisting with risk control and financial discipline.

Nonetheless, the restructuring doesn’t mean CIFI’s problems will magically disappear. Understanding the company’s true predicament requires a closer look at its operational fundamentals.

Sea of red ink

A look through CIFI’s 2025 midyear report shows it recorded about 12.28 billion yuan ($1.76 billion) in revenue in the first half of last year, down by nearly 40% from the 20.21 billion yuan it earned a year earlier. Its pre-tax loss for the period swelled by 170% to about 6.12 billion yuan, reflecting dual pressures of China’s property downturn and high financing costs.

The company’s financing costs during the period increased by 5% year-on-year to 1.94 billion yuan, indicating that its interest burden remained substantial. Fair value losses totaling 675 million yuan on its investment properties suggest that commercial real estate valuations have yet to bottom out. Meanwhile, the company made 883 million yuan in provisions on expected credit losses, underscoring difficulties it may face in collecting money it is owed.

The company’s cash totaled about 10.16 billion yuan at the end of last June, down about 8% from the end of 2024, while its total outstanding borrowings decreased only by a marginal 3% from roughly 86.65 billion yuan to 84.21 billion yuan. Given its high debt and limited cash, the faster rate of cash depletion compared to debt reduction indicates an eroding safety cushion, as short-term liquidity pressures persist.

We should note the company’s midyear report isn’t entirely devoid of more positive news. While revenue from CIFI’s property sales halved year-on-year to approximately 8.1 billion yuan, resulting in a segment loss of 2.05 billion yuan, the company’s property management and property investment arms collectively contributed a profit of about 1.05 billion yuan. This indicates that, even in an environment of extreme contraction, CIFI’s core businesses haven’t entirely crumbled.

The company will certainly get some debt relief with the new restructuring, as some debt gets converted to equity, some is written down and deadlines are extended. However, such improvement is mostly a defensive adjustment, and the company still needs to restore itself to operational health. While some of that is within its own hands, a big element is out of its control as long as the property market remains weak.

In summary, CIFI looks a bit like a patient just out of the operating room after major surgery — physically frail and still requiring strong support in the intensive care unit. But at least the market’s perception of the company will shift from questioning its ability to simply survive, to assessing its ability to rebuild its financial and operational houses.

CIFI’s completion of its offshore debt restructuring is undoubtedly a significant milestone. Among China’s many private property developers still mired in negotiations or already defaulted on their debt, it has at least scored a major victory by adding a higher degree of certainty to its finances.

But at the end of the day, the fate of the company and its peers still rests in a Chinese real estate market that has yet to show signs of improvement. The latest data from the National Bureau of Statistics indicates nationwide sales for residential properties declined year-on-year last November, while declines persisted in real estate development investment, even as the rate of decline narrowed. The bottom line is that recovery is still off in the distance – a reality that will continue to hamper CIFI and its peers as they struggle to dig themselves out of their current holes.

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A former partner has requested Agile’s liquidation over an outstanding debt that isn't substantial, but could still trigger a chain reaction

Key Takeaways:

• Agile Group is facing a liquidation petition filed against it in Hong Kong by a subsidiary of former partner Melco International Development
• The property developer’s average selling price per square meter plunged 32% year-on-year to 9,113 yuan in the first 11 months of this year

Lee Shih Ta

An unfulfilled “cultural tourism dream” could be quickly becoming a nightmare for the debt-heavy Agile Group Holdings Ltd. (3383.HK). The developer’s shares plummeted nearly 20% in intraday trade last Tuesday amid a flurry of market rumors about the company’s welfare. Agile disclosed that evening that one of its creditors was seeking to liquidate the company, further battering already fragile market confidence.

According to its announcement, Melco (Zhongshan) Business Management filed a petition for Agile’s liquidation with the Hong Kong High Court for failure to pay bills totaling $18.59 million and $2.23 million yuan ($317,000). The court has scheduled the first hearing in the case for Feb. 25.

The debt, equal to about $19 million, is a drop in the bucket compared to Agile's total liabilities, and is also tiny compared to the huge sums that many Chinese property developers are currently struggling to pay their creditors. Still, investors are alarmed that the creditor in this case is Melco International (0200.HK), one of Macao’s licensed casino operators and Agile’s former cultural tourism partner in what was previously hailed as a “powerhouse alliance.”

The partnership dates back to June 2021, when Agile and Melco jointly acquired a large mixed-use site spanning about 504,000 square meters in the Cuiheng New District of the city of Zhongshan, just across the border from Macao, for 3.82 billion yuan. They planned to develop the site as a 10 billion yuan cultural tourism hub featuring a theme park, five-star hotel, shopping mall, medical aesthetics center and luxury apartments.

Project unravels

Under the original agreement, Melco was responsible for developing the theme park, while Agile would handle the rest. Agile was to contribute about 5.65 billion yuan and Melco at least 400 million yuan. Agile later failed to meet its obligations and issued a termination notice in July 2022. While the parties reached a dissolution agreement in 2023, Agile ultimately defaulted on the settlement payments, prompting Melco’s pursuit of legal action.

Agile stated in its announcement that it “strongly opposes” the petition and will continue engaging with its offshore creditors, with whom it is trying to negotiate a comprehensive debt restructuring agreement.

Agile's liquidity crunch is directly tied to its massive investments in cultural tourism projects in China. Over the past decade, the company bet heavily on an “integrated cultural tourism complex” model that includes projects like the one in Zhongshan. Such projects demand hefty investment, have long development cycles and slow payback periods. They also generate significantly weaker cash flow than simpler residential developments, putting developers under greater financial strain.

In the first half of this year, Agile's revenue tumbled 35.8% year-on-year to 13.57 billion yuan, while its loss narrowed 17% to 8.03 billion yuan. The bottom-line improvement stemmed largely from one-time measures taken by the company, including selling its condiments business, selling part of its stake in A-Living Smart City Services (3319.HK), laying off roughly 6,000 employees and cutting operating expenses. While such steps helped its bottom line, they don’t signal any fundamental recovery in its core business in China’s struggling property market.

Plunging prices

China's sluggish property market is offering little support for Agile or the many other developers that once thrived when things were booming. The company’s cumulative presales for the first 11 months of the year sank about 45% year-on-year to 8.08 billion yuan. Though that represents an improvement from the 64.8% slide a year earlier, it still marks a second consecutive year of steep contraction. The company’s sales area in the first 11 months of this year fell by about 20% to 886,000 square meters.

Meanwhile, Agile’s average selling price plunged roughly 32% year-on-year to 9,113 yuan per square meter in the 11-month period, much steeper than the 10.2% decrease a year earlier. The accelerating rate of decline reflects increasingly aggressive price cuts by developers to drive sales as they face intense pressure to reduce their inventory. Still, sales volumes continue to decline, indicating such price cutting is having limited effect.

Agile’s financial statements show the structural risks the company currently faces. Its total liabilities stood at 150 billion yuan at the end of June, down slightly from 155.2 billion yuan at the end of 2024. But the structure of those liabilities remained the same. Its short-term borrowings maturing within one year remained high at 37.87 billion yuan, dwarfing its cash of only 3.09 billion yuan. That leaves the company with an extremely thin cash buffer, enough to cover less than 10% of its short-term debt.

On the asset side, Agile still holds about 29.62 million square meters of land reserves with an average cost of just 2,338 yuan per square meter, theoretically offering some monetization potential. But parts of that land bank are already being used as debt collateral, limiting that potential. Reflecting that, three of its plots at the Hainan Clear Water Bay development were auctioned by tax authorities at a reserve price of about 1.56 billion yuan to settle the company’s tax debts. Agile is also negotiating to sell back some of its completed commercial properties to local governments.

The company hasn't been idle over the past year. It secured extensions for a combined 14.92 billion yuan in loans, recovered over 1.2 billion yuan in high-risk receivables, divested non-core assets and slashed its costs. Yet such measures only buy the company time, and Melco's legal action signals that creditor patience is running out.

It often takes just a spark to ignite a debt bomb. Agile stated in September it aimed to reach a preliminary restructuring agreement with its offshore creditors by year-end, already behind its original third-quarter target. With no progress in its offshore debt restructuring and Melco now taking a new legal step, other Chinese partners and creditors could take similar actions, setting off a domino effect. Such a chain reaction could rapidly accelerate, injecting even more uncertainty into the company’s debt resolution process.

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China's largest real estate brokerage has spent $2.3 billion on share repurchases in the last three years as a struggling property market weighs on its profits 

Key Takeaways:

• KE Holdings reported its profit tumbled 36% year-on-year to 747 million yuan in the third quarter
• China’s leading property brokerage has spent $675 million on share repurchases so far this year

By Lau Chi Hang

The ancient adage says that “When the nest overturns, no egg is left unbroken.” Such wisdom perfectly captures the stream of carnage that shows no signs of easing in China's ailing property market, plagued by anemic sales and falling prices that are causing pain for even the best-run giants like leading real estate broker KE Holdings Ltd. (2423.HK; BEKE.US).

The company’s income has continued to rise over the last two years, even as falling commissions in the slumping market take a bite out of its bottom line. Its revenue climbed 20.2% year-on-year to 93.5 billion yuan ($13.13 billion) in 2024, but its profit fell 31% to 4.08 billion yuan. Its top line continued climbing in the first half of this year to the tune of a 24% revenue gain to 49.3 billion yuan, yet its profit still fell 7% year-on-year to 2.16 billion yuan.

Now, even the company’s top line is looking weak, with revenue up just 2.1% year-on-year in the third quarter to 23.1 billion yuan, according to its latest financial report released earlier this month. Meantime, the profit erosion continued with a steep 36.1% year-on-year decline to 747 million yuan for the period.

KE’s fading fortunes come as China's protracted property downturn keeps squeezing its core brokerage operations. While the total value of existing home transactions it facilitated rose 5.8% year-on-year to 505.6 billion yuan, revenue from that segment still fell 3.6% to 6 billion yuan. Meanwhile, its new home transaction value slumped 13.7% to 196.3 billion yuan, dragging down revenue for that segment by 14.1% to 6.6 billion yuan.

Shrinking commissions 

A key culprit behind the shrinking brokerage business is falling commissions on several fronts, as KE lowers prices to try to keep its pipeline full of homes for sale. Such cuts include incentive-based fee waivers for its platform services, and lower franchise fees for its affiliated stores and agents. At the same time, KE is paying employees more at its core Lianjia brand of shops to retain talent. What’s more, cash-strapped developers are demanding lower commissions on new home sales as they continue to bleed nonstop red ink. That confluence of pressures has collectively taken a bite out of KE Holdings' profit margins.

To combat such headwinds, the company previously rolled out a “one body, three wings” strategy to diversify its business. The “body” remains its core brokerage business covering existing and new homes, while the “three wings” encompass its more recent moves into home improvement, rental services and property development.

However, with the exception of a relatively solid showing from its rental business, the other two wings are hardly doing much lifting. Revenue from the home improvement business remained flat year-on-year at 4.3 billion yuan during the latest quarter. And with new home transactions declining, future growth in such services could face constraints.

Its property development business employs a consumer-to-manufacturer (C2M) model using big data for precise product positioning. Yet such development requires heavy spending, lengthy timelines, and only offers modest returns in such a weak market. The segment could also easily swing into the red should the property market remain weak for too long.

In the absence of much lift from the three wings, KE’s fortunes will remain heavily tied to its brokerage business for the foreseeable future. And with no recovery in sight for the property market, its shares are coming under nonstop pressure. A strong rally for the Hong Kong stock market this year has completely bypassed KE Holdings, whose shares are now down about 40% from their high over the last 12 months.

Big buybacks

To buoy its stock, KE has turned heavily to share buybacks since September 2022. Through the end of September this year, it had repurchased about $2.3 billion worth of its stock, equal to about 11.5% of its float before the buyback program. The company has repurchased $675 million worth of its shares this year alone, including $281 million in the third quarter – its highest quarterly outlay in nearly two years.

Yet buybacks alone can only treat the symptoms. To support its stock over the longer term, the company will need to show operational improvement. But that looks unlikely in the current comatose property market. Despite that, KE Holdings' Hong Kong-listed stock has oscillated in a relatively narrow band between HK$30 and HK$50 in recent years, showing the share buybacks may be providing at least some stability.

Not surprisingly, analysts are quite bearish on the company. UBS recently slashed its 2025–2027 profit forecasts for KE by 24%, 29%, and 27% respectively. It also downgraded its recommendation on the stock from a “buy” to “hold” and cut its target price for the company’s U.S.-listed shares by 14% to $19 from $22.10.

Patience required

Even after its stock declines, KE Holdings still trades at a relatively high forward price-to-earnings (P/E) ratio of 34 times, and its trailing ratio is even higher at 39 times. Such a premium means that any upside to its share price could be unrealistic in the near term, with the exception of occasional pops from new government policies aimed at stabilizing the market. Long-term recovery for both the company and its stock will only come when the sector rebounds.

That said, KE Holdings has been relatively resilient since the property market peaked in 2021 compared with others from the sector. Despite the occasional loss, its overall performance has held up reasonably well. Even with its recent profit declines, the company’s ability to keep boosting revenue shows it continues to gain market share, even if that’s coming at the expense of falling commissions and profits.

KE Holdings' ability to stay profitable through all the adversity, coupled with its strong balance sheet, should position it well to weather the downturn, and thus it stands to reap big benefits once the market recovers. Its long-term value is obvious. The big question now is when China's real estate sector will finally reach bottom – be it in two years, five years or perhaps even longer.

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“This looks like a bit of a shell game… the business is going to magically disappear from the listed company's financial statements.”

By Doug Young & Rene Vanguestaine

Two recent corporate maneuvers, though modest in scale, offer a revealing glimpse into some of the many strategic pivots happening in China. One involves a solar company, Xinte Energy (1799.HK; ), tapping into sophisticated financial instruments to fund its green energy ambitions. The other is seeing state-owned travel giant China Travel International (0308.HK) shed its troubled real estate assets to refocus on its core business. Both moves, though in very different sectors, highlight a growing pragmatism in how Chinese companies are navigating capital constraints and past strategic missteps.

We believe the case of Xinte is an interesting story of strategic adaptation. Once a producer of solar materials, the company faced a market requiring enormous investment to compete with industry giants. It wisely shifted into building and operating solar and wind farms, a move that aligned perfectly with Beijing's ambitious goals for green energy generation. This transition, however, requires constant capital for new construction.

For a company without unlimited funding, this presents a challenge. Xinte’s solution is to securitize its assets. The company recently announced a plan to issue around 3 billion yuan ($421 million) in asset-backed securities (ABS) backed by its green energy projects, which will trade on the Shanghai Stock Exchange. This is a mechanism to unlock capital, allowing the company to recoup its investment and reinvest in new farm construction.

The decision to list these securities in Shanghai, rather than the more international market of Hong Kong where Xinte is listed, is significant. We see this as part of the Chinese government's broader desire to build a larger, more diversified domestic capital market. For years, Beijing has understood the need to provide investors with more options beyond equities, government bonds, and a once-booming real estate market. This move helps achieve that by introducing new products while channeling capital toward national priorities like the green transition.

This being China, we are convinced we will see other companies jump on this bandwagon, likely quite quickly. Using ABS to inject liquidity makes sense for many parts of the Chinese economy. It will be particularly interesting to watch how the nation's massive state-owned banks react. Culturally, bigger has always been better in Chinese banking, with a focus on having the largest balance sheet. This stands in contrast to the evolution of Western banking, where firms realized decades ago that an "asset-light" model of originating, syndicating, and selling off loans could be more profitable. Whether Chinese banks will embrace this fee-generating model over asset accumulation remains to be seen.

Unwinding the past: a return to core business

Our second case looks at China Travel International, which has announced it will spin off its real estate business from its Hong Kong-listed entity. This move will leave the public company with its core travel operations, including the development and management of tourism sites. The real estate division, once a major profit driver during China's property boom, has lately become an albatross around the company's neck as the market has soured.

On the surface, this might look like a shell game, as the real estate assets will simply be moved to China Travel International's unlisted state-owned parent. Yet, we believe it is a practical and realistic solution. Dumping the assets on the open market would be difficult and could run counter to government efforts to stabilize the property sector. This internal transfer allows the listed company to cleanse its balance sheet and return its full focus to its core capabilities in the tourism sector.

This maneuver highlights a key distinction in the Chinese corporate landscape. China Travel International can perform this asset shuffle because it is a state-owned enterprise. Many private companies, which also enthusiastically diversified into real estate during the boom years, do not have this luxury. There was a time when it seemed every company, regardless of its core expertise, was a part-time property investor. Before that, it was a rush into mining. Such gold rushes are a recurring theme.

These private firms now find themselves in a difficult position. There are cases where companies are stuck with non-performing real estate assets they cannot easily get rid of. Admitting a mistake is difficult, especially in a business culture where the chairman is often seen as infallible and may have been in place for decades. For anyone in management to acknowledge a past decision was wrong and deal with the consequences takes time, and sometimes it never happens.

Furthermore, some are likely still holding out hope that government intervention will eventually stabilize the property market, allowing them to avoid booking major losses. For investors, this creates a landscape fraught with hidden risks. The key takeaway is clear: one must look at each company very specifically. Now more than ever, it is crucial to check the balance sheet.

Despite Hong Kong’s hot market for new listings, the management company from China’s struggling real estate sector would represent the first new property IPO in several years

Key Takeaways:

• Guo Xin Service has filed to list in Hong Kong, reporting its profits improved steadily over the last three years
• The property manager’s profit fell in the first half of the year due to an accident-related compensation payout

Bai Xin Ru

You know the IPO market is hot when even the wallflowers start to consider new listings.

Hong Kong’s best market for new IPOs in years has finally attracted a company from China’s embattled real estate sector, which has become an investor pariah as the market’s ongoing downturn shows no signs of easing. China Guo Xin Service Holding Ltd., which provides property management services in South China’s Guangdong and Hunan provinces, is hoping investors will look past that beleaguered state, with an eye to a brighter future, with its recently filed prospectus laying the groundwork for a Hong Kong IPO.

Founded in 2006 by Chairman Liang Zanwen, Guo Xin provides property management, brokerage, and value-added services to its controlling shareholder, real estate developer Guo Xin Holdings. Headquartered in the Guangdong city of Foshan, it ranks fourth locally in terms of market share, yet holds only a modest 0.08% share of the management and agency services markets for the Greater Bay Area, used to describe the Pearl River Delta area surrounding Hong Kong, Macao and Guangzhou. That just barely places it in the top 40 companies for the region.

Controlling shareholder Guo Xin Holdings was established by Liang in 1995, and is primarily engaged in property development within Guangdong province.

Growing property management market

Growing numbers of city dwellers with China’s rapid urbanization, combined with rising incomes for average people, have spurred strong demand for new homes in the last three decades, boosting associated demand for property management services. This momentum is most pronounced in the Greater Bay Area, one of China’s wealthiest regions, where demand for such services is growing faster than the sector’s national average. The region’s property-management market grew from 180.7 billion yuan ($25.4 billion) in 2019 to 455.6 billion yuan last year, representing 20.3% annual growth, or nearly double the 11.6% rate for China's broader property management industry.

While China's real estate sector is stuck in deep freeze, sending most developers into the red, the situation for property managers like Guo Xin Service is better due to the recurring nature of their revenues. That has helped Guo Xin Service remain profitable, with its net income rising steadily from 20.18 million yuan in 2022 to 37.33 million yuan last year. A compensation payout tied to a traffic accident drastically inflated the company’s other expenses by 659% during the first half of 2025, leading to a 25.4% year-over-year profit decline to 9.78 million yuan for the latest period.

The company operates three main divisions: property management, brokerage services and value-added services. Property management was the biggest profit spinner, generating a gross profit of 13.2 million yuan in the first half of this year. Brokerage services contributed 11.31 million yuan in gross profits, while value-added services provided another 5.14 million yuan.

As of June, the company managed 42 properties with 5.4 million square meters of gross floor area in both residential and non-residential developments. Of its 13.2 million yuan first-half gross profit, residential properties accounted for 58% of the total, while the remaining 42% came from non-residential. The company’s parent contributed 68.3% of its property management revenue, in a situation commonly seen among most big companies from a sector where they depend heavily on their parents for business.

Parent dependency

If Guo Xin Service relies heavily on its parent for its property management services, it’s even more dependent when it comes to brokerage services. Its work in that area mainly covers property-agency services for primary-market residential developments, with a focus on residential units and parking spaces. All of the company’s brokerage revenue came from transactions involving properties developed by its parent, including ones in the Jun Yu Hai Cheng and Jun Yu Hai An developments. During the period, it received appointments for three additional projects under development by its parent.

Despite such strong support, headwinds still persist due to weakness in China’s overall property market. Existing home prices in China's top 100 cities slipped another 0.7% month-on-month in September to an average of 13,381 yuan per square meter — marking the 41st straight monthly decline, according to the China Index Academy. What’s more, third-quarter prices fell 2.3% sequentially, accelerating by 0.14 percentage points from the second-quarter decline, showing the protracted downturn is unlikely to ease anytime soon.

The national and local governments have rolled out policy-easing moves to try to help the market, including Guangzhou’s recent removal of all home-purchase restrictions alongside Shenzhen’s easing for both buyers and loan approvals. But none of those steps seem to be having much effect yet. Global real estate consultancy Cushman & Wakefield now forecasts that residential prices could retreat up to 5% in the Greater Bay Area for all of 2025.

Weakly valued

The Chinese property market’s woes aren’t just pressuring the sector’s finances, but are also weighing on valuations of property management firm stocks, even as the companies remain profitable. Industry bellwether China Overseas Property (2669.HK) is a case in point. Its net profit increased 4.3% year-over-year to 770 million yuan in the first half of this year, and it declared a special dividend of HK$0.01 per share to celebrate the 10th anniversary of its listing. But investors remained unexcited about its stock, which currently trades at price-to-earnings (P/E) ratio of just 9.4 times, based on its forecast 2025 profit. That marks a huge drop from historical ratios that at one time exceeded 30 times. The company’s stock slumped 8% in the third quarter, massively underperforming the Hang Seng Index’s 11.6% rally.

Country Garden Services (6098.HK), once a Hang Seng Index constituent, posted gloomier results, reporting its first-half net profit shrank 30.8% year-over-year to 997 million yuan. Investors weren’t impressed with that number, nor were they thrilled by the omission of an interim dividend from the company, leaving the stock trading at a forward P/E ratio of just 8.9 times. The company’s stock logged a modest 0.8% stock gain in the third quarter, though that was still well behind the broader market.

With no signs of near-term improvement for China's property market, investor enthusiasm for property management plays has completely cooled. That’s certainly not a plus for Guo Xin Service, which is also less appealing for its regional status. Benchmarked against leading peers now trading below 10 times expected earnings, Guo Xin Service's shares are almost certain to trade at an even lower multiple. That could translate to scant upside potential for short-term speculation, even in the current hot IPO market.

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Despite being taken over by Shenzhen Metro Group and promised full financial support, the developer, while avoiding defaults, reported its loss widened in the first half of 2025

Key Takeaways:

• Vanke’s loss widened by 21% in the first half of 2025 to 12 billion yuan, as its net liability ratio rose to 90%
• The company’s sales plummeted 46% in the six-month period, and its ranking among Chinese property developers dropped to number seven

By Cheng Shui Tong

Its darkest days may be behind it, but any new dawn still looks off in the distance for China Vanke Co. Ltd. (2202.HK; 000002.SZ).

The latest financial report from one of China’s many major struggling property developers showed it continued to bleed massive red ink in the first half of this year. Its loss for the six-month period totaled 11.95 billion yuan ($1.67 billion), 21.3% wider than a year earlier, and at the upper end of a range it gave in an earlier profit warning in July. At the same time, its sales for the period tumbled by 45.7% to 69.11 billion yuan. 

The ongoing sales declines, the direct result of China’s weak property market, and low gross margins were the primary source of Vanke’s continuing profit challenges. The gross margin for its core property development business stood at just 2.6% before deducting taxes and surcharges, down three percentage points year-on-year. The gross margin for its property management services arm fared better, rising 0.3 percentage points year-on-year to 13.9%.

The company signaled its troubles are far from over by increasing its asset impairment provisions during the period, citing increasing business risk, and consideration involving some bulk asset and equity transactions at prices that were lower than their book values.

More losses ahead

The analyst community expects Vanke’s woes to continue for a while. Morgan Stanley estimates the company will continue to lose money until 2027, and forecasts its sales this year will fall between 30% and 40%.

The biggest concern lies in Vanke’s liabilities, which continue to pile up. Its latest net liability ratio reached 90.4% at the end of June, up 9.8 percentage points from the end of 2024. The company held 364 billion yuan in interest-bearing debt at the end of June, equal to 30.5% of its total assets. Its outstanding liabilities maturing within a year totaled 153 billion yuan, even though its cash and cash equivalents stood at less than half that amount at about 69 billion yuan. That means its current cash is far from enough to cover its short-term obligations, which could result in difficulties servicing its near-term debt coming due.

At the same time, Vanke experienced a net operating cash outflow of 3.04 billion yuan in the first half of the year. To meet its financial obligations, the company sorely needs China’s housing market to recover to stabilize its own housing sales – something that some have predicted but is far from certain. Otherwise, it may need to secure further financial support from its major shareholders.

Phased pressures

In its latest report, Vanke laid out some phased operating pressures it will continue to face, and said it is moving ahead with efforts to defuse such headwinds. It stressed that time would be needed to completely address such challenges.

China’s property downturn of the last few years, ending two decades of massive appreciation, has wreaked havoc on the country’s many over-leveraged developers, throwing most into crisis. As that happened, former superstars like China Evergrande (3333.HK) and Sino-Ocean Group (3377.HK) defaulted on their debt, and are currently trying to negotiate restructurings with their many creditors. Vanke has largely avoided that fate so far, thanks to the strong support of its majority shareholder, the state-owned Shenzhen Metro Group, which operates the subway system in the company’s hometown of Shenzhen.

Vanke was founded in 1988 by Wang Shi, who started out running a business selling imported office supplies in the 1980s, before expanding into the property business. His company went on to become an industry leader as China’s property market boomed, making Wang into a celebrity in his own right. Vanke’s sales reached 100 billion yuan in 2010 near the height of the boom, making it the first Chinese developer to cross that symbolic milestone. It maintained its status as a market leader in the decade after that.

But like many of its peers, Vanke ran into trouble when the market slowed and transaction volumes for home purchases began to dry up. It was already starting to struggle when Shenzhen Metro Group took a 27% stake in the company in 2016, stripping it of its private roots to become a mixture of state and private ownership.

That structure turned out to be a saving grace, offering the company a unique position in the market. Earlier this year when Vanke’s crisis was still raging, the central government in Beijing engineered an overhaul of the company’s management, with previous leadership replaced by Shenzhen Metro President Xin Jie as the company’s new chairman. Other top executive positions were also filled with people from Shenzhen Metro, marking the company’s effective nationalization.

In exchange for its management takeover, Shenzhen Metro provided financial support for Vanke, including a cumulative 23.88 billion yuan in shareholder loans at terms more favorable than what the company could have gotten on the market. The takeover restored some investor confidence, supporting Vanke’s stock and bond prices. But such support still doesn’t guarantee Vanke’s operations will thrive in the long run.

Fading market leadership

Vanke hasn’t been as resilient as some of its peers in the ongoing downturn. Its sales fell more than 40% to about 69 billion yuan in the first half of this year, far worse than the 11.8% decline for the top 100 developers during that period tracked by the China Index Academy. Its performance for the period ranked Vanke as China’s seventh largest developer in terms of sales, which was also down from number two in 2023 and number five in 2024.

The company has been destocking in recent years. It was still sitting on 462.5 billion yuan in inventory midway through this year, though that was down 10.9% from the end of 2024. What’s more, the company didn’t acquire more land for future projects in the first half of this year due to its massive debt burden and negative cash flow. The net result is that its sales are unlikely to recover substantially in the near term, which means Vanke may continue to lose its position as a market leader.

The property market’s painful correction is likely to change many of the industry’s earlier rules of engagement, including a business model where developers took on high debt and high leverage on expectation that anything and everything they built would be snapped up by eager home buyers. Like its peers, Vanke will need to transition towards a higher-quality and much more precise business structure, or risk being left behind when the sector finally starts to rebound.

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The property manager has cracked down on late payments for its services and taken steps to insulate itself from the debt woes of its embattled parent

Key Takeaways:

• The company has predicted a swing from a deep loss to a profit of up to $56 million for the first half of the year
• A range of measures has been introduced to limit the financial fallout from its indebted parent, the property developer Agile

By Lee Shih Ta

As China grapples with its real estate crisis, companies that manage properties  are generally seen as safer assets than the firms that develop the buildings in the first place. But when the businesses are part of the same corporate family, problems can spill over.

A prime example is the relationship between A-Living Smart City Services Co. Ltd. (3319.HK), which supplies services such as rent collection, security, gardening and maintenance, and its parent company Agile Group (3383.HK), a real estate conglomerate mired in distressed debt.

In the first half of last year, A-Living logged a loss of 1.6 billion yuan ($220 million), hit by a heap of unpaid bills related to Agile and affiliated companies. But fast forward a year and the property management arm is moving into the black, with a revised forecast of between 300 million yuan and 400 million yuan in net profit for the six months to the end of June.

Assertive action

The turnaround follows a concerted push by A-Living to sort out the tangle of trade receivables and to avoid further impairment provisions. From the second half of last year, it brought legal actions, introduced stricter contract terms and cracked down on payment delays to reduce its exposure to bad debts.

The property management company also began taking tangible assets from cash-strapped developers in lieu of payments. While these assets are not very liquid, they serve to mitigate the risk of outstanding invoices turning into bad debts on its accounts.

The company also said it had restructured its operations to focus on areas that generate consistent cash flow, such as core property management and urban services, while scaling back its value-added offering.

While many property management companies were looking to expand their client base over the past year, A-Living stood out for focusing on rationalizing and de-risking its business. As a result, cash flow will improve in the first half compared with the same period of last year, the company said in its statement.

Meanwhile, A-Living has also completed a 60 million yuan acquisition of two affiliated companies that were previously subsidiaries of Agile. The firms bring with them revenues from urban services and environmental protection that could bolster A-Living’s operating cash flow going forward.

Rising stock price

The profit guidance went down well with investors. The day after the statement, the stock surged 13.6% to HK$3.55, leaving the company with a gain of almost 30% in the past six months. 

It has been a different story for the property management arm of China Evergrande Group (3333.HK). When the real estate conglomerate collapsed, Evergrande Property Services (6666.HK) was plunged into financial crisis, amid reports that 13.4 billion yuan of its funds had been misappropriated. Liquidators will now decide the fate of the property manager. As it faces delisting from the Hong Kong stock market, China Evergrande Group is said to be seeking a buyer for the property management business, whose stock has risen 24% so far this year in anticipation of a possible sale.

Other providers of property services have also been wrestling with pressures from their parent companies.

Shimao Services (0873.HK), while maintaining its core business, is reducing its reliance on its parent while expanding into services for commercial complexes, office buildings and hotels. Despite these efforts, the company posted a loss last year.

With a liquidity crunch at its parent, Sunac Services (1516.HK) has been offloading non-essential operations, including a stake in Guangxi Zhangtai Property Service, to concentrate its efforts on bigger cities. The companies have yet to release first-half results, but their stocks have benefited from a broader rally in the property management sector.

Although investors are showing tentative signs of renewed enthusiasm, the crisis in the sector has not been defused. Agile is still beset by a debt burden that, if exacerbated, could inflict more pain on A-Living. To hedge the risks, the property management firm is seeking third-party business outside of its corporate family, but the scale is still limited. It will take time and resources for A-Living to wean itself off the reliance on its parent company.

The property manager’s forward price-to-earnings (P/E) ratio has not yet returned to pre-pandemic levels. With more third-party business and stable cash flow, it could enjoy some upside potential. But investors would be wise to keep a wary eye on Agile’s debt-related uncertainties, China’s property market policies and the consolidation trends in the industry.

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The shopping mall operator said its losses continued to grow in the first half of this year, but indicated the rate of increase could be moderating

Key Takeaways:

• Red Star Macalline said its loss widened about 36% in the first half of this year, marking an improvement from the 45% increase in 2024
• The company’s stock has risen 30% in the last three months as investors applaud its efforts to get its financial house in order

By Doug Young

Could China’s embattled retail sector be turning a corner?

It’s possible, based on signals coming from shopping mall operator Red Star Macalline Group Corp. Ltd. (1528.HK) in a profit forecast for the first half of the year issued on Monday. The forecast doesn’t look too exciting at first glance, saying the company expects to report a loss of between 1.65 billion yuan ($230 million) and 1.98 billion yuan for the first six months of 2025.

A closer look shows a loss at the midpoint of that range would be 36% bigger than the loss of 1.34 billion yuan the company reported in the year-ago period. While that may not sound too impressive, it would be an improvement from the 45% jump in the company’s net loss last year, when the figure widened to 3.49 billion yuan from 2.41 billion in 2023.

That piece of potentially positive news was also offset by Macalline’s concurrent announcement that it would adjust the value of its investment properties downward by 1.8 billion yuan during its semi-annual valuation adjustment. A similar downward adjustment for the second half of the year would far outpace the 2.9 billion yuan downward adjustment for all 2024, showing values continue to fall sharply in China’s sputtering property market.

The latest half-year loss sets up Macalline to report a third consecutive annual loss for 2025, after it first fell into the red in 2023. It blamed the latest loss on the usual factors, including rental and management fee reductions to help struggling shopping mall owners and tenants. Macalline operates its own shopping malls, which accounts for about two-thirds of its revenue, and also manages malls for other property owners.

While Macalline didn’t provide too much detail on the factors behind its rising losses, its latest annual report released in April showed the company seemed to be getting its own situation under control in 2024. Reflecting that, it returned to positive cash flow for the year, reporting a 605 million yuan inflow, reversing a 101 million yuan outflow in 2023.

From a macro perspective, China’s retail sector appeared to be stabilizing in the first half of the year after more than a year of weakness. Some of that could owe to a growing number of stimulus measures by Beijing to boost consumer spending. The highest profile of those offers government subsidies when consumers trade in their old home appliances, smartphones, PCs and other big-ticket items to buy new ones.

As such programs gain momentum, retail spending has logged relatively strong gains so far this year, including a 6.4% rise in May – the fastest growth since December 2023. That growth followed similarly strong gains in the first four months of the year, with retail sales generally up between 4% and 6% each month.

Slumping real estate

While the macro retail numbers look solid enough, the outlook for China’s retail real estate market hardly looked encouraging going into 2025. British real estate services provider Savills forecast that vacancy rates for retail real estate in most major Chinese cities would rise between 0 and 5 percentage points this year. Similarly, it forecast that rents would be flat at best, and could fall as much as 5%, as landlords offered discounts to retain tenants and more flexible leasing options to bring in new ones.

Macalline’s 2024 results reflect both of those trends, though, as we’ve previously noted, the company appeared to make significant progress in cleaning up its finances. Its revenue totaled just 7.82 billion yuan last year, down by nearly a third from 11.5 billion yuan in 2023.

Its core business of directly managing its own shopping malls did a bit better, with revenue down 21% year-on-year to 5.36 billion yuan, accounting for 69% of its total. Part of that was due to a drop in the number of the company’s directly operated malls, which fell 11.5% to 77 at the end of last year from 87 a year earlier. The occupancy rate for that part of its business actually improved slightly last year to 83% from 82.8% in 2023.

But the relative strength for its directly operated mall business was offset by bigger declines for its other two main areas. Its construction and decoration services segment was especially weak, with revenue plunging by more than three-quarters to just 332 million yuan from 1.48 billion yuan a year earlier, reflecting a lack of demand as new property construction remains anemic.

All that said, Macalline’s attempts to clean up its own house showed up in a wide range of metrics across its latest annual report. In addition to returning to positive cash flow, the company reported its net gearing ratio dropped to 54.8% last year from 64.7% at the end of 2023. It also reported gross margin improvement to 63.8% last year from 61.1% in 2023, as its cash reserves rose to 3.15 billion yuan from 2.53 billion yuan over that time. Its account receivables also fell by more than half to 585 million yuan at the end of last year from 1.2 billion yuan a year earlier.

Investors have generally applauded Macalline’s efforts as it tries to steady its ship, even as it’s far from clear whether the company’s business downturn has reached bottom. The stock has rallied 30% over the last three months, giving the company a price-to-sales (P/S) ratio of 0.91 – not exactly stellar, but well ahead of most of China’s other property developers and managers.

The latest profit forecast looks slightly encouraging as it seems to show the company is bringing its own problems under control, even as the broader Chinese commercial property market remains weak. But we’ll need to wait for the company’s full half-year report, most likely set to come out next month, before making a better-informed assessment of where it’s going, and whether its recent stock rally is sustainable.

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Three years after privatizing its Hong Kong-listed shares, storied hotelier Jin Jiang has rolled out plans to re-list on the city’s stock exchange

Key Takeaways:

• Jin Jiang has applied to list in Hong Kong, just three years after withdrawing from the market
• The company’s profit tumbled over 80% in the first quarter as Chinese travelers reined in their spending

By Lau Chi Hang

The opening chapter of “Romance of the Three Kingdoms,” one of China’s four great classical novels, says the world operates in cycles of long periods of division, followed by reunification, before more division.

That same rule applies in the capital market these days to Jin Jiang Capital Co. Ltd. The company, one of China’s three largest hoteliers, checked out of the Hong Kong stock market three years ago with its privatization, believing its shares were undervalued. But now its 45%-owned company, the similarly named Shanghai Jin Jiang International Hotels Co. Ltd. (600754.SH), is saying it plans to make a second listing in Hong Kong and has hired KPMG as its auditor, according to a filing with the Shanghai Stock Exchange earlier this month.

Jin Jiang is one of China’s most storied hotel brands, with a portfolio that includes some of Shanghai’s most famous properties, such as its namesake art deco-style Jin Jiang Hotel, the Peace Hotel, formerly known as the Cathay Hotel, and the newer Park Hotel. When U.S. President Richard Nixon visited China in 1972, his U.S. delegation stayed at the Jin Jiang Hotel.

Jin Jiang International listed in Shanghai in 1994, just years after China launched its first stock exchanges. Its controlling shareholder, Jin Jiang Capital, went public in Hong Kong in 2006 and delisted in 2022. The new Hong Kong listing attempt for Jin Jiang International, just three years after Jin Jiang Capital’s exit, has left investors wondering why the company is coming back for a second stay, and whether the new listing may be worth considering.

To figure out what’s happening, we’ll rewind to 2021 and examine why Jin Jiang Capital delisted in the first place. Disclosures from that time show its privatization was driven by two main factors. Back then, the company said its Hong Kong shares were consistently valued lower than its peers, which was compounded by low trading volumes. Additionally, the company believed that privatizing could help to cut costs, boosting its operating efficiency.

Low trading volumes

So, if the company withdrew from Hong Kong due to low valuations and trading volumes, why does it feel the same thing won’t happen again?

The biggest Hong Kong-listed hotel stock is H World Group (1179.HK; HTHT.US), whose daily trading volume averages 1 million to 2 million shares typically worth HK$50 million ($6.37 million) or less. Shangri-La Group’s (0069.HK) daily volume averages several hundred thousand shares valued at several million Hong Kong dollars. Hongkong and Shanghai Hotels (0045.HK) is even worse, averaging less than 100,000 shares traded daily worth just several hundred thousand Hong Kong dollars, or tens of thousands of U.S. dollars.

The bottom line is that Hong Kong investors aren’t easily excited by hotel stocks. In the year before Jin Jiang Capital’s delisting, its average daily trading volume was around 1.8 million shares. Does the company have some major plans to bring more excitement to its stock this time around?

The timing of the relisting plan doesn’t seem particularly good, either. Hong Kong stocks saw some terrific runs during Jin Jiang’s first listing between 2006 and 2022, but the company never really took off during the hot periods.

Investors are far less confident these days than those earlier go-go years, worried about uncertainties created by geopolitical tensions and the ongoing China-U.S. trade war. While market sentiment has improved somewhat since late last year, daily trading volume in Hong Kong is still relatively muted, usually less than HK$200 billion. The overall environment in Hong Kong seems less friendly overall than during Jin Jiang’s first Hong Kong listing.

Changing business strategies

Low valuation and trading volumes aside, Jin Jiang also listed cost-cutting as a major consideration behind its 2022 privatization. And yet now such consideration seems less important, since the company will once again incur all the costs associated with a Hong Kong listing. That raises of the question of what may have happened that has suddenly made a Hong Kong listing appealing again.

Perhaps the company really does have a new playbook now that didn’t exist three years ago. Its disclosure says it has been strengthening ties with overseas capital markets to facilitate a future globalization strategy – a common theme recently among Chinese companies in search of growth as their home market slows.

Jin Jiang has been expanding overseas for more than a decade, with high-profile moves including its purchase of U.S.-based Interstate Hotels in 2009, which it later sold, and its acquisition of France’s Louvre Hotels Group for a hefty 1.2 billion euros ($1.4 billion) in 2014. Those deals all happened during Jin Jiang Capital’s first Hong Kong listing and show that global expansion isn’t really anything new for the company.

Money-losing overseas business

Jin Jiang hasn’t exactly been raking in the profits from its overseas business, either. Losses for that part of its operations have been piling up, totaling more than 200 million euros between 2020 and 2023. While the red ink has eased, the company’s overseas business still lost 56.89 million euros last year. Louvre Hotels has been a big part of the problem, continuing to lose money a decade after the acquisition. With such a poor track record, how can Jin Jiang hope to convince Hong Kong investors of the big potential for more overseas expansion?

Things aren’t much better at home. After benefiting from a wave of “revenge travel” in 2023, Jin Jiang and its peers have started to struggle as China’s tourism recovery peters out. As that happens, the company’s revenue fell 4% last year to 14.06 billion yuan from 2023 and its profit dropped 9% to 910 million yuan. The declines accelerated in this year’s first quarter, with its revenue down 8.3% to 2.9 billion yuan and its profit tumbling 81% to 36.01 million yuan. Such plunging profits will hardly reel in investors.

The comeback listing may be Jin Jiang’s way of striking while the iron is hot, since Hong Kong is now experiencing one of its best IPO markets in years. That means the company’s shares might get a strong reception over the short haul from a rising tide that lifts all boats. But longer-term investors might be a harder sell and may want to observe the company for a year or two before swooping in to buy the stock on this second outing in Hong Kong.

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China’s third-largest online travel company is buying the hotel management unit of a former highflying operator now struggling to stay one step ahead of its creditors

Key Takeaways

• Tongcheng has agreed to buy the hotel management arm of Dalian Wanda, adding high-end properties to its growing portfolio of 2,300 managed hotels
• The deal gives Dalian Wanda, a former property and entertainment giant, more cash to meet its debt commitments

By Edith Terry

It’s not a match made in heaven, at least according to shareholders of Tongcheng Travel Holdings Ltd. (0780.HK), which last week announced it would buy the hotel management, construction and design business of Wanda Hotel Development Co. Ltd. (0169.HK) for 2.5 billion yuan ($342 million). Tongcheng’s shares fell 6% after the announcement, even as Wanda’s shareholders welcomed the news by sending it stock up as much as 24% before the stock closed up a more modest 10%.

The deal, announced April 17 just before the long Easter holiday, gives Tongcheng 100% equity in the management, design and construction assets for Wanda’s nine hotel brands, ranging from luxury to mid-scale, covering 204 properties with 40,200 rooms and another 376 hotels under contract that have yet to open. These will join Tongcheng’s existing portfolio of 2,300 managed hotels, with another 1,400 in the pipeline.

Tongcheng’s existing hotel management business consists of mostly midscale and economy brands such as Yaze, eLong and Mehood. The sale will see Tongcheng take over the Wanda brands and management teams, but the actual property assets aren’t included.

The two portfolios are complementary, and part of a fast-expanding business segment that Tongcheng so far only identifies in its financial reports as “others,” which includes hotel management and online package tour services. Tongcheng’s core online lodging and transport bookings businesses represented 27% and 42% of its 17.3 billion yuan in revenue last year.

But while revenue for both of those core categories grew 20% year-over-year, the “other” category grew by a much faster 35%, reaching 2.3 billion yuan, or 13% of total revenue. The new Wanda purchase could spark even faster growth for the hotel management business, since those hotels are typically higher-end and bring in bigger management fees per property.

Tongcheng, whose major backers include internet giant Tencent and leading online travel agent Trip.com (TCOM.US, 9961.HK), is China’s third largest online travel agency (OTA) with 14% of the market, well behind Trip.com’s leading 50% share. Still, its evolving business model distinguishes it from its peers, and its managed hotels could ultimately benefit if it gives those properties preferred status on its platform.

Tongcheng also has plenty of cash to help pay for the acquisition, with 8 billion yuan at the end of the last year, more than triple the acquisition price. The purchase price also looks quite affordable, equal to 5% of Tongcheng’s own market cap of HK$48.67 billion ($6.27 billion).

In announcing the acquisition, Tongcheng said the assets would “enhance the company’s competitiveness in high-end hotels, thus further solidifying its position in the industry.”

Fallen star

On the other side of the transaction is Wang Jianlin, founder of Dalian Wanda, which owns or controls 65% of Wanda Hotel. Wang was once China’s richest man, worth $31.3 billion in 2017 on his then-booming real estate empire. But things began to unravel as early as 2016, when he delisted his Wanda Dalian Commercial Properties, which he believed was undervalued, from Hong Kong. He then failed to re-list the company in Shanghai as part of his plan, leaving him in heavy debt to an investor group that helped to fund the buyout.

Wanda was one of China’s earlier property giants to run into trouble after taking on too much debt during the country’s property boom, and has been selling off assets to meet bond repayment deadlines since 2017. In 2018, it put prize assets including Atletico Madrid and AMC Entertainment Holdings up for sale. It has also sold more than 30 of its signature Wanda Plaza mixed-use shopping and office complexes in the past three years, together with its British luxury yacht manufacturer Sunseeker International.

Recent media reports said it is hoping to redeem 2.27 billion yuan in onshore bonds early, which may explain why it’s eager to close the deal with Tongcheng and get its hands on some fresh cash. Wanda Hotel Development is also probably in need of its own cash, after falling into the red last year with a loss of nearly 1 billion yuan.

The assets being acquired by Tongcheng posted a profit of HK$21.6 million last year, down sharply from HK$148.6 million in 2023.

The sale comes after a similar move in March last year that saw Wanda sell 60% of its Newland Commercial Management unit, which manages 496 Wanda shopping malls across China, to a consortium led by PAG for 60 billion yuan. Those and other sales have kept Wang Jianlin one step ahead of his creditors, at least so far.

So, what explains the negative reaction by Tongcheng shareholders? As we’ve already noted, the deal looks complementary for Tongcheng’s existing low-end hotel management business by providing it with nine new premium brands. But it also comes at a time when the market is downshifting as consumers rein in their spending with China’s slowing economy.

Investors may like Tongcheng’s lower-end hotel management business, which could thrive as travelers look for more affordable lodging options to save money. But such downgrading could come at the expense of the pricier options that Tongcheng is now acquiring.

Tongcheng and Wanda already have a relationship that dates back at least 10 years, even as their fortunes have moved in opposite directions lately. Wanda was one of three investors in a 1 billion yuan funding round in 2016, which also included Trip.com and Tencent.

The same year, Tongcheng bought Wanda’s travel agency business for 700 million yuan, which had nearly 1,000 shops nationwide at that time. Wanda set up that business in 2013, at a headier time when it was aiming to build up a leisure and entertainment empire that it likened to a Chinese version of Disney. But that vision is now a distant memory, with companies like Tongcheng emerging as buyers for pieces of a former empire that Wanda would probably like to move on from.

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The hotel operator’s overseas revenue grew last year, but its widening losses sharply dragged down the company's overall profit

Key Takeaways:

• H World reported its profit dropped nearly 27% in 2024, including a 93% plunge in the fourth-quarter
• The hotel company’s overseas business recorded an operating loss of more than 400 million yuan last year

By Lau Chi Hang

After 20 years of labor and tirelessly rolling out the welcome mat, H World Group Ltd. (1179.HK; HTHT.US) founder Ji Qi finally realized his long-held ambition of operating “10,000 hotels in 1,000 cities” last year. By the end of 2024, his company presided over a portfolio of 11,147 hotels, with just over 1 million rooms.

“In 2024, H World achieved the 10,000-hotel milestone and continued our fast network expansion in China,” said CEO Jin Hui. “By 2024, Legacy-H World has opened over 2,400 new hotels, far exceeding our initial target of 1,800 hotels,” he added, referring to the company’s original China business, which includes the budget HanTing hotel brand.

Climbing revenue, plunging profits

Despite hitting those milestones, H World’s bottom line didn’t fare quite so well last year. Its top line revenue posted a respectable 9.2% rise to 23.9 billion yuan ($3.28 billion) for the year, but its profit went the other way, falling 26.8% to 3 billion yuan from 4.1 billion yuan in 2023. The fourth-quarter was particularly weak, with revenue up by a slower 7.8% year-on-year to 6 billion yuan. And its profit nearly evaporated to just 49 million yuan, plunging 93.4% from 743 million yuan in the year-ago period.

Founded in 2005, H World, like many of its major Western peers, operates a multi-tiered portfolio of hotel brands catering to different market segments. Its economy brands in China include HanTing, Ibis and Hi Inn, while its midscale hotels include Ibis Styles, Starway, JI and Orange. It also operates upper midscale hotel brands Crystal Orange, Manxin and Novotel, and the Steigenberger Icon and Song Hotels luxury brands.

The company’s hotels are divided into two main segments: domestic, which it calls Legacy-H World in its reports; and Legacy-DH, which are part of a previous overseas acquisition in Europe. Like many major operators, the company’s portfolio includes both directly leased and managed hotels, and hotels that it manages under contract for other property owners. The directly leased and managed part of its business is the far smaller of the two, accounting for 9% of its total rooms.

The managed property model, sometimes called “manachised,” is divided into two parts. Under one, H World collects fees from property owners for providing both management and franchising services. Under the other, it simply provides training, reservation and support services and collects related franchising fees but does not provide day-to-day management services.

International business impairment

H World pointed out that the significant profit decline was mainly attributable to one-off restructuring costs related to its overseas business. Those included an impairment loss of 417 million yuan recognized in the fourth quarter, as well as foreign exchange losses and higher withholding taxes related to dividend distributions.

The company’s domestic business also came under pressure, as Chinese consumers and businesses reined in their spending with the country’s economic slowdown. The company’s average daily room rate stood at 277 yuan in the fourth quarter, down 2.5% year-over-year and off by 8% sequentially. Its average occupancy rate for the quarter was 80%, also down 0.5 percentage points year-over-year and 4.9 percentage sequentially. Revenue per available room (revpar), which combines occupancy and room prices, dropped to 222 yuan from 229 yuan in the same period of 2023 and 256 yuan in the previous quarter.

While the domestic market was hardly stellar, the company’s overseas business was the main culprit behind H World’s poor full-year performance. That business posted an operating loss of 311 million yuan in last year’s fourth quarter, ballooning from a loss of 64 million yuan a year earlier, and 40 million yuan in the third quarter.

Continued revenue growth

Excluding the overseas business, H World said it expects its China business to record year-on-year revenue growth of between 3% and 7% in this year’s first quarter, and between 5% and 9% for the full year. Revenue from its managed and franchised hotels is forecast to rise by a stronger 18% to 22% in the first quarter, and by 17% to 21% for the year. During the full-year the company expects to open 2,300 new hotels and close about 600.

Those forecasts show H World expects its China business to continue growing in terms of revenue, but only in the low- to mid-single digits. Its lack of similar forecasts for the international business suggests that segment will continue to be volatile and lose money, further weighing on the company’s overall performance.

Improving the international business will become key to H World’s future growth, especially as the China business slows.

H Group’s Hong Kong-listed shares rose 4.2% to close at HK$29.70 the day after the latest announcement. The stock currently trades at a respectable trailing price-to-earnings (P/E) ratio of 27 times, similar to that for global giant Marriott International (MAR.US) and slightly higher than the 23 times for domestic rival Atour (ATAT.US). That valuation shows H World can play in the big leagues, though it will need to fix its international business to move to the next level.

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The regional property manager has filed for a Nasdaq IPO that would value it at about $100 million and give it a far higher P/E ratio than most of its peers

Key Takeaways:

• Dalu International has filed for a Nasdaq IPO that could raise around $8 million and give the company a price-to-earnings ratio of about 57
• The property management company boasts far higher margins than most of its peers as it transitions into more profitable rental services

By Doug Young

China’s property market has hardly been a friendly place for investors these days, as prices continue to slump and thousands of projects remain unfinished due to lack of funds and weak demand. But that’s hardly deterring Dalu International Group Ltd., a regional provider of property management services, which is aiming to raise a relatively modest $8 million in a Nasdaq IPO, according to a filing by the company this week.

Property management companies are one of the few groups that have remained consistently profitable during China’s real estate downturn, relying mostly on regular management fees for their revenue. Still, even this group is coming under pressure, as reflected by data in Dalu’s prospectus that we’ll describe shortly.

This IPO is somewhat unusual for a number of reasons, led by Dalu’s choice to list on the Nasdaq. Nearly all of its peers are listed in Hong Kong, where investors are quite familiar with anything related to China’s property market. Perhaps Dalu is choosing New York for exactly that reason, as it’s also seeking quite a rich valuation compared with many of its Hong Kong-listed peers.

Dalu seems to feel it merits such a rich valuation due to its impressive margins, which appears to be the result of its recent move beyond traditional property management services into more lucrative leasing services. Such services have become its main revenue source since it entered the business just three years ago.

The company also offers a relatively unique chance for investors to buy into a very regional property manager that hopes to expand beyond its home base in Chengdu, capital of Southwest China’s Sichuan province. It says it plans to use half of the proceeds from its IPO for strategic investments, including acquisitions and joint ventures that could take it beyond its current base where it manages about a dozen commercial and residential properties, and provides subleasing services for another three.

Before we delve into its financials, we’ll take a closer look at the company’s fundraising goals that show why it thinks quite highly of itself. Dalu said it plans to sell 1.5 million shares for between $4 and $6 apiece, representing 7.7% of its expanded share capital. That would value the company at about $100 million.

That market value and the company’s latest annual profit would give it quite a high price-to-earnings (P/E) ratio of 57. Other Hong Kong-listed peers, which are all much larger, trade at far lower multiples, including Jinmao Services (0816.HK) at just 6.7, Onewo (2602.HK) at 15, and the smaller Yuexiu Services (6626.HK) at 9.2.

Part of the low valuations for its peers may owe to the fact that most are units of major listed property developers that are nearly all losing big money right now. Investors may worry that those bigger parents may try to syphon funds from their property management arms that are one of their few profitable assets. In fact, Dalu International is also controlled by a real estate developer, Dalu Group, which currently supplies about a quarter of Dalu International’s revenue.

The only peer that comes even close to what Dalu is seeking in terms of valuation is KE Holdings (BEKE.US; 2423.HK), China’s leading provider of real estate brokerage services, whose current P/E ratio stands at 47.

Fat margins

All that said, we’ll take a closer look at Dalu International’s financials, including gross margins that look quite strong. At the same time, those financials show how even property managers are now coming under pressure as commercial property vacancies grow and homeowners are less willing to pay high management fees in a slowing economy and weak property market.

The company operates in a Chinese property management services market expected to grow 4.5% annually from 2020 to reach $108 billion by 2027, according to third-party market data in the prospectus. Dalu also points out that the market’s regional nature makes it highly fragmented, providing opportunities for consolidation.

Dalu’s revenue grew by an anemic 3% to $2.84 million in the six months to last September, the first half of the company’s fiscal year, from $2.76 million in the year-ago period. That represented a sharp slowdown from the 15.7% year-on-year revenue growth it recorded in its fiscal year through March 2024, when the figure reached $5.54 million.

A major factor behind the slowdown was weakness in the fees the company charges for its services. Those fees for its managed residential properties fell slightly to $0.34 per square meter in the six months to September 2024 from $0.35 a year earlier. Commercial property management fees showed a similar trend over that period, dropping to $1.71 per square meter from $1.75 a year earlier. Before that, residential management fees jumped 46% in the previous full fiscal year, while commercial management fees rose by 14%.

“At present, office space and retail space supply are rising when occupancy rates are on the decline,” the company said. “How to attract and retain tenants and customers has become a major challenge in our business operations.”

Despite the weakness, Dalu managed to record a gross margin of 44.2% in the six months to last September – nearly double or more compared with the 24.6% for Jinmao Services in the first half of last year, 25.9 for Yuexiu Services and 21.2% for Country Garden Services.

A major factor behind its high margins appears to be Dalu’s April 2022 entry into leasing services, which carry higher margins than management services. The prospectus shows that such leasing services now account for more than half of the company’s total revenue, at around 60% in its latest reporting period, while most of the rest comes from property management.

On its bottom line, Dalu reported a net profit of $878,000 for the six months through last September, up 4.8% year-on-year. That kind of profit growth, combined with its 3% revenue growth, hardly look that impressive, and trail most of its peers. But Dalu is probably hoping investors will focus on its margins, plus its potential to become an industry consolidator, as it floats shares in New York – rather than Hong Kong – to take advantage of relative investor unfamiliarity with the complexities of China’s property market.

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The virtual interior design startup filed for a Hong Kong IPO after its earlier New York listing attempt unraveled

Key Takeaways:

• Virtual interior design company Manycore has filed for a Hong Kong IPO after its New York listing application in 2021 failed
• The IPO could be buoyed by a wave of positive sentiment as Chinese tech stocks rally amid optimism over AI development and expectations of government support

By Warren Yang

It wasn’t long ago that Manycore Tech Inc. became a victim of circumstances beyond its control as it sought a New York listing that ultimately failed. Now, whether by design or not, the virtual interior design startup may be benefiting from a different set of external developments as it makes a second attempt to go public – this time closer to home in Hong Kong.

Last Friday, the company filed for a Hong Kong IPO, with big-name underwriters JPMorgan and CCB International as co-sponsors, indicating the listing could be relatively large, raising $100 million or more. The encore listing attempt comes more than three years after its failed first application in 2021.

In that first effort, Manycore put together a reasonably compelling story for investors. The company, using third-party data, described itself as the leading provider of interior design, decoration and construction software, with a 10% market share in terms of gross billings. It said the market was set for explosive growth as millions of Chinese sought software that creates interactive visualizations of designs and floorplans of their properties in a country where home ownership is considered nearly essential for most young people.

But unfortunately for Manycore, investors were growing wary of Chinese companies in general at that time as tensions between Washington and Beijing were heating up. Particularly, Chinese authorities stepped up scrutiny of overseas-listed domestic tech companies with large volumes of user data, raising concerns about information they transfer across borders.

Those concerns were embodied in the short-lived New York listing by DiDi Global, China’s version of Uber. Chinese regulators weren’t so happy about DiDi’s U.S. listing plan to begin with, fearing it could make the company’s huge pool of user data accessible to U.S. regulators. But the company proceeded anyway, completing an IPO in the summer of 2021. All hell broke loose soon after as Beijing took steps to punish the company for failing to complete a required data security review, and DiDi ended up delisting from New York the following year.

A long-running spat over American regulators’ inability to access audit documents of U.S.-listed Chinese companies didn’t help matters. That led a number of Chinese companies, including some of the largest state-owned enterprises, to leave U.S. stock exchanges in 2022.

All this clearly wasn’t favorable for Manycore’s New York IPO attempt, making it little surprise that the listing never materialized.

Upbeat mood

Fast forward to the present when the mood is far more upbeat for Chinese tech companies, many of which are increasingly abandoning their former preference for New York to list in Hong Kong instead. For starters, the rise of artificial intelligence (AI) startup DeepSeek is fueling optimism about prospects for the whole sector. Most recently, President Xi Jinping met with China’s top tech entrepreneurs this week in Beijing, including Alibaba founder Jack Ma, which seemed to signal the government’s intent to take better care of a group that was previously the subject of numerous regulatory crackdowns.

At least that’s how the market interpreted the move, sending the Hang Seng Tech Index to a new three-year high after the meeting, extending gains for the past month to more than 30%.

The resurgence of Chinese tech stocks could be a boon for Manycore, considered one of the “Six Little Dragons” of Hangzhou, China’s equivalent of Silicon Valley, along with DeekSeek. Manycore’s Kujiale software is cloud-based and allows users to create 3D renderings of home interior layouts. The company is also looking to increase the use of AI, and makes frequent mention of the hot technology. In its latest prospectus for the Hong Kong IPO, it prominently describes itself as a “fast-growing, disruptive design and visualization platform” powered by AI.

The term “AI” is used more than 100 times in the company’s latest prospectus, more than four times the 24 mentions in its original 2021 New York IPO prospectus before the AI craze began in late 2023 with ChatGPT.

The suddenly warming climate for a sector that has weathered a long, harsh winter makes Manycore’s timing look quite good for its latest listing attempt. The company was looking to raise up to $200 million from the Hong Kong IPO, according to a Bloomberg report last year. That’s a considerable sum, twice the initial target for the U.S. IPO. But it may not be too far-fetched, given that Manycore’s valuation hit $2 billion after a funding round in 2020, according to a media report.

Also, the company’s revenue increased 88% from 2020 to 2023, the latest annual reporting period included in its prospectus for the Hong Kong IPO. So, the company could make a case for a doubling of its valuation during the period solely based on its business growth. 

That said, Manycore’s recent annual growth isn’t exactly mind-blowing. Its revenue increased by a mediocre 10% to 663 million yuan ($91 million) in 2023 from the prior year, and rose 13.8% to 552.9 million yuan in the first nine months of last year from the year-ago period. While such growth doesn’t look particularly large, the company’s ability to maintain such momentum in the face of China’s slowing economy and property downturn still looks relatively commendable.

Manycore has yet to make money, largely due to high R&D expenses. Its loss for 2023 narrowed a bit to 646 million yuan from 704 million yuan a year earlier, and similarly narrowed to 422 million yuan in the first nine months of last year from 489 million yuan a year earlier. But those are still large amounts that are nearly equal to its entire revenue. Because of these losses, Manycore’s cash holdings are dwindling as well.

A $2 billion valuation for Manycore would give the company a price-to-sales (P/S) ratio of more than 20, based on its 2023 revenue. By comparison, shares in Autodesk (ADSK.US), which pioneered architectural design software and is the international leader in the field of computer aided design trade at a much lower P/S ratio of 11. And unlike Manycore, Autodesk is comfortably profitable.

Despite what looks like a high valuation target, Manycore may have positive sentiment on its side – a critical factor when it comes to capital markets. That means the company probably wants to wrap up its Hong Kong IPO sooner rather than later to take advantage of the tide of positive sentiment that will die down eventually.

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By Doug Young & Rene Vanguestaine

As we enter 2025, one of the world’s largest consulting firms, McKinsey & Co., is grappling with its presence in China — a market that has historically been a key player in its global business strategy. A recent report from Bloomberg indicates that a vocal group of McKinsey partners are advocating for a potential pullout from China, a move that would not only mark a significant shift for the consulting giant but also reflect broader shifts in geopolitical and economic trends.

The arguments for such a move stem from both economic realities and geopolitical tensions. McKinsey, like many foreign companies in China, has seen its revenues decline in recent years. The Chinese government's growing preference for domestic firms — especially in sectors involving state-owned enterprises (SOEs) — has increasingly isolated high-end foreign consultants. Over the past several years, global companies, including investment banks and law firms, have found it more challenging to maintain their presence and influence in China. The government's emphasis on reducing reliance on foreign consultants in favor of domestic alternatives has intensified, signaling a challenging environment for global firms like McKinsey.

While it's difficult to assess the scale of McKinsey's business in China, one can estimate that it’s a far cry from the substantial revenues it may have enjoyed a decade ago. The shifting economics of doing business in China, alongside heightened geopolitical tensions, are prompting companies to reassess their footprint in the country. For McKinsey, the pullback could be offset by stronger business prospects in its home North American market, where the firm has a long-established client base.

Beyond the economic factors, geopolitical considerations cannot be ignored. Over the past few years, both Republicans and Democrats in the U.S. have taken a stronger stance on reducing American businesses’ exposure to China — especially when those companies engage with entities that may pose national security risks. The uncertainty surrounding U.S.-China relations, particularly in light of rising tensions, has fueled concerns among McKinsey partners in the U.S. about the long-term viability of maintaining ties with Chinese companies, particularly those seen as having dual civilian and military roles.

From China’s perspective, McKinsey’s potential departure might seem like a loss, given the prestige associated with having such a global name in the market. However, China’s priorities have shifted in recent years. National security and technological self-sufficiency now take precedence over maintaining relationships with foreign consultants. The Chinese government has repeatedly assured the world of its openness to foreign investment, but the focus has increasingly been on technology transfer and job creation rather than fostering a robust consulting ecosystem that benefits global firms.

The eventual impact on China’s economy may not be as significant as it once would have been, especially as foreign companies continue to pull back or reduce their presence in the country. The broader trend of companies shrinking their operations or exiting entirely from China reflects a larger, more complex set of challenges that are now in play.

While McKinsey’s potential pullout from China remains speculative, the company’s retreat from the world’s second-largest economy would be part of a larger wave of disengagement by foreign firms, driven by a combination of shifting economic factors and increasingly difficult geopolitical dynamics.

State power in action

In a separate but equally important development, the city of Shenzhen has stepped in to support one of its most prominent property developers, Vanke, in the face of severe financial distress. Vanke, once a leading player in China's booming real estate sector, has found itself teetering on the edge of insolvency as the broader real estate crisis in China continues to wreak havoc. In a strategic move, Shenzhen Metro Group, a government-owned entity, has taken over one of Vanke’s major unfinished projects, injecting capital to stabilize the company.

However, this rescue comes with strings attached. Shenzhen Metro Group has placed its own personnel in key management positions at Vanke, signaling a shift in control and raising questions about the company’s future. While most of Vanke’s current executives remain in place at the highest levels, it is clear that Shenzhen Metro intends to assert considerable influence over the company’s operations. This raises the question of whether this move is merely temporary or the beginning of a broader shift towards increased government control over private enterprises in China.

It is not unusual for state-run entities to intervene in struggling state-owned enterprises. But the involvement of a government-linked organization in rescuing a private company like Vanke is a notable departure. With the Chinese real estate sector still reeling from a series of defaults and financial difficulties, the Chinese government appears willing to step in wherever necessary to prevent major players like Vanke from collapsing. This raises the prospect of further state involvement in the private sector, particularly in industries that are seen as strategically important to China’s economic stability.

As China grapples with its ongoing real estate crisis, it may increasingly look to state-owned entities to step in and take control of struggling private firms, particularly those in key sectors. This trend could have long-lasting effects on the balance between the public and private sectors in China, and potentially reshape the future of the country’s economic landscape.

Both McKinsey’s potential departure and the rescue of Vanke illustrate the complex interplay of economic, political, and geopolitical factors that are reshaping business operations in China. As the world’s second-largest economy continues to evolve, foreign firms and domestic companies alike will need to navigate these shifting dynamics with caution and strategic foresight.

Default risks have receded at the embattled property developer after a state-backed support effort, but business recovery is still a long way off

Key Takeaways:

• The head of the firm’s biggest shareholder, state-owned Shenzhen Metro, will take the Vanke helm in a boardroom shake-up
• The real estate developer warned of a net loss of up to 45 billion yuan for 2024 after making a 12.2 billion yuan profit a year earlier

By Lee Shih Ta

Just before the New Year holidays, property developer China Vanke Co. Ltd. (2202.HK; 000002.SZ) dropped a series of bombshells, as if keen to get the fireworks out of the way and make a fresh start in the Year of the Snake.

First up was a profit warning. The real estate giant forecast it was facing a record loss of 45 billion yuan ($6.17 billion) for 2024 on disappointing sales, in a sharp reversal from a profit of 12.2 billion yuan a year earlier.

Next came another shocker. A boardroom shake-up was announced in which the chairman and CEO were both stepping down and a new leader was taking control, crossing over from the state-owned company that is Vanke’s biggest shareholder.

Just 10 minutes later, the body in charge of state assets in Shenzhen, where Vanke is headquartered, rattled off a statement of support, endorsing what could essentially amount to a state takeover of the troubled real estate firm.

The dramatic intervention came as Vanke was facing a crunch time in its debt repayment cycle. The company’s ability to service its debts was shaping up to be a critical test this year for China’s crisis-hit real estate sector.

The rapid-fire announcements were a lot for investors to process, just as the country was winding down for the Lunar New Year festival. But the state’s financial firepower has clearly reduced the default risks for Vanke, in what some analysts called a de-facto bailout of a firm that was deemed “too big to fail”.

Describing the management changes, Vanke said Yu Liang was resigning as chairman but would remain as a director and executive vice president. CEO Zhu Jiusheng was giving up all his positions for “health reasons”. Meanwhile, the chairmanship would pass to Xin Jie, the head of state-owned Shenzhen Metro Group, which owns more than a quarter of Vanke shares.

The subway operator invested more than 66.4 billion yuan in Vanke in 2017, becoming the firm’s largest shareholder with a 27.18% stake. Up until now, it had stayed out of Vanke's business, leaving managers in charge. But with creditors circling and the developer’s finances deteriorating, the state authorities have asserted control, via Shenzhen Metro and the powerful local body that manages government assets.

The head of the Shenzhen Assets Supervision and Administration Commission (SASAC) said ample resources could be called upon to help Vanke move forward in a “market-oriented and law-based” manner, citing assets of more than 5 trillion yuan and annual revenues of more than 1 trillion yuan.

With a new team installed, media narratives can blame Vanke’s struggles at least in part on the decisions of outgoing managers.

Both in it together

But even with ultra-deep pockets, the task will be challenging.

A mountain of debt is coming due in 2025 that had put Vanke on track for potential default, with the risk of ripple effects through China’s struggling real estate market. The developer’s interest-bearing liabilities totaled 327.61 billion yuan at the end of last September, while cash in hand was just 79.7 billion yuan.

When they first got together, Shenzhen Metro and Vanke enjoyed a honeymoon period, sweetened by profits from real estate assets along transit routes. In 2019, just over half of the metro firm’s revenues of 20.99 billion yuan came from real estate and property investment. Vanke alone contributed a whopping 11.2 billion yuan.

Real estate goes hand in hand with mass transit, as new transport links boost the value of nearby properties and businesses.

The first phase of the Shenzhen Metro helped to lift the value of residential buildings by 19.9%, shopping malls by 14.7% and office buildings by 11.5% within 500 square meters of the new transport system. The value boost is three times the construction cost, according to the company. Meanwhile, every kilometer of metro can add 1.56 billion yuan to the value of the surrounding properties.

However, falling prices and excess supply have triggered a downturn in China's real estate market, taking the gloss off the symbiotic business model. The once highly profitable Shenzhen Metro has also landed in the red, logging a loss of 8.07 billion yuan in the first three quarters of 2024, its biggest since 2015. The close ties between the Shenzhen Metro and Vanke can exert downward as well as upward pressure on earnings.

Too big to fail?

Vanke has long been a property bellwether as China’s first real estate company to go public in 1991. A default could deal another crushing blow to confidence after previous crises at developers Evergrande (3333.HK) and Country Garden (2007.HK).

A Bloomberg report concluded that a state lifeline had to be thrown because Vanke’s status in the industry made it “too big to fail”.

Elsewhere, analysts described the move as a landmark intervention by the government in the property sector.

“China Vanke is the first (Chinese) real estate company to get the government directly involved, which is almost tantamount to a bailout,” said Raymond Cheng, head of China and Hong Kong research at Galaxy Securities. Vanke’s state-owned backer, Shenzhen Metro, will eventually become the controlling shareholder, he predicted.

Vanke's share price jumped nearly 14% when the news came out on January 28, the last trading day of the Year of the Dragon, but the stock closed with a gain of just 2.12%.

Investors are still braced for the share price to fall in the long run. After all, the official endorsement spoke of “market-oriented” assistance, rather than unconditional support. Vanke’s fate will depend on many variables, but the authorities are now stepping up with a protective shield, which may bolster confidence in the market as a whole.

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The Chinese real estate developer is battling a wind-up petition from one of its creditors and could be forced to seek another debt restructuring

Key Takeaways:

• Sunac China said it could not rule out another overhaul of its offshore debt
• The company’s property sales fell 44% to 47.14 billion yuan in 2024

By Lee Shih Ta

The new year has sent fresh chills through China’s troubled property sector, with confidence shaken by a liquidation suit against a leading developer.

Sunac China Holdings Ltd. (1918.HK)had already skirted debt disaster in the past and, along with other property companies, enjoyed a temporary lift late last year from a government policy package to revive the real estate sector.

But earlier this month Sunac China announced it had been served with a wind-up petition from a state-owned asset management firm, China Cinda (1359.HK), over outstanding debts, with a Hong Kong court due to hear the case on March 19.

The news put a fresh question mark over Sunac China and the wider real estate industry, as investors wondered whether the embattled developer of upscale urban properties could continue to keep creditors at bay. The company fended off a liquidation request in 2023 and more recently agreed restructuring terms with bond holders for its domestic debt.

Shares in Sunac China plunged 25.7% after the news broke about the debt acton, deepening the property developer’s stock market woes. Since October last year, the firm’s share price has fallen more than 65%.

It’s a déjà vu moment for Sunac China and its investors. Back in May 2022, the company found itself in deep trouble when it was unable to make scheduled interest payments on four dollar-denominated bonds. At that time, a creditor owed $22 million in principal and accrued interest filed a winding-up petition but the suit was withdrawn a month later when the parties reached an offshore debt agreement.

Sunac China said it would fight the latest petition but was also seeking a speedy resolution with the creditor, insisting that its business should not be materially affected in the meantime.

An update from the firm’s bond trustee, Guotai Junan, showed that Sunac China had added 3.24 billion yuan ($446 million) in outstanding debt principal by the end of November, taking borrowings due and payable to 115.5 billion yuan. Specifically, overdue bank loans stood at 23.42 billion yuan, loans from non-bank financial institutions at 74.11 billion yuan and other interest-bearing debts were overdue to the tune of 17.86 billion yuan.

In terms of money owed offshore, Sunac China has 24 existing foreign debts with a balance of $7.45 billion, three of which will mature on Sept. 30, 2025 with a balance of $1.57 billion.

The amount owed to the petitioner, Cinda, is only a drop in this ocean of debt. But with Sunac China depleted by repayment pressures, investors may worry that the case could tip the property developer over the edge.

Domestic restructuring deal

Sunac China has been negotiating with domestic and offshore creditors while trying to deliver its construction projects. It was one of China’s first beleaguered developers to achieve a debt overhaul, but faces further pressure as property sales have been lagging expectations.

Sunac China submitted a plan for a second restructuring of its domestic debt In November 2024, covering 10 bonds with a face value of 15.4 billion yuan. The proposal, which would cut the debt load by half, has been accepted by all the bond holders, effectively defusing the onshore crisis for now.

However, the outlook for foreign debt is more troubling. According to media reports, Sunac China has notified some of its creditors that it may not be able to make timely payments on dollar-denominated bonds due in September 2025. A suspicion that Sunac China may be prioritizing domestic debts over external ones could have been a factor in the filing for a liquidation ruling.

Sunac China has admitted that the winding-up petition may trigger a chain reaction, spurring other creditors to seek accelerated repayment or launch  enforcement action. In that case, the developer could be forced to seek a more comprehensive solution to its external debt problems. The company has been reported to be planning to announce a new reorganization plan in March this year at the earliest.

Drive to raise cash

The Chinese government has taken a series of steps to support the flagging real estate market, including interest rate cuts and incentives to clear a backlog of unsold properties. But slow economic recovery and weak consumer confidence are confounding efforts to stabilize the sector.

Sunac China itself has been battling against declining demand. Company data released in December showed that its contracted sales fell 44% to 47.14 billion yuan in 2024 from a year earlier. But there is a bright spot – a residential and commercial complex in Shanghai that is proving popular with buyers. “One Sino Park”, a joint project between Sunac China, CITIC and Xinhu, recently released a second batch of units and logged 6.6 billion yuan in first-day sales. A third round of sales is due to launch in the spring of 2025.

Meanwhile, the company has been raising cash to repay its debts by selling off assets over the past year. These include a 35% stake in Wuhan Ganlushan Cultural and Creative Town, hotels in Wanda Cultural Tourism City in Wuxi and an 80% stake in projects in Shijiazhuang Central Business District. In December it shed a 46.67% stake in the popular Harbin Ice and Snow World, pocketing about 173 million yuan. The firm also placed up to 489 million shares at a 20% discount last October to raise HK$1.2 billion for debt repayments.

The property developer also launched a case at a Chinese arbitration body against Wanda Group over9.5 billion yuan of disputed funds. Wanda has expressed confidence that it will prevail, saying there is no contractual basis for the claim.

Sunac China has shown a willingness to explore every avenue to raise cash to settle its debts, but it could still be thwarted by continued weakness in the real estate market.

In the first half of 2024, residential property deliveries at Sunac China fell 51% from the same period a year earlier. The debt disputes weighing on consumer confidence risk trapping the company in a vicious cycle of decline.

Analysts at Bloomberg concluded that the company’s debt plans may ultimately be in vain, without a fundamental recovery in China’s property market.

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The debt-laden developer released two long-overdue financial reports last week after detailing a clearly defined debt restructuring plan

Key Takeaways:

• Country Garden revealed it lost 12.84 billion yuan in the first half of last year, as it released its long delayed interim report for 2024
• The report showed the struggling developer’s total outstanding liabilities stood at 250.2 billion yuan at the end of last June

By Lau Chi Hang

The clock has been ticking down on debt-laden developer Country Garden Holdings Co. Ltd. (2007.HK) following the suspension of trading of its Hong Kong-listed shares last April after it failed to publish its 2023 financial statement on time. Its broader financial woes aside, the company’s stock could also be de-listed under Hong Kong Stock Exchange rules if it fails to resume trading within 18 months – or by October this year.

As it scrambles to regain compliance, the company, after considerable effort, finally published its annual results for 2023 and its interim report for the first half of last year, both last week. While the numbers weren’t pretty, the exercise was critical to bringing the company back into the stock exchange’s good graces as it tries to maintain its listing.

Dwindling cash

The pair of reports showed Country Garden’s revenue fell 6.8% year-on-year in 2023, as it recorded a massive loss of 167.3 billion yuan ($22.8 billion). Its liabilities at the end of that year totaled 249.6 billion yuan, and it had 63.8 billion yuan in cash.

Things deteriorated sharply in the first half of last year, as its revenue fell 55% year-on-year to 102.1 billion yuan. Its loss narrowed by 73% but was still sizable at 12.8 billion yuan. Meanwhile, its bank and other borrowings at the end of last June stood at a whopping 121.85 billion yuan. It had 250.2 billion yuan in total liabilities and operating cash flow of negative 185 million yuan for the period. And at the end of June, its cash was down to just 6.7 billion yuan.  

Although the business has yet to see signs of improvement as China’s property market continues to sag, the company is making progress on another important front with its debt restructuring.

Earlier this month it released a restructuring proposal and reached consensus with a committee composed of seven banks. If implemented, the plan would allow Country Garden to significantly deleverage, with a targeted debt reduction of up to $11.6 billion. The plan also includes an extension of up to 11.5 years on its outstanding debt, with an aim of reducing its fundraising costs from a weighted average annual borrowing cost of about 6% to about 2%. Controlling shareholders are also considering swapping out $1.1 billion in outstanding loans owed by the company for shares of Country Garden or its subsidiaries.

The release of the pair of financial reports could pave the way for the company’s stock to resume trading, while the latest restructuring proposal represents another step forward in Country Garden’s long road toward its goal of eventually returning to financial health. However, the situation is far more fraught with potential obstacles than at first meets the eye.

Some foreign media have cited people familiar with the situation saying the company’s main creditor group has yet to sign off on terms for the offshore debt restructuring. That group accounts for over 30% of a tranche of its offshore debt totaling $10.4 billion.

All about the property market

In addition, Country Garden’s restructuring is directly tied to improvements in its cashflow that could be difficult in the current market. The company estimates that its 29 international projects can bring in cumulative debt-free cash flow of $2.6 billion to $3 billion between 2024 to 2040. Additionally, it expects to raise approximately $600 million to $800 million in cash between January 2025 and 2033 by selling financial investments.

Property sales in its core China market will be one of the most critical factors in any return to financial health. According to its own projection, it will have between 20 billion yuan and 25 billion yuan in cash available for offshore debt servicing between 2024 and 2039.

Several assumptions underlie the company’s cashflow projections. One of the most basic is its ability to maintain its status as a going concern with continuous operations and normal business activity as the domestic property market starts to stabilize. Another is the assumption that average selling prices of its domestic projects will experience only low-single-digit declines this year, followed by low- to mid-single-digit growth from 2026 to 2032, stabilizing at low single-digit growth in 2033.

In other words, the company can only realize its projections if the property market bottoms out this year and starts a gradual recovery in 2026, and if all its creditors get on board with its restructuring proposal.

On the latter point, the company has come up with a clear and well-defined proposal. Though not all creditors have necessarily signed on, it’s at least a step forward. Meantime, the domestic property market remains the biggest wild card and potential spoiler. China’s property market remains in a deep slump, and no one can say for sure if prices will only decline slightly this year and start to rebound in 2025. And even a stabilizing market by itself wouldn’t necessarily guarantee a more positive outlook for the company.

Shrinking sales

Its creditors are most worried about Country Garden’s ability to deliver homes when it’s mired in a mountain of debt. Even home buyers in the market are shunning high-risk developers like Country Garden. And they have plenty of alternatives in a massively oversupplied Chinese market filled with developers desperate to sell.

Country Garden’s sales have been deteriorating over the last few years, dropping 36% from 558 billion yuan in 2021 to 357.5 billion yuan in 2022, then tumbling another 51% to 174.3 billion yuan in 2023, before crashing 73% last year to just 47.2 billion yuan. The company seems to be reaping little or no benefit from a near nonstop rollout of government measures to stabilize the market over the past year.

Another major development saw PricewaterhouseCoopers (PwC) resign as Country Garden’s outside accountant last September, replaced by Zhonghui Anda Cpa. In its resignation letter, PwC pointed out delays in the company’s provision of data and documents, including cashflow projections, impairment assessments on its properties under construction and completed, as well as loss assessment on receivables, hampered its own ability to compile Country Garden’s financial statements. Without sufficient information to back its cashflow projections at that time, how accurate could its current projections be?

As things now stand, even if Country Garden can resume trading and get its restructuring plan approved, its ability to stay in business will depend on a funding situation that hinges on stabilization of China’s property market. None of those factors are within the company’s control, leaving it with no choice but to feel its way slowly forward in hopes for returning to better times.

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The spat between the wife of a Shanghai tycoon and her estranged stepson shows how family disputes can paralyze companies, both private and publicly traded

Key Takeaways:

• A family feud has left more than $1 billion worth of homes in a Shanghai ultra luxury villa complex in limbo
• The case illustrates the complex web of onshore and offshore companies that Chinese entrepreneurs often set up to hide and protect their assets from seizure

By Doug Young

A Shanghai family dispute that has left a luxury development in limbo is casting a spotlight on the legal quagmires that some of China’s earliest and most successful private companies may face as their aging founders start passing on their wealth to the next generation.

The case, involving a Shanghai-based company called Shanghai Jiacheng Zhaoye Real Estate Co. Ltd. (上海嘉城兆业房地产有限公司), includes a bit of everything. At its core is a falling out between Hu Lan, the wife of Jiacheng founder Gao Jiaren, also known as Karl Golden, and Gao’s son, a 54-year-old Chinese-born man with the similarly foreign-sounding name of David Golden.

The tale crosses international boundaries, involving courts in both China and the British Virgin Islands (BVI), a favorite place where Chinese entrepreneurs often set up holding companies that are the ultimate owners of their China-based businesses. It also contains some spice from China’s go-go real estate market that fueled the rise of many of the country’s best-known entrepreneurs and has more recently left many nearly insolvent as the market crashes.

While this story mostly affects several members in this family dispute, it also offers a cautionary lesson on the kinds of perils that could confront minority investors in such companies that ultimately go public. While many such companies portray themselves as modern and professionally managed, most are dominated by a single individual or family that often controls a large majority of the voting power over any decisions.

Such concentrations of power can often claim victims, including minority shareholders, as helpless hostages when internal disagreements break out.

In our Jiacheng story, the biggest hostage isn’t any minority shareholder, but rather Sunville, or Shanghai Ziyuan (上海紫园), a complex of more than 200 ultra-high-end villas in Shanghai’s western suburbs that was once China’s most expensive address when it was completed about a decade ago. While 68 of the villas were sold, most of the rest have currently been frozen under a court order pending the dispute’s resolution – something that could still be years away.

Even two years after China’s property market crested and began to decline, a recent listing for the development shows a 430-square-meter unit for sale at 43 million yuan ($5.9 million), implying the remaining unsold villas could be worth more than $1 billion.

The latest chapter in this story unfolded in November 2024 with a Shanghai court ruling that took an unusual four years to reach. But the complete story traces back to the 1990s when China’s first generation of private entrepreneurs was starting to emerge. Gao Jiaren was among those, building his fortune in China’s young real estate market after earlier entrepreneurial endeavors, some in Singapore, with his son, which led the family to establish Jiacheng in 2001.

Like many Chinese entrepreneurs both then and now, Gao and his son set up a holding company to own their Shanghai entity, in this case the British Virgin Island-based Best Land Investments Ltd. (嘉城置业有限公司). They added another layer to the mix in 2008 with the establishment of Sundale International Ltd. (新达国际有限公司), another BVI company and ultimately the 100% owner of Best Land and Jiacheng back in China.

Such ownership webs are relatively common among Chinese business owners, often used to create legal obstacles for anyone who wants to try and seize or otherwise learn more about such assets.

Generational handover

With the business empire’s legal foundation now in place, the elder Gao Jiaren began handing over the reins by naming David Golden, his only son through his first marriage, as Jiacheng’s chairman and legal representative in 2008. The family set up Sundale in the British Virgin Islands the same year with Hu Lan, Gao’s current wife and David Golden’s stepmother, as the lone shareholder.

As Gao became seriously ill in 2012, the family transferred 100% equity of the BVI companies to David Golden in January 2013, making him the sole director of Best Land as well as the sole director and shareholder of Sundale. That effectively gave him 100% control over the actual Shanghai company, whose signature development, the Sunville luxury villa complex, was nearing completion at the time.

But family relations began to sour towards the end of the 2010s, leading Hu Lan to file a lawsuit in the BVI’s Eastern Caribbean Supreme Court in February 2020, claiming all the equity in Sundale was held by her stepson Golden on her behalf through a trust agreement. As part of her action, she demanded her stepson return 100% of the company to her.

Hu Lan also filed another lawsuit in March 2021 in Shanghai that mirrored the one in the BVI, again claiming the equity in Sundale was held by her stepson on her behalf through a trust agreement. She took the action before the BVI court issued its verdict, even though the Shanghai court should technically lack jurisdiction over such a matter limited to the shareholding status of an offshore company, and a verdict from the Shanghai lawsuit was unlikely to be enforced in the BVI.

In late 2020, patriarch Gao Jiaren filed lawsuits in Shanghai, claiming Jiacheng owed him 4.4 billion yuan for a 1.1 billion yuan loan and an additional 3.3 billion yuan in interest that had been accruing at an unusually high rate of 24% annually. That lawsuit was the primary factor leading the court to freeze all future sales at the luxury villa complex until the matter was resolved.

The BVI court was the first to reach a verdict, ruling in Golden’s favor in July 2021 that Hu Lan and Gao Jiaren had engaged in document tampering and forgery, and that David Golden was the rightful owner of Sundale. Notably, the verdict also revealed that Hu Lan and Gao Jiaren admitted to creating a loan agreement with fabricated interest rates and deliberately inserting it into the loan agreement at a later stage – a document that became the basis for Gao's claim involving the 4.4 billion yuan he was owed from a loan to Jiacheng.

But the Shanghai court where Hu Lan filed her same complaint ruled in her favor over Sundale’s ownership in late November 2024. In fact, the Shanghai case violated a BVI court order prohibiting a party from initiating or continuing legal proceedings on the same matter in another jurisdiction. The BVI court then declared Hu Lan in contempt and ordered her committal to prison, even though such an order is unenforceable as long as she is in China.

David Golden has appealed the Shanghai court’s decision, meaning the story has yet to end. Also to be resolved is the 1.1 billion yuan loan at the heart of the other lawsuit that has left the luxury villas frozen.

The legal dispute stands out in the Chinese market not only for involving rare luxury villas in one of Shanghai's most prestigious areas, but also as the latest example of challenges facing family-owned companies.

A growing number of listed Chinese companies have encountered similar family-related boardroom, management and shareholder disputes in recent years, resulting in commercial, operational, and reputational damage. Recent cases include ones involving Shanshan Corp. (600884.SH) and Seazen Holdings (601155.SH). Meanwhile, the years-long family dispute at Sun Hung Kai (HK.0016) is a classic example among Hong Kong-listed companies.

For overseas investors in particular, these family-related governance issues often remain hidden until legal proceedings begin. That highlights the importance of understanding not only the companies themselves but also the family dynamics of their majority shareholders – especially as more Chinese family-owned businesses are transitioning to the next generation.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here.

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What should Chinese companies expect in Trump 2.0? And a mid-tier property developer advances a plan to reorganize its offshore debt at lightning speed.

By Doug Young & Rene Vanguestaine

As the world digests Donald Trump’s return to power, questions abound about what this means for Chinese companies, especially those with interests in the United States. We are seeing a mix of apprehension and opportunity, particularly when it comes to Chinese stocks listed on U.S. exchanges and the broader impact of Trump’s policies on these companies. In this edition, we dive into what's ahead for these firms and examine the broader context of a new Trump administration.

Trump is not new to controversy when it comes to China. His first presidency saw aggressive moves against Chinese firms, notably the signing of the Holding Foreign Companies Accountable Act, which threatened to delist Chinese companies from U.S. stock exchanges unless they complied with strict audit transparency. Trump also attempted to ban Chinese super apps like WeChat and TikTok, although those efforts largely stumbled.

Chinese stocks listed on Wall Street responded with mixed movements as news of Trump’s election spread. The MSCI China Index seesawed before ending down about 3% over three days. While not a drastic drop, this reaction hints at investors' uncertainty about what lies ahead. The Chinese economy’s internal challenges, such as stimulus measures that fell short of market expectations, have only added to the pressure.

When it comes to the future of Chinese stocks, it is reasonable to expect more of what we saw during Trump's first term. He remains focused on U.S. economic interests, national security, and what he considers fair competition. This means that policies around U.S. investment in Chinese companies, particularly those in tech and AI, are likely to tighten further. With the Biden administration already having imposed limitations on tech exports and investments in Chinese AI, Trump's policies may reinforce or even expand those actions.

The fate of U.S.-listed Chinese companies could become even more restricted. While consumer-focused companies may continue to find their way to U.S. exchanges, sectors like AI and technology face mounting scrutiny. The U.S. stance will be just one part of the equation—Beijing will also decide which companies are allowed to list abroad, especially those handling sensitive data.

E-commerce Giants in the Spotlight

The second part of this equation involves Chinese tech giants that are already major players in the U.S. market. Companies like TikTok, Shein, and Temu have managed to carve out significant market shares, though not without generating considerable controversy. Trump's previous attempts to ban TikTok and WeChat have left many wondering what the future holds for these apps under his renewed leadership.

The e-commerce players like Shein and Temu operate in a somewhat different context compared to social platforms like TikTok. Shein and Temu benefit from the "de minimis" rule, allowing goods under a certain value to enter the U.S. tax-free, a rule that has largely helped them thrive. However, there has been growing momentum, even among Democrats, to close this loophole, which would primarily impact Chinese companies. Trump’s return could see him either endorsing or allowing such measures to move forward, which could significantly affect these e-commerce firms.

The situation for TikTok is even more complex. Its massive popularity among American youth makes it a high-profile target for scrutiny over data privacy and national security concerns. While Biden has already pushed for measures to limit TikTok’s influence, Trump's administration is expected to take an even tougher line, especially with strong support from the Republican Party.

Debt Restructuring: A Glimmer of Hope or a One-off Success?

In another significant development, we turn our attention to one of China’s mid-tier property developers, CIFI. The company recently reached an agreement on its offshore debt restructuring, securing support from nearly 80% of its foreign debt holders just a month after beginning negotiations. This rapid progress stands in stark contrast to the prolonged debt restructuring struggles of larger names like Evergrande and Country Garden.

The quick resolution of CIFI's debt has led some observers to speculate that this could mark a turning point for China’s embattled property sector. There are even rumors that Beijing may be pushing these companies to resolve their offshore debts sooner rather than later, possibly providing some behind-the-scenes support. However, it is essential to maintain a sense of realism here—CIFI is a much smaller player compared to giants like Evergrande, and its situation may not be indicative of a broader trend.

The willingness of CIFI to offer more favorable terms to its creditors might simply reflect the nature of its business and the scale of its issues, which are more manageable compared to those of larger developers. Additionally, this comes at a time when Beijing has been vocal about attracting foreign investment and stabilizing the real estate market, which might be influencing optimism around this case.

Nonetheless, the underlying issues of China’s real estate market remain far from resolved. The oversupply of unoccupied apartments across the country—a problem that has persisted for years—continues to weigh on the market. While CIFI's rapid restructuring is a positive sign, it would be premature to declare it the start of a new era for Chinese real estate without further evidence of similar successes.

The return of Trump, the challenges facing Chinese companies, and the ongoing restructuring of China’s property sector all paint a complex picture for the future. While there are signs of progress, there are also numerous risks and uncertainties that could derail any positive momentum.

The property company is battling to get its house in order after posting big losses, hoping to capitalize on a tentative market revival

Key Takeaways:

• Vanke swung from profit to a deep loss of 17.94 billion yuan in the first three quarters of the year, despite efforts to steamline its business and maximize income
• The company reported stronger demand during the National Day holiday period in October, logging sales subscriptions worth 10.22 billion yuan

By Lee Shih Ta

Stimulated by pledges of government support, China’s troubled property market is showing signs of life, but the latest earnings reports from top developers underline the true scale of the recovery challenge.

Take for example China Vanke Co. Ltd. (2202.HK; 000002.SZ), the country’s second-biggest real estate developer by sales. The company is doggedly battling through a crisis in the property sector, trimming operations and selling off assets, but its revenues dropped by nearly a quarter in the first nine months of the year, pushing the bottom line from profit into a deep loss.

And the earnings result for the three months to the end of September was the biggest quarterly loss in the company’s history.

But Vanke was more upbeat about recent market activity, saying supportive government policies since September were helping to drive an uptick in property deals.

Over the three quarters Vanke’s revenues fell 24.5% to 219.9 billion yuan ($31 billion), delivering a net loss of 17.94 billion yuan against a profit of 13.62 billion yuan in the same nine-month period a year earlier.

For the third quarter, revenues came in at 77.12 billion yuan, with 61.55 billion yuan generated by property development, on a settlement area of 5.05 million square meters. The company posted a third-quarter loss of 8.09 billion yuan, after contract sales fell 29.7% to 53.87 billion yuan and the sales area slumped 24.9% to 3.91 million square meters.

Data submitted to the Shenzhen Stock Exchange indicated that the situation was particularly dire in September, when sales contracts totaled 17.42 billion yuan, a whopping year-on-year drop of 45.6%.

The company blamed the flood of red ink on troubles in the property development business, as well as investment and impairment losses and discrepancies between transaction prices and book value for some equity and asset disposals.

From January to September, all the key metrics were flashing red. The property development business realized a settlement area of 13.84 million square meters, down 24.4% from the year-earlier period, generating revenue of 173.23 billion yuan, a drop of 29.1%. Over the same timeframe, the gross margin for property development after tax fell 11.9 percentage points to 2.7%.

Sizeable drops were recorded on other business measures for the nine months. The contract sales area fell 26.8% to 13.31 million square meters, with the amount of contract sales tumbling 35.4% to 181.2 billion yuan.

Weighty liabilities

Meanwhile, the market downturn has also stressed the company finances. Total Vanke capital stood at around 79.75 billion yuan by the end of September after a net outflow of 12.65 billion yuan compared with three months earlier. Interest-bearing liabilities amounted to 327.61 billion yuan, of which 64.4% were obligations of more than one year.

The company said it paid out nearly 70 billion yuan in the first three quarters on interest-bearing liabilities and had serviced all its publicly issued debt for the year. But the servicing task is set to be challenging next year, when the company has 16 tranches of domestic debt coming due or being exercised, on principal of 32.64 billion yuan. In the first quarter of next year alone, 9.89 billion yuan worth of debt will mature.

The company revealed an operating net cash flow of 330 million yuan in the third quarter. But during the first three quarters, the cash flow was a net negative 4.85 billion yuan, compared with a positive 240 million yuan during the same period of last year.

Vanke has sold off a host of assets at a discount to ease its financial pain and took other actions to boost incoming payments, such as maintaining a high collection rate and leasing some properties at a marked-down price.

In the first nine months of the year, it entered into deals exceeding 23.26 billion yuan to divest or securitize assets, including a project at the Shenzhen Bay Super Headquarters Base sold at 70% of the market value for around 2.24 billion yuan.

Some 8,000 property units were converted from sales to rentals in the nine-month period, including over 5,500 units owned by Vanke itself. Rental income from residential homes rose 3.7% in the nine months to 2.63 billion yuan.

Vanke has also unleashed several rounds of organizational restructuring this year, streamlining its regional offices in the latest rationalization drive in October.

Staying afloat

At the same time, the company was actively securing new loans or refinancing totaling 77.4 billion yuan in the nine months. And Vanke borrowed another 16 billion yuan in late October and early November from Shenzhen branches of ICBC and the Bank of Communications, with collateral provided by its subsidiaries.

A slew of government stimulus measures announced since late September has enlivened China’s real estate market. Vanke noted an increase in customer interest during the National Day holiday, when it logged subscriptions worth 10.22 billion yuan. The average daily sign-up rate jumped by 113% compared with the Mid-Autumn festival in September, Vanke said.

Shares in Chinese real estate developers have been gaining traction since early October, helping Vanke to eke out a year-to-date gain of 2.6%, although its  price-to-sales (P/S) ratio has barely budged from a paltry 0.2 times, lower than the 0.7 times for China Resources Land (1109.HK) and the 0.5 times for Longfor Group (0960.HK). Vanke’s multiple is marginally higher than the 0.1 times for Sunac China (1918.HK) and is on a par with Poly Property (0119.HK; 600048.SH).

Persistently rumored to be on the brink of collapse, Vanke has been buying time with a strategy designed to support its vow to avoid debt default. The company will no doubt be hoping that a policy-driven recovery in the property market will offer longer term salvation.

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The property developer said its restructuring plan, which will give it two years of relief from debt repayments, has gained support from nearly 80% of its creditors

Key Takeaways:

• CIFI has kept interest rates between 2.75% and 3% in its debt restructuring plan, a significant decrease from previous financing costs, and extended the repayment period to nine years
• A compulsory exercise of all the developer’s convertible bonds under the plan will lead to the issue of about 14.9 billion new shares, substantially diluting existing shareholders

By Ken Lo

Tales of talks between debt-heavy Chinese developers and their creditors are aplenty these days, with the two sides often at loggerheads on contentious debt restructuring plans.

But one name possibly leading the way out of the mess is CIFI Holdings (Group) Co. Ltd. (0884.HK) which announced on Oct. 27 that creditors holding about 77.88% of its outstanding debt had formally signed or joined its restructuring support agreement (RSA). The company intends to implement the proposed RSA through a scheme of arrangement that would be executed in Hong Kong

While CIFI isn’t the first cash-strapped property developer to reach such a restructuring deal with its offshore creditors, it is the fastest in its class so far. The restructuring sends a positive signal from such Chinese developers to their offshore creditors, since the company’s offshore debt accounts for as much as 54.2% of CIFI’s total.

According to its financial results for the first half of 2024, CIFI had 88.57 billion yuan ($12.42 billion) in interest-bearing liabilities at the end of June, with offshore senior notes, offshore convertible bonds and foreign currency loans accounting for 28.92 billion yuan, 1.63 billion yuan and 17.43 billion yuan, respectively, or about 48 billion yuan altogether. The RSA will reduce the pressure on CIFI’s cash flow on the one hand, while also dispelling doubts about its ability to continue doing business on the other.

Under Hong Kong rules, the RSA must be approved by creditors holding at least 75% of the company’s debt, and also by a majority of the total creditors present and voting at the creditors' meeting. The plan can only take effect after the Hong Kong court confirms that the terms are fair and issues an order approving it. Accordingly, CIFI is likely to apply to the court soon for a specific hearing date.

In its Sept. 27 announcement, CIFI said it had reached a consensus with its major offshore creditor group, holding 47% of its $4.55 billion in offshore bonds and 31.1% of its in-scope debt. To encourage more creditors to participate in the restructuring and sign onto the deal, the company even added early bird and general consent fees equal to 0.2% and 0.1% of the claim amount, respectively.

CIFI was able to obtain support from the nearly 80% of its creditors within just one month thanks to its well-balanced restructuring plan, which combines short-, medium- and long-term measures and takes into account the needs of different creditors. Judging from the plan’s five options, CIFI will not need to pay much principal or interest in the first two years after the restructuring takes effect.

In addition, the interest rate for new loans and notes in the restructuring plan is only 2.75%. If terms for bonds are extended, the coupon rate will be 3% in the sixth to ninth years after the plan takes effect, meaning CIFI’s financing cost will be significantly lower than before. Such terms not only relieve the company from short-term pressures on its cash flow but also reduce its financial leverage, improving CIFI’s financial stability in the medium to long-term.

Chinese real estate companies have continued to suffer from tumbling monthly sales this year, with year-on-year declines generally ranging from 40% to 60%. That’s resulting in dwindling cash flow for most companies, which is hurting their flexibility to negotiate debt restructuring with their creditors. CIFI is a case in point, with cash generated from operations in the first half of this year down to just 7.39 billion yuan, versus 12.31 billion yuan in the year-ago period.

Improving sentiment

At a meeting of the Political Bureau of the Communist Party of China’s Central Committee on Sept. 26, the central government rolled out major interest rate cuts and lowered banks’ reserve requirement ratios as part of a bid to bring stability back to the property market. These measures helped restore some confidence to investors, helping to fuel a rally for CIFI's shares from a low of HK$0.20 in early September to its latest close of HK$0.41 on Wednesday. The changing sentiment may also be helping to move the debt restructuring process along.

CIFI previously stated that the offshore debt restructuring is expected to reduce its debt by $3.3 billion to $4 billion. It’s still worth noting that the latest debt restructuring proposal will require CIFI to issue a large number of new shares, which means existing shareholders will be significantly diluted in the long run.

According to the Sept 27. debt restructuring plan, up to $3.06 billion worth of convertible bonds are eligible for conversion to the company’s stock. Based on a conversion price of HK$1.60 per share, that means that CIFI will issue approximately 14.9 billion new shares, equivalent to 1.43 times its current share count. The bottom line is that shareholders are likely to face major dilution once convertible bonds are exercised.

CIFI also owes shareholders a loan of about $67.5 million that can be converted into 1.32 billion new company shares at a price of HK$0.40 per share, which could make the dilution even greater.

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A successful Hong Kong listing for the property manager could reflect growing confidence in a long-awaited recovery for China’s ailing real estate market

Key Takeaways:

• Shum Yip Property has filed a fourth time to list in Hong Kong, ranking ninth among all Chinese property managers
• The company reported 1.41 billion yuan in revenue during the first half of the year, while its profit rose 12.6% to 92.3 million yuan

By Lee Shih Ta

Listing is never easy, even when you’re a state-owned company with the powerful Shenzhen government as your backer. Shum Yip Property Operations Group Co. Ltd. has learned that lesson the hard way, making its fourth application for a Hong Kong IPO earlier this month as it hopes to catch a ride on a recent wave of positive sentiment towards new listings.

Founded in July 1992 in the Southern boomtown of Shenzhen, Shum Yip is a relative old timer on China’s property management scene with more than three decades of experience. Its parent, the Shenzhen government-owned Shum Yip Group, was founded even earlier in 1983 and counts other units like Shenzhen Investment (0604.HK) and Shahe Industrial (000014.SZ) among its listed assets.

Shum Yip Property provides property management, commercial operational and city services in China, with 498 such properties under management in 46 cities across China as of June, according to its listing document. It focuses on Guangdong province’s Greater Bay Area, which includes Hong Kong, Macau, Shenzhen and Guangzhou, and accounts for 60.2 million square meters of its gross floor area under management, or 67.5% of its total.

The company ranked ninth among comprehensive property management companies in China last year, accounting for 0.3% of the market. In the first half of 2024, its operating revenue reached 1.41 billion yuan ($198 million), up 9.8% year-on-year, while its profit rose 12.6% to 92.3 million yuan.

The company first applied to list in Hong Kong in February last year. It reapplied again six months later after the initial application expired without a listing. Its application was officially registered with the Chinese securities regulator in February this year, and it made its third Hong Kong application a month later but failed to pass its listing hearing. 

Best listing window missed

Shum Yip Property is actually a bit late to the listing game within its industry. A wave of IPOs began around 2018 as developers split off their property management arms to give investors clearer choices among the two different business models. The number of Chinese property managers listing in Hong Kong surged from eight in 2019 to 18 in 2020, followed by 13 in 2021. But then the number dropped to six in 2022, and just two listed last year.

Only two other small companies from the group have managed to list so far this year, Hollwin Urban Operation Service (2529.HK) and Kingfar Property (1354.HK).

The drop-off in listings is a direct result of China’s sagging property market, which could easily cast a damper on Shum Yip’s parade if the company makes it to market this time. At such a time of low confidence, a company’s profitability matters more than ever.

Shum Yip has size in its favor, as it’s several times bigger than Hollwin and Kingfar. The company’s revenue has been rising the last three years, going from 2.15 billion yuan in 2021 to 2.71 billion yuan last year. By comparison, Hollwin’s revenue rose from 430 million yuan to 650 million yuan over that period, and Kingfar’s grew from 590 million yuan to 860 million yuan.

But in terms of profitability, Shum Yip lags behind the smaller Hollwin, which is also state-owned. Hollwin’s gross margin has hovered between 25% and 23% over the last three years, well ahead of Shum Yip’s margins in the 13% to 16% range.

The margin gap between the pair might be related to their specific businesses. Shum Yip’s scope includes management services for city and industrial parks, as well as residential and commercial properties. The first two categories make up a high percentage of Shum Yip’s revenue but are less profitable, with gross margins of just 13.4% and 10.3%, respectively, in the first half of the year. Its commercial management services category is much more profitable, with a gross margin of 27.3% in the first half of the year. But that business accounted for less than 24% of the company’s revenue during the period.

Reducing related-party dependence

Like many of China’s real estate management spinoffs, Shum Yip relies heavily on affiliated companies for its profits. Its gross margin for services provided to affiliated companies ranged between 21.6% and 23.9% over the last three years, roughly triple the range of 6.4% to 8.9% for independent third-party companies.

The company has been trying to reduce its dependence on related parties in order to get listed. Related parties as a share of its business, based on gross floor area under management, fell from 27.4% in 2021 to 20.8% in late June this year. But its share of revenue from third-party companies did not come up during that period, and actually fell from 56.6% in 2021 to 54.5% in the first half year of 2024.

Shum Yip’s growing pile of receivables is also a concern. In the first half of the year, its losses from financial asset depreciation totaled 13.7 million yuan, more than quadruple the previous year, as a result of an increase in trade receivables. Its outstanding receivables totaled around 630 million yuan at the end of June, some 35% of that associated with related parties and the rest from third parties. The turnover period for its related-party receivables was also quite long at 284.2 days, compared with 59.5 days for third-party companies.

The clock is ticking on Shum Yip’s latest application, as its registration with the Chinese securities regulator will expire in four months. Shum Yip also adds that its listing will have to be accomplished by next year, as it aims to become the first publicly listed property management company controlled by state capital with operating revenue exceeding 6 billion yuan during China’s 14^th Five Year plan that runs from 2021 to 2025. So, the pressure is on.

China’s property market is showing signs of stabilizing lately thanks to policy support from the central government, meaning the property management sector that is suffering relatively less than developers might be poised for a rally. Shum Yip Property would certainly benefit from such a rally, which could reflect recovering confidence in the beaten-down sector. But first it will need to clear the IPO process in its fourth – and what it hopes will be final – attempt. 

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The former real estate titan is negotiating new terms with pre-IPO investors after its Zhuhai Wanda property management unit missed a 2023 deadline to list in Hong Kong

Key Takeaways:

• Dalian Wanda is negotiating with a series of investors who are owed repayments after its commercial property management unit failed to list by an agreed deadline
• One of the investors, Country Garden Services and its parent, Country Garden Holdings, withdrew their investments to focus on their core business

By Lau Chi Hang

His name isn’t a household word, but Wang Jianlin was once a kingpin of China’s property market in its heyday. Now, it seems, he’s become a shadow of his former self with the plunge of a market that once made him one of China’s richest men.

His powerlessness, and subsequent reliance on the goodwill of others, has been on quiet display this year in the unfolding saga of his attempts to placate a group that once hoped to make big returns by investing in his Zhuhai Wanda Commercial Management Group.

Zhuhai Wanda originally planned to raise up to HK$30 billion ($3.86 billion) in a Hong Kong listing before the plan crumbled with the tanking of China real estate market. But time doesn’t wait, and pre-IPO investors in Zhuhai Wanda began clamoring for repayment. They said Zhuhai Wanda’s parent, Dalian Wanda, had to honor its commitment to buy back their shares, or offer other compensation, for failing to complete the IPO by an agreed deadline.

As China's largest commercial property manager, Zhuhai Wanda’s business portfolio runs the range from commercial management to related value-added services. As of November 2023, the company was operating and managing 494 large-scale commercial centers, of which 290 are owned by Dalian Wanda and 204 were for other third parties.

The planned IPO was part of a broader trend for Chinese developers to spin off and separately list their property management arms, partly to raise cash and partly to better value their different business models. But then the market, which had been booming for years, suddenly began to sag, derailing Zhuhai Wanda’s IPO.

Zhuhai Wanda recorded after-tax profits of 9.57 billion yuan in 2022 and 7.53 billion yuan in 2023, and had net asset worth 9.45 billion yuan at the end of June.

Country Garden pulls out

Following the collapse of the Zhuhai Wanda IPO, Dalian Wanda recently agreed to repurchase nearly 108 million Zhuhai Wanda shares from Country Garden Services (6098.HK) for 3.14 billion yuan, accounting for 1.49% of Zhuhai Wanda’s total share capital. In addition to returning what Country Garden Services paid, the price also included an 8% annualized rate of return after tax. Following the deal, Country Garden Services still holds 0.31% of Zhuhai Wanda.

As early as mid-December last year, Country Garden Services’ parent, Country Garden Holdings (2007.HK) also sold 1.79% of its Zhuhai Wanda stock to Dalian Wanda in a similar deal for 3.07 billion yuan. Thus, the sale by Country Garden Services just represents the latest unwinding of the Zhuhai Wanda investments for an IPO that never happened.

Zhuhai Wanda’s IPO story dates back to 2021, when Dalian Wanda’s well-connected Chairman and sometimes karaoke crooner Wang Jianlin brought in 22 investors who contributed a combined 38 billion yuan to boost the listing. That group was an A-list of corporate China, including not only Country Garden but also Citic Capital, Ant Group and the Zhuhai State-owned Assets Supervision and Administration Commission (Sasac). The largest investor was regional private equity giant PAG, which bet 18 billion yuan.

According to their agreement at the time, investors had the right to ask Dalian Wanda to buy back their shares, plus an 8% annual return on their investment, if Wang Jianlin failed to list Zhuhai Wanda by 2023.

The cruel reality that followed was that Zhuhai Wanda failed not once, but four times, in Wang’s attempts to take the company public in Hong Kong since 2021. With the listing deadline now expired, Dalian Wanda would have come under considerable pressure if its investors all demanded their money back. Fortunately for Wang, PAG and some of the others, after more negotiations, agreed to a deal that included their reinvestment in Zhuhai Wanda and the introduction of new investors.

Lifeline investment

Brought in by PAG, companies providing new investment included the Abu Dhabi Investment Authority's Platinum Peony, Mubadala Investment Co., Citic Capital and Ares Management, which contributed a combined 60 billion yuan in new funds to Zhuhai Wanda. As part of the deal Dalian Wanda’s stake was reduced to just 40% of Zhuhai Wanda, taking away its control of the company, as PAG and the other investors took over the rest.

But not every investor was willing to keep betting like PAG. The two Country Gardens withdrew their investments, as Country Garden Holdings struggles under a crushing mountain of debt. One of the other major investors, Zhuhai Sasac, has yet to declare whether it will demand that Dalian Wanda buy back its 3 billion yuan stake in Zhuhai Wanda.

Observers believe those two parties might have reached a deal, given that Dalian Wanda will soon relocate the headquarters of its commercial property management company and 500 employees from Beijing to Zhuhai. Specifically, Dalian Wanda has agreed to move its commercial property management business into Zhuhai’s Hengqin district, a newly developed area of the city where many office buildings still have high vacancy rates.

Besides the two Country Gardens and the Zhuhai government, word has yet to emerge of other investors requesting refunds for their Zhuhai Wanda shares. But the strong support from PAG is leading many to believe that Dalian Wanda will have the resources to handle additional repayment requests if any come.

Investors such as PAG have not disclosed details of their reinvestment, and no timetable has been given for any potential new listing attempt by Zhuhai Wanda. But with China’s residential and commercial property markets both in a sorry state with no signs of improvement on the horizon, a new listing bid seems unlikely anytime soon.

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The cement admixture producer has bucked recent construction industry weakness, but dependence on an affiliate could be the biggest hurdle on its path to a Hong Kong listing

Key Takeaways:

• Anhui Conch Material has filed for a Hong Kong IPO, reporting revenue from sister firm Anhui Conch Cement accounted for 30% of its total in the first half of this year
• The company’s accounts receivable stood at 790 million yuan at the end of June, equal to 72% of its total revenue in the first half of the year

By Lee Shih Ta

China’s struggling property market has taken down not only developers, but also the many supporting industries that also soared on the sector’s earlier boom. Cement makers are one of the groups that’s fallen on hard times, as demand for their product rapidly dries up.

But Anhui Conch Material Technology Co. Ltd. has bucked the industry-wide weakness. Now, it’s hoping its counter-cyclical growth will attract investors to a planned Hong Kong listing, which it detailed in its second IPO application filed late last month. China Securities (International) is the deal’s sole sponsor.

According to its application, the company is a fine chemical materials supplier that produces and sells cement admixture, concrete admixture and their upstream raw materials. Third-party market data in the document shows the company ranked first in China last year in terms of both sales volume and revenue for cement admixtures, with market share of 28.3% and 32.3%, respectively.

The company is a unit of Conch Holdings, China’s biggest cement manufacturer and a China Fortune 500 company. Conch Holdings is Anhui Conch Material’s controlling shareholder with 36.4% of its stock. The holding company’s other assets include Anhui Conch Cement (600585.SH; 0914.HK), which is listed in both Shanghai and Hong Kong.

The woes for China’s broader cement industry are apparent in the numbers. Manufacturers churned out 850 million tons of cement in the first half of this year, down 10% year-on-year and the lowest first-half-year output since 2011, according to China’s National Statistics Bureau. The average price for cement in the first half of the year was 367 yuan per ton, down 13% year-on-year, hitting a nearly six-year low.

What’s more, large players in the industry lost a combined 3.4 billion yuan ($484 million) in the first five months of the year, with over 55% of companies from that group in the red.

Countercyclical profit surge

Despite the broader market’s weakness, Anhui Conch Material has maintained solid growth over the last three years. Its revenue rose from 1.54 billion yuan in 2021, to 1.84 billion yuan in 2022 and 2.39 billion yuan last year. Its revenue also grew 5.7% year-on-year to 1.1 billion yuan in the first half of this year, translating to annual growth of 24.8% over the three-and-a-half year period. The company also logged a profit of 52.7 million yuan in the first half of this year, up by a healthy 38% year-on-year.

The company derives a big chunk of its revenue from sister company Anhui Conch Cement, which has been a major customer since the second half of 2018. Anhui Conch Cement has consistently been Anhui Conch Material’s biggest client, though the latter’s reliance has fallen steadily from accounting for 52.5% of revenue in 2021 to 30.7% in the first half of this year.

The numbers make it clear that Anhui Conch Material is eager to shake off its reliance on its bigger sister. And, in fact, the company attributed its ability to keep increasing its revenue in the first half of the year to orders from new clients. But business from such clients also typically comes with relatively lower margins, which risks eroding Anhui Conch Material’s own gross margin.

Its prospectus shows its gross margin from sales to affiliated clients stood at 45.4% in the first half of the year, compared to just 40.2% for unrelated third-party clients. The company admitted to selling to such unaffiliated buyers at lower prices to grab market share, adding it was able to charge higher prices to affiliated clients due to their higher demand for product quality as well as its provision of supporting services.

“We usually set a relatively high price range so as to maximize the potential profit without compromising our chance of securing the contracts successfully,” Anhui Conch Material said, explaining its philosophy for participation in bidding organized by affiliated clients.

Put differently, Anhui Conch Material may be more diverse now than before in terms of revenue, but its profitability is still closely tied with the fortunes of Anhui Conch Cement. And Anhui Conch Cement’s financials hardly look positive right now as the entire cement industry suffers.

According to its interim results, Anhui Conch Cement’s revenue plunged 30.4% to 45.6 billion yuan in the first half of the year, while its profit fell by an even larger 48.4% year-on-year to 3.48 billion yuan. In the first 10 days of September, the company issued 7 billion yuan in medium-term notes bearing interest rates of 2.12% and 2.10%.

Growing accounts receivable

Anhui Conch Material’s strong ties with affiliated companies hasn’t come without some pain, as its accounts receivable have soared. According to its listing application, the company’s trade receivables more than doubled from 300 million yuan at the end of 2021 to 760 million yuan by the end of last year. The figure rose further to 790 million yuan by the end of June this year, equivalent to 72% of its revenue in the first half of the year. As its receivables grew, the company’s average number of turnover days for those receivables grew from 68.8 days in 2021 to 99.7 days by June this year.

The rapidly rising accounts receivable and turnover days are clearly red flags that potential investors need to take note of.

While the company wants to show investors it’s not completely reliant on its affiliated companies for sales, many may still be skeptical. And the industry’s broader weakness will also create a major overhang for the IPO. Given such a precarious situation for construction material makers in general, even a company with growing profits and revenue like Anhui Conch Material may have trouble convincing investors to buy into its IPO makes it to market.

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By Doug Young & Rene Vanguestaine

PwC has received a record fine in China for lapses in its audits of failed developer Evergrande. Is this the end of the road for PwC in China? And EV battery system maker Octillion finds new life in India after its biggest China customer hits the skids. Is this the road to the future for Chinese EV component makers?

The Big Four accounting firm was hit with a record fine for its auditing work of Evergrande, whose failure cost investors billions of dollars

Key Takeaways:

• China levied a record fine on PwC and suspended its China operations for six months as punishment for lapses in its audits of failed developer Evergrande
• Beijing is increasingly encouraging state-run companies to avoid big foreign accounting firms like PwC in favor of Chinese companies, partly due to data security concerns

By Warren Yang

PricewaterhouseCoopers (PwC) has become the latest high-profile victim of troubles spilling out of China’s property sector, receiving stiff punishment for its role as auditor of failed property giant China Evergrande Group (3333.HK). At the same time, the case underscores the perils of doing business for foreign firms in the world’s second-largest economy, as the accounting giant and its peers face growing headwinds due to Beijing’s data security concerns.

On what certainly will go down as a memorable Friday the 13th for the global accounting firm, China slapped PwC’s China affiliate with a record 441 million yuan ($62 million) fine and ordered its China operations suspended for six months over its auditing work of Evergrande.

China’s securities regulator said its investigation revealed that the Big Four firm’s PwC Zhong Tian LLP affiliate knowingly overlooked Evergrande's fraud while auditing the developer's key onshore unit, Hengda Real Estate, and helping it to issue bonds, according to a Reuters report. The Ministry of Finance also ordered the six-month closure of PwC Zhong Tian's China offices.

The latest development came six months after Chinese regulators fined Evergrande’s founder, Hui Ka Yan, and cut his access to domestic financial markets for good for exaggerating the company’s revenue by more than $78 billion. He was accused of committing securities fraud as well. Evergrande itself has also been fined 4.2 billion yuan for fraudulent bond issuance and violations of disclosure rules.  

In its heyday, Evergrande led a property boom that helped to fuel China’s economic growth for more than two decades. But its demise began in 2021 and has had massive ripple effects across China’s entire real estate sector as many other developers have also defaulted on their debt. The sector’s woes are producing casualties across other industries as well, putting a dent in China’s broader economic growth with no easy fix in sight.

That’s why Chinese authorities are showing no mercy in punishing anyone involved in Evergrande’s case, living up to their promise to protect investors with “teeth and horns.” The China Securities Regulatory Commission found numerous violations of audit standards in PwC’s work for Evergrande, which was ordered by a Hong Kong court to liquidate in January.

Among other things, PwC Zhong Tian was found guilty of failing to take issue with the developer in numerous instances where it should have noticed red flags. Those included Evergrande’s dubious treatment of apartments under construction as ready to welcome buyers, and its booking of payments it received for them as revenue.

Such malpractice allowed the company to hugely inflate its revenue in 2019 and 2020, artificially propping up its Hong Kong-traded stock. The shares are now essentially worthless, costing investors billions of dollars in lost value.

Unacceptably below standards

In a statement issued last Friday, Mohamed Kande, PwC’s global chairman, said the firm is “disappointed” by the work of its Chinese unit, “which fell unacceptably below the standards we expect of member firms of the PwC network.” PwC Zhong Tian isn’t directly owned by the U.S. accounting giant, but functions like an independently owned franchisee of the brand.

PwC also took its own action, firing partners and staff involved in the audit of Hengda and starting a process to hand out financial penalties to current and former members of the leadership team responsible for the account.

“PwC China has a long history of high-quality audits and we do not believe that the behavior of a very small number of engagement team members is representative of the work of the vast majority of PwC China’s 18,000 professionals,” Kande said. “We recognize, however, that we need to take actions that continuously reinforce our values and expectations throughout the PwC network. This is a priority for all PwC leaders.”

PwC had long braced for punishment from Chinese authorities since quitting as Evergrande’s auditor in January last year. The conclusion of the case shows just how badly things can go wrong for a foreign business in China, especially when it comes under pressure to lower its standards to accommodate questionable practices by their major clients

The PwC case also shows how multinationals are coming increasingly under the microscope on government concerns about their potential to pose national security risks amid growing tensions between China and the U.S. Auditing is especially sensitive since it involves access to extensive market data that Beijing worries could be leaked to foreign governments. To avoid that, it has been urging state-owned enterprises to switch to local auditors from foreign ones like PwC. 

In this regulatory climate, foreign businesses wishing to stay in China have no choice but to walk a tightrope between keeping both their clients and the government happy. And as the Evergrande case shows, sometimes it’s not easy to do both. That can be problematic for the broader China business of a company like PwC, whose other clients have been jumping ship over concerns about the company’s future.

Big state-owned companies that take their cues from the government are especially sensitive to the situation, as reflected by PwC’s loss of Bank of China as a big client last month. The record amount of the latest fine and high-profile nature of the case sends a similar signal to other state-owned firms, making PwC’s situation in China even more precarious. 

Among other Big Four auditing firms, Deloitte last year was also fined $30 million for improperly auditing China Huarong Asset Management, which was on the brink of collapse, triggering a government bailout in 2021. Underscoring the magnitude of that scandal, two former Huarong officials were sentenced to death for taking bribes.

As to PwC, its future in China is anything but certain. For now, it appears to be committed to the country – or at least it’s trying to move on. After receiving the fine, it sent around an internal memo saying it’s making “tangible” investment to ensure that it has “long term, high quality and sustainable business” in China, according to another Reuters report.

But it’s unlikely to be business as usual for PwC in China anytime soon. The company recently halted construction of a fancy $140 million campus for training in south China’s Hainan province, and the project is under a strategic review, the Financial Times reported.

The company is obviously in damage control mode right now, which is normal after any crisis of such magnitude. But regardless of how things play out, it seems highly unlikely life will become any easier for the firm in a new Chinese climate of slower growth and increasing wariness toward big multinationals with access to large amounts of domestic data.

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This story has been corrected to show the six month suspension applies to all of PwC's China operations

By Doug Young & Rene Vanguestine

Bondholders of struggling developer Sino-Ocean have flatly rejected its debt restructuring proposal. Does that spell the end for the company? And Alibaba's shares could become available to Mainland investors as soon as the end of this month. What kind of upside could that bring to the sagging stock?

By Doug Young & Rene Vanguestaine

China trials a plan to prop up its property market with affordable housing plan. But will it solve the oversupply problem? And lithium miners are singing the blues as prices plunge from recent highs. What's behind the bubble for this important new energy metal?

By Doug Young & Rene Vanguestaine

China has set up a $50 billion fund to support its microchip sector. Will the big bucks be enough to overcome U.S. sanctions? And a growing number of Chinese companies dump PwC as their auditor. Is the flight related to PwC's role as auditor for insolvent developer Evergrande?

Despite falling sales in the first four months of the year, the property developer’s revenue was still much higher than many of its struggling rivals

Key Takeaways:

• Greentown China reported 52.5 billion yuan in sales from January to April, surpassing Longfor as the biggest purely private company in terms of sales 
• The developer has avoided the more serious woes of many of its peers in the current property downturn after learning the dangers of high leverage in the past

By Lau Chi Hang 

It’s often said that one man’s misfortune is another man’s fortune. But in the case of Greentown China Holdings Ltd. (3900.HK), the company’s earlier misfortune is turning out to be its own greatest asset in China’s current property market downturn.

Even as many private developers drown in massive debts, often tottering on the brink of insolvency, Greentown has emerged as a rare exception. The company is no stranger to financial woes, having flirted with bankruptcy twice. But it appears to have learned a lesson on the dangers of too much debt, and long ago ditched the high-leverage strategy that is now getting so many of its rivals into trouble. 

Greentown last week reported April sales of 14.5 billion yuan ($2 billion), down “just” 26% year-on-year. Its cumulative sales for the first four months of this year showed a similar trend, falling 24.5% year-on-year to 52.5 billion yuan. While those declines look big, they are far smaller than those seen at other private developers, many reporting declines of more than 50%.

Star performer

Developers with monthly sales of over 10 billion yuan have become a rare breed in the current climate. The struggling Country Garden (2007.HK) reported only 3.85 billion yuan in sales for April, while Poly Property Group (0119.HK) brought in just 5.6 billion yuan. Even Longfor (0960.HK), one of the strongest in the pack, raked in just 32.4 billion yuan in the first four months. That makes Greentown the champion among private developers in terms of sales. 

While revenue has tumbled for most private developers, Greentown's has actually risen, growing from 100.2 billion yuan in 2021, to 127.2 billion yuan in 2022 and 131.4 billion yuan last year. Its profit is also rising, up 13% last year to 3.12 billion yuan.

The company’s financial position also looks much healthier than its peers. It had 73.45 billion yuan in pledged bank deposits, group bank deposits and cash at the end of last year, with total borrowings of 146.1 billion yuan. Its net debt-to-asset ratio was just 63.8%, and its net borrowings coming due within one year stood at a manageable 32.55 billion yuan.

That raises the question of how Greentown has managed to maintain such good health when other private developers are suffocating under mountains of debt.

Near-death experiences

Greentown’s key to survival may be its two previous flirtations with disaster, teaching it valuable lessons that have helped it to navigate the current industry crisis. The company went public in Hong Kong in 2006 and followed with a binge in fundraising and business expansion. Then the financial crisis hit in 2008 and the Chinese economy slowed, sapping the company’s funding sources. Rumors swirled that Greentown almost sold itself to China Overseas Land (0688.HK), before the government stepped in with a 4 trillion yuan lifeline. 

Unfazed by that near-death experience, it continued its high-leverage strategy again. As a result, the company ran into trouble once more when the Chinese property market started to slow again in 2011, leaving it with 36 billion yuan in debt and a debt-to-asset ratio of 163%. Speculation at that time said the company could go under at any moment, despite regular confidence-boosting speeches by its Chairman Song Weiping. 

After running out of options, Song had to invite Hong Kong blue chip developer Wharf (Holdings) (0004.HK) to come onboard as a strategic investor. Wharf provided HK$5.1 billion ($653 million) in cash, helping Greentown to barely make it through the crisis. In 2014, China Communications Construction Group bought 24% of the company’s shares from Song and increased that by another 4.6% the next year, replacing Song as the biggest shareholder. 

After failing to learn its lesson the first time, Greentown finally seemed to get the message. It sold off a number of its developments to save on costs and pay off outstanding debts. Under Wharf’s influence, the company also ended its reckless expansion, since Wharf had the power to veto any major new investments if Greentown’s debt ratio rose above 100%.

A more humble, cautious company

Having learned its lesson, Greentown cut its debt substantially and swore not to play the high-leverage game again – a strategy that has served it well in the current sea of misery.

In addition to its more conservative financial management, the company has also revised its development strategy to focus on high-quality markets. Chairman Zhang Yadong said that the company only takes on projects in first- and second-tier cities such as Beijing, Shanghai and Hangzhou, as well as others in the wealthy Yangtze River Delta region. Giving up on smaller third- and fourth-tier cities meant it couldn’t benefit from booms in those places. As it paid more to acquire land in more expensive high-tier cities, its gross sales margin fell from 16.3% in 2022 to 11.3% last year. 

But land supply is tighter in those larger cities than in smaller ones, helping prices to hold up better in those markets. At the same time, household income is relatively higher in these higher-tier cities, limiting the downturn’s negative impact on sales. Thus, Greentown’s focus on these higher-quality markets has turned out to be a savvy strategy in the current market.

In addition, its sound financial condition and the fact that it doesn’t need government assistance to finish its projects have helped to maintain confidence that it will complete its developments. Home buyers tend to choose its homes because the risk of non-delivery due to lack of funds to complete construction is low. That assurance helps it sell homes more effectively than its more cash-strapped peers. 

Despite performing much better than its peers, Greentown isn’t immune from the downturn, which has been characterized by oversupply that will take time to absorb. When the broader industry is in trouble, no developer can stay unscathed forever. Greentown’s COO has previously said that the company’s top priority right now is simply to survive. If it can do that, it could be well positioned to thrive again more when the market finally starts to recover. 

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By Doug Young & Rene Vanguestaine

Much has been said about China's suffering property developers, but construction material makers are also in trouble. Will the government come to their rescue? And offshore China stocks enter bull territory with a 25% rally for the Hang Seng Index. What's driving this sudden surge, and will it last?

Some of the struggling developer’s Chinese creditors recently agreed to roll over their maturing obligations, as the company races to restructure its foreign debt

Key Takeaways:

• Country Garden's sales continued to deteriorate in the first quarter, plunging 81% year-on-year
• Media reported the Malaysian government was considering allowing gambling in the company’s struggling local Forest City project, though the government denied the reports

By Lau Chi Hang

Ten years ago when his property development firm was thriving, Country Garden founder Yang Guoqiang ambitiously wrote a brief 12-line verse titled “The Country Garden of My Dreams,” describing how his company “creates a happy life for society.”

But such happiness seems like a distant memory now, with the debt-heavy company fighting off creditors both at home and abroad as sales plunge for its core property business.

Despite its former status as a leading player and model private company, Country Garden Holdings Co. Ltd. (2007.HK), has gotten caught up in a sagging domestic property market that has dealt it billions in losses as it sits on more than 100 billion yuan ($13.8 billion) in debt. Many of the mega-projects that were once its crown jewels are also stumbling. Take its Silver Beach in the city of Huizhou, for example, which is now derided by many as a “Rotten Beach.” And its Forest City project in Malaysia, now jokingly dubbed a “Forest Ghost Town.”

The company has made headlines as it scrambles to reorganize its foreign debt, but less talked-about are the domestic creditors also knocking on its door. Last year, some of those creditors, many of them state-owned entities that take their orders from the national and local governments, allowed Country Garden to extend eight or nine domestic bonds. More recently, portions of three bonds reportedly missed some of their principal and interest payments, but were given an extension to September after discussions with creditors.

Creditors keep coming

If true, the extensions are really just some temporary relief but are nowhere near helping to resolve Country Garden’s bigger problems. The company has yet to announce its full-year results for 2023, prompting the suspension of its Hong Kong-listed stock when it missed the required deadline. One of its creditors, Kingboard Holdings Ltd. (0148.HK), has also petitioned to have the company liquidated over HK$1.6 billion in debt that it’s owed. A hearing in that case will be held in Hong Kong's High Court on May 17.

The company has yet to reach an agreement for restructuring its foreign debt, only saying last month that it was communicating with its creditors and their advisors. Some of the latest market talk is saying Country Garden will submit a preliminary restructuring plan to a group of bondholders sometime next month.

As it has yet to issue its financial results for last year, we can only judge the company’s finances using information from its interim report for the first six months of 2023. The company had 101.1 billion yuan ($14 billion) in cash at the end of June, plus about 29.45 billion yuan in restricted cash. 

In terms of debt, its interest-bearing liabilities, including bank borrowings, senior notes, convertible bonds and corporate bonds, totaled 257.9 billion yuan, with a net gearing ratio of 50.1%. While Country Garden seemed to have ample cash at that time, its situation probably deteriorated considerably in the second half of the year, reflected by its failure to repay a growing number of financial obligations.

Recent reports said the Malaysian government may allow gambling into Forest City, one of Country Garden’s largest overseas developments, to revive the struggling project. The government later denied the reports. But even gambling might not be enough to boost Forest City in the short term and resuscitate Country Garden, whose problems extend much wider than any single project.

Nosediving sales

Reviving property sales and policy support from Beijing are the only two silver bullets that might be able to tide Country Garden through its crisis. Property sales are the lifeblood of any real estate developer, but Country Garden’s plunged 81% in the first quarter of this year to just 13.5 billion yuan.

There’s little sign that things will improve within the year as cash-strapped developers roll out big discounts, further pressuring prices. As new properties continue to flood the market, many potential buyers worry that today’s bargains might look expensive next year if prices continue to fall. Many also worry that a growing number of developers may lack the money to deliver properties still under construction. 

Such cautious sentiment makes it unlikely the sector will start to rebound in a year or even two. Instead, the market will need to be cleared of inventory and developers will need to get back on more solid financial footing through debt restructuring before buyer sentiment will finally improve.

Policy support treats symptoms, but not the root cause

Will the government continue to lend a policy hand to developers? The answer is almost certainly yes, but only in limited ways. For example, the government is unlikely to assist in helping companies resolve their foreign debts, and will only help some ease their domestic debt, based on their individual situations. The government is most likely to provide such support to more responsible companies like Country Garden, for example, by asking its state-owned creditors like banks to extend their debt repayment periods and asking such banks to lend the companies money to ensure they can finish their projects.

But such measures can only buy the companies some time while they try to restructure their large overall debt. Over the longer term, no government policy will be able to solve these companies’ problems once and for all. The recent bankruptcy and reorganization of Shenzhen-listed Jinke Property Group (000656.SZ) may be the canary in the coalmine, signaling the beginning of the end for many smaller domestic developers.

Country Garden director Yang Huiyan promised at the end of last year that the company’s founder and his family would “sell everything to support the company and explore an effective path to resume normal operations as soon as possible.” Yang Huiyan and three other directors also proposed substantial cuts to their own salaries to 120,000 yuan per year. President Mo Bin took the biggest cut from his previous annual salary of 3 million yuan.

But frankly speaking, such cuts are only a drop in the bucket for a company with more than 100 billion yuan in debt. That hole will remain even if the founder’s family sells its assets to support the company. So, Yang Huiyan's words and actions look like mostly a gesture rather than anything more substantive. The fate of the collapsing China Evergrande (3333.HK), now being liquidated in Hong Kong, could well be a good lesson for all Chinese real estate developers large and small, namely that no company is too big to fail in the current climate.

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China Construction Bank’s request to liquidate Shimao shows that state-owned banks are starting to take legal action to recover their money from the debt-ridden industry

Key Takeaways:

• A unit of China Construction Bank has asked a court to liquidate Shimao Group, which had a net debt ratio of 473.2% at the end of last year
• CCB Asia has taken legal action against three Hong Kong-listed Chinese real estate developers so far this year

By Li Shih Ta

A new phase of all-out war has begun in China's sagging real estate industry, pitting struggling developers against their increasingly militant creditors seeking to recoup billions of dollars they’re owed.

Ever since a Hong Kong court ordered the liquidation of China Evergrande Group (3333.HK) in January, those creditors have been turning up their efforts to seek redress in court by filing liquidation requests, formally known as winding-up petitions. In a significant step, big state-owned banks, which typically don’t act without approval from Beijing, are joining the campaign. 

Shimao Group Holdings Ltd. (0813.HK), one of China's top real estate enterprises, became the latest to fall victim to such a court-based assault with its announcement last week that it was the subject of a liquidation petition filed by China Construction Bank (Asia) Corp. Ltd. (CCB Asia). The unit of China Construction Bank (CCB), one of China’s “Big Four” state-owned banks, is owed HK$1.58 billion ($202 million) from the developer, whose embattled stock plunged 18.7% to a fresh record low on the day of the announcement. 

Shimao said it would “oppose the petition vigorously and continue to work towards an offshore restructuring that maximizes value for its stakeholders.” The liquidation petition “does not represent collective interests of the company’s offshore creditors and other stakeholders,” it added.

Shimao, which owns offices, residential buildings, hotels and shopping malls in Beijing, Shanghai, Hong Kong and other cities, is one of the many companies that have defaulted on their offshore debt since China tightened supervision of property developers in 2021. The company failed to make interest and principal payments on $1 billion of its offshore bonds in July 2022, and has so far defaulted on up to $11.7 billion in cumulative debt.

CCB gets aggressive

After 18 months of negotiations, Shimao first submitted terms for an offshore debt restructuring to its creditors last December. The company offered them a variety of options in March this year, including converting their debt into six- or nine-year notes or loans, or zero-coupon mandatory convertible bonds.

Among those choices, the convertible bond option allows creditors to convert their bonds into company shares at a conversion price of HK$8.50 per share after one year. However, creditors are less than enthusiastic about that option since the conversion price is more than 20 times the current stock price. A major creditor group holding more than 25% of the outstanding overseas bonds called the terms “detrimental” to creditors’ interests.

The long negotiation process and lack of results are severely testing creditors’ patience. One creditor, Deutsche Bank, had said the proposal was unacceptable and that it would prepare for legal action in Hong Kong. But now it seems that CCB Asia beat it to the punch.

This isn’t CCB Asia’s first legal action against a Chinese developer. In late February, the bank filed another winding-up petition against DaFa Properties (6111.HK), which owes it $360 million. It then filed a similar petition against Dexin (2019.HK), which owes it $350 million for 9.95% senior notes that came due in December 2022 as well as accrued interest.

Whitelisted projects

China launched a “whitelist” program for properties under development in January this year, with projects on the list given priority for financing from CCB and China’s other top four lenders, including ICBC, Agricultural Bank of China, Bank of China and Bank of Communications. The program is expected to provide as much as 3.2 trillion yuan in loans for more than 8,200 residential projects, many of whose construction has slowed or stopped due to lack of funds.

It's worth noting that the whitelist program aims to guarantee delivery of projects under construction and isn’t designed to rescue real estate companies. That means that even if a state-owned bank grants a loan to help a developer finish a project, the bank doesn’t forfeit its right to take legal action involving other debts that developer might owe it. 

The serious real estate downturn of the last two years has produced a bumper crop of related non-performing loans (NPLs) for the banking sector. After reviewing financial results of 27 large and medium-sized banks listed in Hong Kong, Japan’s Nikkei found that total NPLs related to China's real estate sector rose by 27% year-on-year last year. CCB, which traditionally focused on the construction industry, saw the biggest increase in real estate NPLs among the four major state-owned banks.

CCB’s latest annual results released at the end of last month show it had 48.2 billion yuan worth of real estate-related NPLs in 2023, up 43% from 33.6 billion yuan in 2022, the highest increase among the four major state-owned banks. That increase lifted its real estate NPL ratio to 5.6% from 4.4%.

No auditor opinion

The saying goes that “God helps those who help themselves,” and such self-help may be the only way out for China’s big field of heavily indebted developers. In addition to debt restructuring, Shimao is also selling off quality assets and pushing for more sales in order to secure the funds it desperately needs to work out its crippled finances as quickly as possible. But that hasn’t gone so well.

According to the company’s latest financial report for last year, it brought in revenue of 59.5 billion yuan in 2023, down 5.7% year-on-year, and lost about 21 billion yuan, similar to its year-ago loss. As of the end of last year, Shimao had total assets of 543.3 billion yuan and total liabilities of 492 billion yuan, giving it a liabilities-to-asset ratio of 88.7%. Its net debt ratio swelled to 473.2% from 302.2% in 2022.

We should note that in Shimao’s latest annual results, its auditor said it was “unable to express an opinion” on the report because the company “may not be able to realize its assets and repay its debts in the normal course of business.”

The fate of China’s property developers has been much like a low-speed train wreck, with each new phase only starting after much wrangling in the previous period. The newest phase now appears underway as banks and other creditors start to take legal action to defend their rights and interests, meaning more real estate enterprises may soon follow in Shimao’s footsteps.

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The high-end hotel operator ended three years of losses with a return to profits last year, buoyed by a post-pandemic rebound in global travel

Key Takeaways:

• Shangri-la earned a profit of $184 million last year and distributed a dividend of HK$0.15 per share to celebrate its return to the black after three years of losses
• The Hong Kong-listed hotel operator expects its next growth driver to come from a pickup in Chinese traveling abroad

By Lau Chi Hang

As the global economy stumbles its way back to post-pandemic health, tourism stands out as a surprising bright spot that has rebounded much more strongly. High-end hotel operator Shangri-la Asia Ltd. (0069.HK) has benefited from that rebound, impressing investors with a strong performance last year that included a return to the black after three years of losses. 

The Shangri-la brand takes its name from the fictional Never-never land of Shangri-la created by British author James Hilton in his novel “Lost Horizon” in the 1930s. Cut off from the rest the world, the place’s inhabitants live in a sort of paradise similar to the wonderland in the Chinese classic “Peach Blossom Spring” by poet Tao Yuanming. 

Exactly how this idyllic name ended up on a hotel chain is yet another story.

In 1971, when legendary Asian sugar king Robert Kuok of Malaysia was planning to establish a top-tier hotel brand in Singapore, he told his French friends and raised the subject of a name with them. One responded dismissively with the word “idiot” and threw out the name Shangri-la as well. And thus a name was born.

CFO revolving door 

The rest of the company’s history is familiar to people in the region. Shangri-la soon became a world-renowned hotel group and carved out a comfortable spot for itself at the higher end of the market until 2019 when the pandemic broke out. It went on to lose money for three consecutive years. It also suffered from management turbulence during that time, with three CFOs coming and going, leaving many outsiders scratching their heads. 

Just when investors were losing their patience, the company received a lifeline with the unexpectedly strong tourism recovery as people spent lavishly on “revenge travel” after three years of staying close to home. As that happened, Shangri-la’s revenue rose 46.5% last year to $2.14 billion. It also celebrated a return to the black with a profit of $184 million, reversing losses of $46 million in 2020, $29 million in 2021 and $159 million in 2022. With money to spare, the company also resumed returning some of its profits to shareholders with an end-of-the-year dividend of HK $0.15 per share.

The company’s main businesses include hotel management and property investment. Besides Shangri-La, its other chains include Kerry, JEN and Traders Hotel, and it has a total of 103 hotels with 41,800 rooms. It owns 83 of those properties and provides management services for the rest. It also has a portfolio of 2.43 million square meters of offices, commercial properties and serviced apartments.

Revenue from its hotel business rose 49.3% last year to $2.03 billion, while its investment property revenue rose by a slower 8.6% to $108 million.

Cost cutting without layoffs

Improvement in the broader travel market was the main driver behind Shangri-la’s new lease on life. According to the World Tourism Barometer published by the United Nations Tourism Organization, international tourism recovered to 88% of pre-pandemic levels in 2023, with 1.3 billion trips made by international tourists who spent an estimated $1.4 trillion, 93% of levels from 2019.

It was little surprise that Shangri-la, whose hotels are concentrated in popular international travel destinations, benefited from the trend. The company said surging demand for hotel rooms on the Chinese Mainland and in Hong Kong, combined with growing demand for travel worldwide, turbocharged its global business.

The company should also be commended for making its own strategic recalibration during the pandemic. It took advantage of slow days to cut costs and increase efficiency. And while many companies laid off staff to trim costs during the pandemic, only to find themselves short-handed afterwards, Shangri-la tried its best to retain front-line workers. That left it with enough skilled staff to quickly ramp back up without having to hire and train new workers as the industry bounced back. 

But some also believe the strong rebound in the hospitality and tourism industries was already a forgone conclusion, and that Shangri-la’s post-pandemic bounce-back was equally driven by the low base for its performance in 2022. With much stronger numbers for 2023, its ability to sustain the rapid growth into 2024 could be much harder.

Room for occupancy improvement 

To answer that question, we should look at the company’s occupancy rates, which will be a major factor affecting its outlook. Last year, its average occupancy rate was 62%, a relatively low figure but still up 20 percentage points from 42% in 2022. Meanwhile, its revenue per available room or revpar, a widely watched industry metric, rose by 69% to $108. That means there’s room for the occupancy rate to go up further if the rebound continues. 

Market projections show the tourism industry’s outlook remains rosy. The United Nations Tourism Organization’s latest travel confidence index survey found that 67% of respondents believe the outlook will be better or much better this year than in 2023. Shangri-la also estimates that as international travelers return to China, and with more favorable policies and promotions from countries like Singapore, Malaysia and Thailand for outbound Chinese travelers, international travel could become the next catalyst for its business. 

Despite its business rebound, Shangri-la’s valuation is still relatively low with a price-to-earnings (P/E) ratio of around 12 times. That’s well behind the 66 times for Hong Kong and Shanghai Hotels Ltd. (0045.HK) and 21 times for H Word Group Ltd.(1179.HK; HTHT.US). In net asset terms, Shangri-la’s hotels and properties were valued at nearly $11 billion at the end of last year, with a net asset value of $1.47 per share, representing a 57% discount to the stock’s closing price of HK$4.90 last Thursday.

In a nutshell, Shangri-la is a company with solid fundamentals and business prospects. But local equity investors aren’t so interested in hotel stocks, which may explain the drop in its share price after its latest annual results announcement. Such solid stocks could continue to suffer with the slump in Hong Kong’s stock market, compounded by China’s economic slowdown and growing China-U.S. tensions. That means that companies like Shangri-la are hardly guaranteed of being rewarded for their improving performance. 

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The integrated online and offline real estate broker returned to the black last year and paid a generous dividend despite operating in China’s weak property market

Key Takeaways:

• KE Holdings posted a net profit of 5.89 billion yuan for 2023, returning to the black after losing 1.4 billion yuan in 2022
• The leading property broker paid a generous final dividend of $0.351 per American depositary share

By Lau Chi Hang

It’s one thing to ride the coattails of a booming industry like China’s property market was for most of the last three decades. But what separates an ordinary building from a modern high-rise is the ability to stand tall, even during a winter like the one now chilling the sector.

The last two years have decimated China’s property market, with nine out of 10 private developers now teetering on the brink of insolvency. The chill has rippled through to real estate brokers, forcing former heavyweight E-House (2048.HK) to restructure after failing to collect commissions from developers. Despite that, brokerage KE Holdings Inc. (2423.HK; BEKE.US) stands out as one of the few companies that managed to not only grow last year, but also to do so profitably.

The leading broker returned to the black last year with a 5.89 billion yuan ($815 million) annual profit, reversing a 1.4 billion yuan loss in 2022. Its revenue also rose 28.2% for the year to 77.8 billion yuan. And to show off its deep pockets, the company announced a special interim cash dividend of $0.171 per American depositary share (ADS) midway through last year, followed by a newly announced final dividend of $0.351 per ADS, according to its latest results released earlier this month.

The past year highlighted success for the company’s “One Body, Three Wings” strategy, featuring its traditional brokerage service as the body, and home renovation and furnishing, rental property management, and its developing Beihaojia business that “facilitates supply-side upgrades for new homes” as its three wings.

Expanding market share

Even as overall home transactions in China dropped last year, KE Holdings managed to maintain solid growth in its core business. Transaction value for its existing home sales totaled 2.03 trillion yuan, while that for new homes was 1 trillion yuan, up 28.6% and 16.7%, respectively. The company’s net revenue from existing home transactions rose 15.9% to 28 billion yuan, while the figure from new home transactions was up 6.7% to 30.6 billion yuan.

The strong results owe to turf wars that KE Holdings is winning over its smaller rivals, which is the only way to grow in such an ailing market.

As those rivals scaled back operations and even closed, KE Holdings actually expanded its footprint by boosting its store count to 43,817 at the end of last year, up by 8.1% from a year earlier. Its salesforce of individual brokers grew by a similar 8.5% year-on-year to 427,656, showcasing its ability to keep expanding even in such a tough market.

A major concern for all property brokers is the potential for delayed commission payments, which was a major factor in E-House's downfall. But KE Holdings seems to be avoiding the issue, at least for now. Its accounts receivable turnover days for new home transactions actually fell from 105 days in 2022 to just 43 days in last year’s fourth quarter. The company is avoiding deadbeats through its “Commission in Advance” model. Such prepaid commissions from developers accounted for around 53% of its net revenues from new home transaction services in last year’s fourth quarter, up from around 44% a year earlier. 

It's worth noting that KE’s demands for quicker commission payments haven’t dampened its new home transaction business, as reflected by its revenue gain last year. That reflects the company’s strong bargaining power with the cash-strapped developers that are some of its largest clients, many of whom are struggling to pay their bills.

“Two wings” take off

The company’s non-brokerage services, while still small as a proportion of total revenue, still performed well last year. The integration of its home renovation and furnishing business into its broader property transaction process helped to boost that business. The company also enriched its offerings and delivery capabilities in the business, lifting revenue from its home renovation and furnishing services to 13.3 billion yuan last year, up 146% from 2022.

KE also continued to boost its “Carefree Rent” rental property management business, whose property under management roughly tripled from 70,000 units in 2022 to 200,000 units by the end of last year. The occupancy rate for that part of the business also rose by 6 percentage points to 95.1%.

Unlike many cash-strapped real estate companies, KE Holdings is also relatively good at managing its capital. Its current gearing ratio is 40%, and it had 19.6 billion yuan in cash at the end of last year. That strong position allowed the company to spend approximately $719 million last year to buy back 46.7 million of its ADSs, accounting for 3.7% of the total number outstanding before the buybacks. Meanwhile, the company has invested its idle funds in low-risk wealth management products to secure certain basic returns, avoiding riskier higher-return products that in the past were often backed by real estate assets.

“We now have a solid foundation – we have the space to make our mark in the vast residential sector, our team has the trust and unity formed through battles fought together, we increasingly resemble an invincible team,” said Chairman and CEO Peng Yongdong in the results.

Ability to endure?

Despite its strong performance, no one knows if KE Holdings will be able to remain a winner. That may explain why the stock fell 2.5% in New York after the announcement, and the shares continued to fall the next day in Hong Kong, closing down nearly 3% at HK$36.90.

Some noted a slowdown in the company’s fourth quarter results, even though its full-year performance was strong. In particular, total transaction value for its new home sales fell 9.7% to 238 billion yuan during the quarter, while its revenue fell 8.5% to 7.6 billion yuan. Investors may be concerned that even if KE Holdings stays ahead of its rivals, it may ultimately fall victim to continued deterioration in China’s oversupplied property market. In such a challenging environment, even a well-managed company may not be able to keep growing indefinitely.

The book “Good to Great” by Stanford University professor Jim Collins has been widely read and respected by entrepreneurs around the world. KE Holdings looks well-run right now, but can it become the kind of great company described by Collins? That could largely depend on whether it can continue to thrive and grow, even as the property market around it crumbles.

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The setback has added new uncertainties to the online real estate agent’s ongoing restructuring 

Key Takeaways:

• E-House’s restructuring has stalled over its inability to use one of its key assets that is currently tied up as collateral for an outstanding bank loan
• The company’s interest-bearing liabilities totaled over 5 billion yuan by the middle of last year

By Lau Chi Hang

The rebuilding has stopped, at least for now, at E-House (China) Enterprise Holdings Ltd. (2048.HK), a former highflier that has become a poster child for the woes overtaking China’s property sector. 

The online real estate services provider was forced to slam the brakes on a plan to raise money through a rights issue late last month, throwing its broader reorganization into question. Time is rapidly running out on the company, which is racing to avoid becoming the next China Evergrande (3333.HK) – a former industry superstar that is now in bankruptcy liquidation after its creditors tired of waiting for a viable plan to recoup some of their money.

E-House is in especially tough straits, having lost 11.6 billion yuan ($1.61 billion) in 2021, another 3.9 billion yuan in 2022, and a further 726 million yuan in first half of last year. Add to that as much as 5.58 billion yuan in loans and convertible notes coming due this year, and its situation looks even more dire.

The company had just 1.18 billion yuan in cash and restricted deposits midway through last year – far short of what it needs to cover its obligations. It also holds another 6.72 billion yuan in receivables, but much of that is considered unrecoverable from the property developers who are its main customers and are facing even greater difficulties.

The assessment from the company’s independent auditor sums up its situation, saying the many uncertainties E-House faces create significant questions about its ability to continue as a going concern.

The same source that once brought the company’s huge success is now behind its huge losses. When E-House went public in Hong Kong in 2018, Chairman Zhou Xin enticed more than 20 developers – who were also some of his best customers – to become his investors, raising HK$4.6 billion ($588 million). That group included three of China’s top property developers, Evergrande, Country Garden (2007.HK) and Vanke (2202.HK; 200002.SZ), along with e-commerce giant Alibaba (BABA.US; 9988.HK). 

What raises the boat can also sink it

At the time of the listing, Zhou had everything all planned out. Bringing on those developers as investors would naturally incline them to giving his company priority in representing their latest projects. As stakeholders entitled to a share of the company’s profits, he figured, they would also be more likely to pay generous commissions and pay their bills on time. 

E-House derives most of its revenue from fees for selling new homes, and boomed when the market was booming. But as things soured, the developers who are its main revenue source have faced difficulty servicing their billions of dollars in debt, making payment of their commissions to real estate agents like E-House a low priority. 

With developers delaying their commission payments, E-House has had to prepare for the growing likelihood that it will never collect much of those debts. As a result, it has struggled to pay off its own debts and other obligations, forcing it to undergo a financial restructuring.

Under a plan announced last April, E-House said it would meet its obligations using a combination of cash and the new shares of TM Home, a joint venture it formed with Alibaba in 2021. 

E-House planned a rights issue that would raise about HK$483 million by selling 12 new shares of priced at HK$0.23 each for every 10 E-House shares held by its existing stockholders. As part of the plan, E-House would inject its CRIC real estate data and consulting service, as well as its online real estate marketing business, into TM Home. 

But a sticking point arose over the status of CRIC, which E-House previously used as collateral for a loan from a Chinese bank. That bank is now refusing to relinquish the collateral status, thus holding back the injection of CRIC into TM Home. As a result, the issue of new TM Home shares as part of the reorganization has also stalled. 

Resolving the impasse

With the rights issue now on hold, E-House has been unable to raise the funds it needs to complete its restructuring. And with a March 31 deadline for finalizing the plan fast approaching, the company is now scrambling to resolve the situation. 

Its top priority now is getting the bank to lift CRIC’s status as collateral for the loan. The company said it received very positive feedback from the bank during initial negotiations to convert the loan from a collateralized loan to a credit loan. But later the bank unexpectedly changed its mind. While we don’t know what caused the change of heart, there may still be hope for the restructuring if that issue can be resolved. 

In fact, E-House has taken out 436 million yuan in loans from the bank, though just 200 million yuan of that is secured by CRIC as collateral. Thus, a repayment of the 200 million yuan could resolve the impasse, paving the way for a resumption of the right issue.

At the same time, the rights issue was only going raise a little over 400 million yuan, which isn’t an astronomical amount. So, even if the rights issue doesn’t proceed, there might be other ways to come up with the cash. But the clock continues to tick down as E-House scrambles for a solution, meaning the deadline will quite likely need to be extended. 

No second chances in real life

During its briefing to discuss its interim results last year, Zhou offered a mea culpa as his company’s top decision-maker and apologized for causing major losses for his investors. He also stressed that he and his company could turn a new page if creditors would just give them a chance.

While there’s no doubt his appeal was sincere, Zhou needs to realize there are often no second chances in real life, and that an opportunity lost to carelessness cannot easily be replaced. Many of his industry bedfellows have learned that lesson in much harder ways. Evergrande founder Hui Ka Yan, also known as Xu Jiayin, is now under investigation as his company faces liquidation. Meantime, Country Garden founder Yang Guoqiang probably regrets not trying to sell his company’s properties more aggressively in 2022 before the current downturn began to accelerate. 

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International bondholders have low expectations for recouping their money as the world’s most indebted developer is finally ordered to liquidate

Key Takeaways:

• How much international investors can recoup from Evergrande’s liquidation will depend on decisions made by governments and courts on the Chinese Mainland
• 90% of the Evergrande’s assets are on the Mainland, making it impossible to carry out a Hong Kong court’s liquidation order without help from Mainland courts

By Ken Lo 

After months of delays, a Hong Kong judge finally pulled the trigger on China Evergrande Group (3333.HK) last week by ordering the debt-laden developer to liquidate, ending a saga that began with a request from one of its creditors back in 2022. That ruling followed seven delays in a decision on the matter, marking an unofficial end to an era of years go-go expansion by China’s overheated property sector.

China Evergrande’s stock was halted before the Jan. 29 ruling at HK$0.163 per share, valuing the company at just HK$2.15 billion ($275 million), a tiny fraction of the HK$400 billion it was worth at its peak. Among other things, the company’s stakes in its Hong Kong-listed EV subsidiary China Evergrande New Energy Vehicle Group Ltd. (0708.HK), and property management services company Evergrande Property Services Group Ltd. (6666.HK), are likely to be seized by liquidators.

According to the court order, two staffers of consulting firm of Alvarez & Marsal, Edward Simon Middleton and Wing Sze Tiffany Wong, will act as joint liquidators.

Nearly all of Evergrande’s property development business is on the Chinese Mainland through its locally based Evergrande Property unit. Most of its debt, both at home and abroad, was taken on to finance its Mainland operations, including big sums owed to its suppliers, construction partners and financial backers.

Its interim financial statement last year showed its net liabilities stood at a whopping 2.39 trillion yuan ($336 billion) at the end of last June, while it had just 13.4 billion yuan ($1.87 billion) in cash. The company listed 17 defaulted dollar-denominated bonds as it tried in vain to forge a restructuring plan with its foreign creditors involving more than $19 billion in debt.

Evergrande Managing Director Xiao En, responding to media queries, said the court-ordered liquidation applied to the company’s overseas business, affecting its Hong Kong-listed China Evergrande unit. He added the company would do its best to keep its Mainland-based Evergrande Property afloat and move ahead with key priorities, including delivery of homes still being built. 

He added the company would continue to work with the liquidators to fulfill their duties while further winding down its debt.

Failed restructuring plan

Even as the Hong Kong judge made her ruling, the company’s Mainland-based Evergrande Property unit was the target of an investigation by the Chinese securities regulator. That case’s suspects include company Chairman Hui Ka Yan, whose lack of availability for the Hong Kong case made a restructuring of the company’s foreign debt effectively a mission impossible.

Evergrande has provided only a smattering of information to its offshore creditors since defaulting on two dollar-denominated bonds in late 2021, making it extremely difficult for investors to get a full picture of the many challenges facing the company. Issues like how the liquidation of the Hong Kong entity can proceed – and how much offshore investors might hope to recoup – will largely depend on decisions by Mainland-based authorities and courts.

In 2021, Mainland and Hong Kong courts agreed to coordinate their separate bankruptcy proceedings, with Hong Kong liquidators allowed to petition courts in the cities of Shanghai, Shenzhen and Xiamen. But final decisions will be made by the Mainland courts, which may refuse to recognize the Hong Kong court order and assist in its implementation. In other words, failure to win support from the Mainland court system will make it very hard to complete the Hong Kong liquidation proceedings.

Paul Lam Ting-kwok, from Hong Kong’s Department of Justice, acknowledged last November that Mainland courts might refuse to recognize a Hong Kong liquidation order. A Shenzhen court previously recognized the Hong Kong court’s authority when it appointed liquidators in the case of Samson Paper Holdings Ltd. in 2021. But that case is regarded as an exception rather than the rule.

Even if Mainland courts recognize the liquidation order, cooperation from the company’s many domestic creditors will also be critical. Priority given to such onshore creditors over their offshore peers means it will be that much harder for offshore creditors to get compensated.

The liquidation order could be just the start for China’s embattled developers. Earlier rumors said that creditors of Country Garden(2007.HK) would also seek to liquidate the company, and some Hong Kong banks would take over its Hong Kong assets, even as company sources were cited in media reports denying such claims. But such denials are common by Chinese companies, even when what they are denying is really happening.

Ensuring home deliveries 

Beijing has instructed developers to deliver pre-sold units and fulfill their social responsibility to deliver homes, many of which are midway through construction that has often ground to a halt due to lack of funds. But that requires more money, typically obtained by selling more properties, which is difficult in the current weak environment of falling home prices.

Regardless of whether the liquidation process moves ahead, Evergrande will be in a virtual state of bankruptcy and its bonds will trade at less than 20% of their face value, pointed out Hong Hao, partner and chief economist of Hong Kong-based GROW Investment Group.

According to a report from the property-focused China Index Academy, existing home prices in 100 Chinese cities fell by an average of 0.56% month-on-month in January, marking the 21st consecutive monthly decline. Developers in many cities are cutting prices to drum up sales. The report said that following the easing of purchase restrictions in Shanghai and Guangzhou, other top-tier cities will take similar actions, and second-tier cities might remove purchase restrictions altogether to attract buyers. The Academy also predicted down payment requirements will fall further for first-time and second-home buyers in major cities.

Chris Beddor, deputy director of research at Gavekal Dragonomics, told Reuters that in many ways the Evergrande case represented the broader woes of China’s property sector, whose prolonged slump is having a chilling effect on consumer sentiment. Data shows that potential buyers are not willing to purchase pre-sold units from struggling developers for fear of losing their money, further aggravating the situation for companies like Evergrande.

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The debt-hobbled former property leader is quietly exiting its many overseas projects to raise cash, as it also faces policy uncertainties abroad

Key Takeaways:

• Country Garden is negotiating to sell its remaining projects in Australia, as it retreats from the market.
• The developer’s once-heralded Forest City mega-project in Malaysia has ground to a halt, hobbled by local politics and bad publicity that have led many to call it a “ghost city”

By Lau Chi Hang

A decade ago when it was on the rise, Country Garden Holdings Co. Ltd. (2007.HK), having conquered its home China market by feeding an endless appetite for homes from property-hungry Chinese, set its sights it overseas. The Asia Pacific market topped the list of destinations for then-Chairman Yang Guoqiang, who acted swiftly by investing in Malaysia, Thailand, Indonesia and Australia. By 2017, the company was working on 17 projects in the region.

Fast forward to the present, when rather than bringing Country Garden new wealth, much of that overseas portfolio has run into a brick-wall, adding to the company’s ongoing financial woes.

Country Garden recently said it planned to sell its remaining interest in its Wilton Greens project in Sydney for A$240 million ($158 million), in a deal that may close by June this year. That came after a sale last October where it offloaded other plots it owned that were part of the Windermere residential project in Melbourne to Singapore’s Frasers Property for A$250 million. A successful sale of the Sydney project would mark a complete exit from Australia for the company.

Country Garden is also using its land and properties in Thailand as collateral to backstop two bonds it issued worth a combined 774 billion baht ($21.7 billion), relieving it from responsibility to personally guarantee the bonds.

Forest City ghost town

But Country Garden’s troubles in Australia and Thailand pale compared with the woes facing its super-sized Forest City development in Malaysia, which has become a hot potato providing endless headaches for the company. The development in Malaysia’s Iskandar special economic zone adjacent to Singapore was meant to show off its global ambitions, built over a sprawling 30 square kilometers. The development was designed with residential, commercial, hotel and tourism components, built over 25 to 30 years with an investment of $100 billion.

In 2016, the Malaysia’s then-Prime Minister Najib Razak vowed to create 200,000 jobs in the special economic zone over 20 years. But then he was abruptly replaced by Mahathir Mohamad, who first threatened to ban any foreign purchase of the Forest City properties, before easing slightly while still stressing that visa restrictions would make it hard for foreigners to actually live there. That sparked an uproar among its many foreign investors, who have since shunned the project.

The final nail in the coffin came during the pandemic, which brought sales and construction to a near halt. Sales plunged and funds quickly dried up. Meantime, Country Garden’s troubles at home meant it couldn’t spare any domestic resources to support its Malaysia business. At the same time, buyers who took delivery and went to live in their Forest City homes found themselves in a cold, empty city with little traffic, far from the hustle and bustle they were promised. That led to a slew of protests, further dampening buyer and investor interest, as observers began to label Forest City as a ghost town.

Current Malaysian Prime Minister Anwar Ibrahim designated the city as a special financial zone last year, reviving hopes for the project. But investors are still cautious, concerned about the frequent policy flip-flops. 

The overseas turmoil comes as Country Garden’s current 130 billion yuan ($18 billion) in cash and restricted cash at the end of last June was roughly half of its 257.9 billion yuan in interest-bearing debt. Things have worsened since then with steady offshore debt defaults and sharp sales declines in the second half of last year, leaving the company overwhelmed with zero resources to commit to continuing the Forest City project.

The mess is the result of Country Garden’s reckless expansion, combined with misjudgment of local business climates, especially the turmoil in Malaysian politics. The pandemic didn’t help either, and the final straw for the company was the Chinese government’s forced deleveraging for all developers with its “Three Red Lines” policy in 2020. 

Wild West

Detractors believe that developers like Country Garden have only themselves to blame, and their current woes are the direct result of blind over-leveraged expansion with little or no consideration for risk management over the years.

But such Monday-morning quarterbacking doesn’t help much as many of these companies teeter on the brink of insolvency. Such heavily indebted developers now represent the majority of privately owned Chinese property companies. Players differ only in terms of how deeply in debt they are, whether they’re on the hook for tens or hundreds of billions, or even trillions, of yuan.

The fact that nearly all private developers now face the same dilemma shows that all were simply following the same rules that gave them easy access to credit to fuel their building frenzy as China encouraged them to develop the national housing market. Back then, any developer that didn’t take on such massive debt risked either falling behind or being forced from the game outright.

It’s only now just 20 years since China liberalized its housing market. That major shift after decades of state-led development left many rules waiting to be written, and practices normally seen in more mature markets lacking at the embryonic stage, as policymakers felt their way forward. The result was a virtual Wild West in a freewheeling landscape where almost anything could go.

Imagine hundreds of cars on a brand new road with no speed limit. They race at 100 kph at first, then 200 and 300 kph, with no major accidents initially, all afraid to slow down for fear of falling behind. Speeds are up to 500 kph before the traffic police finally smell danger and order all contestants to slam on the brakes, creating havoc on the road.

At the end of the day, Chinese developers like Country Garden have been going at full speed for years without regard for safety. After years of reckless unsustainable overdevelopment, their moment of reckoning has finally arrived. Their needed mid-courses correction will undoubtedly be painful, with some certain to crash and burn. But the overall result should be a consolidation around the stronger players, which will ultimately set the industry on a stronger footing going forward.

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Several courts have approved the struggling developer’s offshore debt restructuring plan, which will save Aoyuan billions of dollars in interest payments

Key Takeaways:

• Aoyuan has restructured its offshore debt with a plan that includes some refinancing, and the issue of common shares and perpetual and convertible bonds.
• Aoyuan expects to save up to $4.9 billion in interest payment on its foreign debt over the next eight years through the plan

By Lau Chi Hang

“Winter will eventually pass, and spring is sure to come.”

That was the message of hope coming from Guo Ziwen, a major shareholder of debt-strapped China Aoyuan Property Group Ltd.(3883.HK), in a letter he sent to employees last year. As things stand now, no one knows exactly when that long-awaited spring will come. But at least the winter is getting just a tiny big less-cold as the company restructures its massive financial obligations.

Burdened with more than 100 billion yuan ($14.1 billion) in offshore debt, Aoyuan filed for bankruptcy protection in a New York court at the end of last year. Its plan to restructure $6.1 billion of that was opposed by one of its creditors, the powerful China Ping An Insurance Overseas (Holdings) Ltd. Despite that, the plan was finally approved by courts in Hong Kong, the Cayman Islands and British Virgin Islands.

Under the restructuring, Aoyuan will refinance its foreign debt by issuing four debt instruments worth a combined $2.3 billion. It will also issue $143 million in zero-coupon convertibles, $1.6 billion in perpetual bonds, and $1.4 billion worth of common shares. The plan will help to reduce interest payments on its foreign debt by as much as $4.9 billion over the next eight years. Under the plan, Aoyuan won’t have any open-market foreign debt coming due in the next two or three years. 

Breathing room

Aoyuan previously got extensions for all of its 12 domestic debt instruments by last September. Now, with the offshore debt successfully restructured, it has become the first property developer in South China’s Guangdong province, home to many of the nation’s top developers, to successfully restructure both its onshore and offshore debt. 

Its well-earned respite comes after two years of intense negotiations. Now, its ability to meet its future obligation will largely depend on how China’s ailing domestic property market fares.

Aoyuan was insolvent with 20.5 billion yuan in net liabilities at the end of last June, according to its results for the first half of last year. It registered a loss of nearly 2.94 billion yuan for the six-month period and borrowed a total of 108.8 billion yuan, including 74.5 billion yuan in short- and long-term bank loans and 34.4 billion yuan via preferred notes and bonds. Over 90% of that debt was set to mature within one year, even as the company had just 6.94 billion yuan in cash and restricted deposits at the time.

It also has 150 billion yuan in investments or assets in the form of properties for sale. But those assets will lose value if home prices continue their declines of the last two years. So, even with its new breathing room, the company will only be able to finally rebound if the property market pulls out of its slump. 

Destocking takes time

The Mainland Chinese property market’s steady supply of new homes contrasts sharply with declining demand, pressuring prices and leaving developers stuck with unsold inventory and short on cash to fund their operations. The slumping demand is reflected in the China Index Academy’s annual list of China’s Top 100 Developers, whose sales fell 17.3% last year to 6.28 trillion yuan. 

The reality is that Chinese see real estate as both an investment product as well as a place to live. When prices are rising, people rush to buy for fear of missing out on quick returns. Some may initially swoop in when the market starts to decline, seeing it as a rare window of opportunity. But people increasingly take to the sidelines as the declines persist, steering clear of the market on belief that the downward spiral will continue. 

The increasing failure by some developers to deliver homes on time is furthering dimming sentiment as potential buyers worry that they won’t even get their homes if they buy now – a relatively big problem in China as developers lack funds to complete some of their projects in progress. Thus, the downward spiral gets worse.

Destocking of excess inventory is also a necessary before a rebound can take place. According to a report from the Shanghai Yiju Institute last year, 68 out of China’s top 100 cities need more than 14 months to absorb existing stock in their local markets, and some smaller cities may require more than four and five years.

An Urban Housing Vacancy analysis published by the Southwestern University of Finance and Economics showed that at the end of 2022, the Mainland already had 120 million vacant homes, nearly double the 65 million vacant units just a year earlier.

Long winter ahead?

Even after inventory is cleared, more time will be needed for a return in consumer confidence necessary to return prices to a growth track. For what may lie ahead we could look to Hong Kong, whose housing market began to decline in 1997 at the start of the Asian financial crisis, and did not finally start to rebound until six years later in 2003.

Then there’s also the broader Chinese economy. The World Bank projects China’s economy will grow just 4.5% in 2024, and many investment banks are also skeptical about the country’s ability to keep growth at or above 5%. Such a slow economy will undoubtedly weigh on demand for homes, further delaying any real estate rebound. 

Aoyuan was founded in 1996. As the Chinese economy took off and the country began hosting international sporting events, the company made a small fortune by building athlete villages for such events and then later transforming them into long-term housing for sale. Its strong attachment to the Olympic Games is reflected in its name, which means Olympic Village.

The company has gone through many ups and downs over the years, always pulling through any hardships to see the kind of spring like the one envisioned by shareholder Guo. But the current winter is quickly shaping up as a test unlike any other for Aoyuan and its peers, with no end in sight. Whether the latest restructuring buys the company enough time to make it to the spring, or it gets gobbled up in a prolonged winter, remains to be seen. In the end, it will largely depend on the domestic property market and whether China’s economy can stabilize.

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