ChinaDaily Briefs

China: Soho China Ltd, China State Construction Development, Evergrande Real Estate Group, Helen’s International Holding, Asia High Yield Bond Index and more

In today’s briefing:

  • SOHO China (410 HK): At Least There Is Dialogue
  • China State Construction: Great Numbers, But Taking a Breather for Now
  • Evergrande’s Bonds Rebound as Loan Extensions Agreed Upon
  • Helens International Holdings IPO First Day Trading
  • Macro; Rating Changes; New Issues; Talking Heads; Top Gainers and Losers

SOHO China (410 HK): At Least There Is Dialogue

By David Blennerhassett

The speculation and conjecture continues in the takeover of Soho China Ltd (410 HK)‘s tier-1 property assets.

The last piece of positive news occurred on the 3 August 2021, when Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law (AML) had been formally accepted by SAMR for review. 

The announcement, however, stopped short of stating the review was simplified, and simply said the application has been formally accepted, and “notwithstanding such formal acceptance, the Offeror and the Company may still be requested to provide further information and materials for the regulators’ review“.

In 2020, simple cases took 14 days on average to process. By the middle of last month, you knew you were in for the long haul, and the 30-day Phase 1 period expired on the 1 September.

I’m not aware an official announcement occurs when the review spills into Phase 2 (ostensibly another 90 calendar days); but Blackstone/SOHO were expected to clarify proceedings in its monthly update announcement.

On the 6 September, SOHO announced its SAMR application was still ongoing, and that…

The Offeror has received further requests to provide additional information for the regulators’ review. It is uncertain when the review process will be completed.

The Composite Document is now expected to be dispatched on or before the 31 December 2021. 

Without either party expounding on the situation, the application now moves into Phase II.

China’s AML provides the following periods for review:
  • Phase I. The initial review period is for 30 calendar days. Under the simplified procedure, SAMR generally grants clearance in Phase I.
  • Phase II. If necessary, the Phase I period will be followed by an additional 90-calendar day review period
  • Phase III review period. The review period may then be extended for a further 60 calendar days if need be.

Additional information? One media source reckoned this was in regards to Blackstone providing more details  – such as GFA – on its property interests.

This is doubtful – SAMR would likely know Blackstone’s property exposure, right down to the last wastepaper basket.

More likely the “additional info” concerns the seller, although pertaining to what, it’s unclear. Cue all the rumours and the ensuing backlash from Pan Shiyi son’s comments last year (see here for more detail). 

The takeaways from all of this? At the very least, there is a modicum of dialogue between the parties and the regulator. Often the clock runs down on the review process with little to no information made public, before a deal is blocked/prohibited.

Perhaps there are alternative means to lock-up the proceeds to Pan in escrow – sort of like an elevated withholding tax applied in the Grand Baoxin Auto (1293 HK) case (see further details below) – so as to progress the deal.

The negatives, apart from the extended review process over property assets, which historically have not triggered similar treatment – SOHO sold Sky SOHO to Gaw Capital Partners in 2018 for RMB5bn, plus entered into an agreement to sell car parking spaces for RMB761mn, none of which attracted security concerns – is that the clock does indeed run down to the long-stop date (31 December 2021), and both parties agree to terminate negotiations.

But I’d be surprised to see Blackstone walk. The underlying assets on a stand-alone basis are worth considerably more, potentially >HK$8/share by some asset valuation models. 

The Trade? I still like SOHO here – a high probability of a break is already priced in. I just don’t see Beijing setting a precedent and outright blocking the deal on anti-trust grounds.


China State Construction: Great Numbers, But Taking a Breather for Now

By Sameer Taneja

In our last report on China State Construction Development (830 HK) entitled China State Construction Development (830 HK): A Short-Term Opportunity with Tremendous Upside, we highlighted an opportunity to play the name before its results due to our belief that the company would report a profit alert. With this catalyst playing out now, we see limited upside in the short term.

Notable highlights of the result and our conversations with management:

  • New orders increased by 76% YoY from 2.5 bn HKD to 4.5 bn HKD in H1 FY21.
  • A 50 bps increase in gross profit margin from 13.6% to 14.1%.
  • A stated intention of decreasing net gearing from 38.7% to 10% by the end of FY21. 
  • A goal of paying out 40-50% of the net profits as dividends.

We believe that the stock has a reasonable valuation of 13x FY21 and 10x FY22 but provides a limited upside.  We expect a drop in profits (in line with previous years ) HoH, but an increase YoY by 70-80%.


Evergrande’s Bonds Rebound as Loan Extensions Agreed Upon

By BondEvalue

Dollar bonds of China Evergrande rebounded up to 3 points as the regulator, China’s Financial Stability and Development Committee signed off on its proposal to renegotiate payment deadlines with banks and other creditors. The move is a temporary reprieve to the indebted developer that has been facing financial troubles in recent months.

Helens International Holdings IPO First Day Trading

By Oshadhi Kumarasiri

  • The largest pub chain in China, Helen’s International Holding (9869 HK) priced its IPO at the midpoint of the offer range (HK$19.77 per share). Shares started trading on the Hong Stock exchange today at HK$23.05 per share and currently trades at HK$ 24.15 per share 22.2% above the IPO price.
  • The pub chain has attracted decent interest from investors as the Hong Kong offer and international offer were oversubscribed by around 30.8x and 25.6x respectively.
  • What was already an expensive stock was made even more expensive after listing gains of 22% on the first trading session. We think IPO investors should look to cash in the listing gains as early as possible as Helen’s could give away most of the listing gains over the course of the next 3-4 weeks.

Macro; Rating Changes; New Issues; Talking Heads; Top Gainers and Losers

By BondEvalue

US markets started the day in the green after US jobless claims hit a post-pandemic low; however, negative sentiment gripped the markets in the second half – S&P and Nasdaq ended the day 0.5% and 0.3% lower. Financials up 0.3% was the only sector which provided some substantive support to the markets. Real Estate and Healthcare down 2.1% and 1.2% dragged the markets lower. IT, Industrials, Utilities and Consumer Staples were also down ~0.5%. European stocks were mixed after news of the ECB slowing the pace of its bond buying program – FTSE was down 1% while CAC and DAX were slightly up, 0.2% and 0.1% respectively. Brazil’s Bovespa regained some of Wednesday’s losses and closed 1.7% higher. UAE’s ADX closes 1.2% higher while Saudi’s TASI ended 0.3% lower. Asian markets inched higher – HSI started the day with gains of more than 0.5%. Nikkei, Shanghai and Singapore’s STI followed with gains of ~0.2-0.3%. US 10Y Treasury yields fell another 4bp to 1.3%. US IG and HY CDX spreads widened 0.2bp and 1.6bp respectively. EU Main CDS spreads were 0.5bp tighter and Crossover CDS spreads tightened 3.7bp. Asia ex-Japan CDS spreads widened 0.8bp.

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