Money Matters

Here’s a HK$100 bet that HNA will win its third bid for Kai Tak land, for another record price

To understand why, one must know the prime aim of many Chinese corporate actions these days -- get the money out of the mainland

PUBLISHED : Tuesday, 27 December, 2016, 2:32pm
UPDATED : Tuesday, 27 December, 2016, 10:24pm

Money Matters will bet HK$100 on Chinese conglomerate HNA Holding Group putting down another jaw-dropping sum of money to win its third bid for the residential site in Kai Tak.

Not that I have a crystal ball or know any insider in the conglomerate. It’s simply a logical deduction from the high leverage asset game mainland Chinese corporates have been playing these days.

To understand it, one must know the prime aim of most corporate actions nowadays – get the money out of China.

That’s for security’s sake. It’s not only a protection against the depreciating yuan but more importantly against the graft crackdown that shows no sign of abating. Not a fen is real unless it’s out of the country.

It is, however, becoming increasingly difficult.

Beijing has been tightening its control on capital outflows since last spring. Corporates have to prove the authenticity of their overseas investments to get approval to move money.

What deal can be more authentic than winning a Hong Kong government land tender against dozens of competitors, both mainland and local?

You have a strong case for sending out money, not only to pay off the land premium, but also to build the apartments. The fact that you paid 80 percent higher than the market value has no impact on the bona fides of your deal.

After all, your counter party is the Hong Kong government, who in the eyes of mainland regulators, is far more trustworthy than any private party.

Under-the-table deals with private property sellers, of say a 30 percent rebate to the buyers, are not unheard of.

With approval secured, the parent can send money to Hong Kong, pledge an asset, or even remit cash to a mainland Chinese bank, which would lend the sum to the parent’s Hong Kong subsidiary.

For argument’s sake, let’s take HNA’s first winning site in Kai Tak as example. That means the exodus of 11.64 billion yuan (HK$13 billion), comprising HK$8.8 billion for the land and an estimated HK$4 billion in building cost.

Once the money is out of China. The world is your oyster.

After the premium is paid, the land can be used as collateral for a loan. Of course, we are not talking about a mortgage, which is heavily regulated.

There are many products and ways to get the developer a HK$10 billion loan, or even more. It can then further leverage up by pledging the cash, getting another HK$10 billion.

That makes a total of HK$20 billion to play with. The leverage can then be showered on various asset investments and the money mill keeps going.

This two-times leverage is far too conservative an estimate if you bring in the mainland Chinese banks.

A telling case is Baoneng Group. The private developer, much smaller than HNA, had been able to leverage up to four times via China’s shadow banking system to buy control of China Vanke, a property developer many times Baoneng’s size.

There’s one catch though. If you have significantly overpaid for a piece of land, how do you get the bank to agree with your valuation and maximize the loan?

Imagine if a piece of land adjacent to yours -- for which you’d paid a record price -- were to be sold for a lower sum, how well can your house of cards stack up?

The answer is no rocket science. You simply must pay more for the second piece of land, and even more for the third. The game is self-sustaining, and the benefits are multipronged.

Firstly, you create a market value to support the leverage of the first and second parcels of land. The bankers have a case to sell to their risk managers.

Secondly, you fend off other rivals, in particular the Hong Kong developers who don’t enjoy your aggressive cost structure and financing.

Most important of all, you get another good excuse to send another mega sum of money out from the mainland.

It’s therefore no surprise that HNA put down HK$13,600 per square foot for its second Kai Tak site, which was HK$100 per sq ft more than its own previous record, and won the bid.

Now you see why I’m expecting its third victory in Kai Tak.

The only question is whether the price will be HK$13,700 per sq ft.

It’s a bit too obvious, but so what?