Sunac’s shares rally as investors ignore warnings on credit ratings
Sunac’s Hong Kong shares have rallied 15.9 per cent since resuming trade on Tuesday, lifted by large fund flows from the mainland
Investors are piling into Sunac China Holdings, pushing the shares of the country’s biggest domestic buyer to a record, ignoring warnings by the world’s three dominant credit rating agencies on the rising default risks caused by its US$9.3 billion acquisitions of Wanda’s assets.
Sunac’s shares jumped as much as 3 per cent to HK$17.10 in morning trading on Friday before closing midday at HK$16.92, bringing its advance to 15.9 per cent since resuming trade on Tuesday. However, the gain narrowed by the end of the day, with the stock closing up 1.69 per cent to HK$16.88.
The surge was mainly driven by southbound money flows, which accounted for 24 per cent of trading in Sunac’s shares as of Thursday, the largest share among all Hong Hong-listed mainland developers.
“Mainland investors overwhelmingly care about the company’s sales growth and land bank, while heedless of debt and other risks,” said Carol Wu, a China property analyst at DBS Vickers. “This is in contrast with Hong Kong and US investors, who are concerned with Sunac’s risk side.”
Fitch Ratings cut Sunac’s credit rating deeper into junk status on Wednesday, citing what it called the company’s “acquisitive business approach”. It lowered its score on Sunac’s rating and on its senior notes one notch to BB- and placed all scores on a negative rating watch.
The move comes after Sunac agreed Monday to buy hotels, land and theme park projects from Dalian Wanda Group for 63.2 billion yuan (US$9.3 billion), in China’s largest property deal.
The deal adds 59 million square metres to the ambitious builder’s existing land reserves of 73 million sq m, according to Sunac’s filing. The developer’s contracted sales in the first half jumped 89 per cent on year to 111.8 billion yuan.
The other two global agencies have not cut Sunac’s ratings, but signalled their concerns.
Moody’s Investors Service said on Wednesday that Sunac’s proposed acquisition raises its financial risk. Moody’s expects that Sunac will assume a sizable amount of debt as part of the acquisition, including a 29.6 billion yuan 3-year loan from Wanda and consolidation of debt at the project company level.
If the acquisition is successfully completed, Sunac’s debt leverage — as measured by revenue to adjusted debt and including adjustments for its joint ventures and associates — is expected to deteriorate to 30 to 38 per cent over the next one to two years, from 40 to 45 per cent forecast by Moody’s previously.
One day after the Wanda deal, S&P Global Ratings put Sunac’s rating on CreditWatch with negative implications, citing the company’s “aggressive expansion appetite”, which means its cash flow from operations will remain negative and the company will rely on further debt to support its expansion.
Sunac has emerged as one of the most acquisitive Chinese developers, having launched 11 land and equity acquisitions in the past 10 months totalling 124 billion yuan (US$18.2 billion), including a high-profile 15 billion yuan capital injection into cash-strapped Chinese technology giant LeEco.
By the end of 2016, before the LeEco, Wanda and seven other deals, Sunac’s debt to asset ratio rose to 86.7 per cent from 71.8 per cent a year ago, and net gearing jumped from 75.9 per cent to 121.5 per cent, according to its public filing.