May 1, 2014 / 9:11 AM / 3 years ago

Credit investors start to fear China property crunch

* Homes sales slow even as developers cut prices

* Average gearing ratios nearing all-time highs

* Comparisons with 2011 crunch making the rounds

By Christopher Langner

SINGAPORE, May 1 (IFR) - Bearish analyst reports and weaker-than-expected home sales are once again raising concerns among overseas investors of a credit crunch in the Chinese property sector.

Official data released earlier this week showed property sales in the first quarter down 7.7% versus the last quarter of 2013 to Rmb1.1trn (US$176bn), while analysts are also pointing to evidence suggesting that companies are cutting sale prices. That double whammy of weaker sales and lower prices has raised red flags for some investors.

"There are concerns about China property as the bond issuers have bought a lot of land so they are building up inventory," said a hedge fund manager. "And if you are cutting prices and don't sell, that is bad."

The concerns have prompted comparisons with 2011, when fears of a downturn in the sector prompted a heavy sell-off of stocks and bonds. That pushed the price of Country Garden's 10.625% August 2015 dollar bond, for example, as low as 71 in October that year.

The property sub-index of the Shanghai stock exchange is down 2.7% this year, while Country Garden's Hong Kong-listed stock has dropped 34% year to date.

Bearish equity analysts see a number of causes for concern. Net debt-to-equity ratios for the sector overall are already approaching 45% and will hit 46% this year, close to the all-time high of 48.1% seen in 2011, according to Credit Suisse.

An asset manager in Singapore said that asset turnover in the sector and gross margins have fallen, a twin drop which he said gave cause for concern.

Agile Property Holdings (Ba2/BB), for instance, has seen its inventory turnover fall from 2.2 times at the end of 2012 to 1.9 times by December last year. Meanwhile, its gross profit margin dropped from to 35.6% from 41.3%.

China Vanke's inventory turnover similarly slowed to 2.94 times last year versus 3.03 in December 2012, although the company managed to hold its gross margin at 26.4%, slightly higher than the 26% of the prior year.

Country Garden Holdings (Ba2/BB), which is on the road marketing a new US dollar bond, saw its inventory turnover drop to 1.69 times by December in 2013 from 1.87 by the end of in 2012, while its gross margin ended the year at 30.3% versus 36.6% in the prior period.

Slower sales and lower prices are not the only concern. Standard & Poor's downgraded Evergrande Real Estate Group to BB- on April 29, saying the company's leverage had increased faster than expected. The rating outlook remains negative.

"The company spent Rmb52bn in cash to acquire land in 2013, much higher than the Rmb28bn it spent in 2012. In contrast, contracted sales increased by only 8.8%. Evergrande's total debt surged to Rmb134bn (including Rmb25bn in perpetual bonds) at the end of 2013, from Rmb60bn a year earlier. The debt-to-Ebitda ratio deteriorated to about 5.8x from 4.2x in 2012," S&P said.

The change is not exclusive to Evergrande. In a report released earlier this week, Credit Suisse equity analysts noted that Agile and Country Garden have also increased their gearing significantly. The Swiss bank downgraded Guangzhou R&F (Ba2/BB/BB) to underperform for the same reason.

Credit investors are taking the bearish report with caution, but they have become more aware of the risks presented by the sector.

"Credit Suisse has been bearish on the stocks of the sector for a while and so far they have been right, but that has only been seen in equities," said a portfolio manager in Singapore for a global fund.

Credit investors have also had a more benign approach to the sector than stock buyers. "Property represents 16% of GDP, you would think that the government cannot afford to let that sector slow down too much," said the hedge fund manager.

The asset manager echoed a similar feeling.

"It feels different from 2011, people (in the credit market) don't seem so worried about it," said the Singapore asset manager. Still, he admitted: "Bonds in the sector are not necessarily cheap so caution is needed." (Reporting By Christopher Langner; editing by Steve Garton, Julian Baker)

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