Moody's says newly listed Chinese property developers face challenges

Moody's Investors Service says that eight major Chinese property developers succeeded in substantially enhancing their capital bases and liquidity positions during September-December


2009 with a total raising of HK$38.5 billion (US$4.9 billion) through IPOs on the Hong Kong Stock Exchange, but these improvements to their financial fundamentals could prove short lived.

"Debt leverage is likely to rise again and exceed the levels seen at the time of the IPOs as the sector continues with its ingrained strategy of pursuing high growth and bigger scale," says Peter Choy, a Moody's VP and Senior Credit Officer.

"It was common for the debt to total capitalization of those developers already rated by Moody's to increase -- some by 10-15% -- in the 2 years after their IPOs, and such a similar trend is therefore expected for most of the recently listed developers," says Choy.

"Most usually, funds are spent on the expansion of land banks and larger scale developments, and experience indicates that Chinese developers generally come over budget in their land acquisitions," says Choy.

Choy was speaking on the release of a special comment -- authored by him and Kaven Tsang, a Moody's Assistant Vice President and Analyst -- on the implications of recent IPOs by Chinese property developers.

"Once their listings are complete, developers will experience -- in line with past examples -- strong shareholder pressure to grow," says Choy.

"As a result, the newly listed companies are likely to see debt leverage increase over the next 2 years."

Even though the Chinese real estate market in 2010 is expected to be stable, conditions will not be strong enough to support the very aggressive targets set by the newly listed companies, and their reliance on strong pre-sales to reduce their borrowing needs may prove misplaced, the report says.

In addition, Chinese banks will likely strengthen their capital bases and reduce loan growth in 2010 to help reinforce the stability of the banking system; and, as such, availability of mortgage finance to property purchasers will not be as strong as in 2009, the report says.