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Kaisa default: managers on the outlook for China's property sector

Kaisa default: managers on the outlook for China's property sector

Earlier this month, Chinese property developer Kaisa Group Holdings failed to make the coupon payments on its 2020 bonds.

It has a grace period until early February, failing which it could officially become the first Chinese property developer to default on its foreign debt.

The Kaisa crisis first began in late December, when a slew of top management executives quit the company. This was followed by a failure to pay its coupon payments in January and now there are media reports the company could be bought out by a rival.

How are fund managers reacting to a potential Kaisa default? Citywire Asia asked four experts on how they view the ongoing crisis and whether it changes the outlook for China's property sector.

Arthur Lau, PineBridge

Citywire A-rated manager of the PineBridge Hong Kong Dollar Fixed Income fund 

In terms of the property sector, if you look at the equity and bond markets, there is a clear divergence. While equities have done very well, bonds have suffered because of some selective distress credit situations.

If you look at the fundamentals – sales and transactions volumes – they have been on the uptrend, with some developers being able to meet or even exceed their targets for 2014. The property sector is important not just from the China economy perspective but also as a source of provincial government revenues.

I believe that because of the reforms drive and anti-corruption campaign, there will be individual companies that will be subject to these kinds of political risk rather than any fundamental risk. You really can’t generalise to all the names in the sector.

I think the market is trading on a very defensive mode since political uncertainty is high and it’s difficult to predict which company will be the next target or even if there will be a new target. The risk aversion mode is leading the sector to suffer and underperform in the bond markets. 

Ariel Bezalel, Jupiter

Citywire AA-rated fund manager of the Jupiter JGF Dynamic Bond fund

Kaisa is a good example of the dangers that foreign investors face in this market. What is happening to Kaisa is very puzzling with no one really clear about why it defaulted.

It highlights the lack of security for bondholders and there are big question marks on the recovery on some of these property bonds.

I wonder if what is happening to Kaisa is indicative of what’s happening in the wider economy; there are stresses that are beginning to appear and the sector is looking vulnerable, so we are definitely avoiding this space.

Andrew Seaman, Strattton Street

Fund manager of the Stratton Street Ucits Renminbi Bond fund

We view this potential default as actually a healthy event because it's all part of the normalisation of the Chinese bond market, taking it more in line with what is happening globally.

Defaults in high yield bonds are not uncommon. The trick is to calculate whether the coupon of these bonds is enough to cover for the potential defaults.

Stratton Street’s Renminbi Bond Fund does not hold such debt as they were not only rated sub-investment by the rating agencies, but through our credit process, the company highlighted too many weaknesses and was therefore not added to our universe of bonds. 

Robert Samson, Nikko AM

Co-manager on the Nikko AM Global Multi Asset Conservative fund

Our teams that are focused on these kinds of bonds have very selectively built exposure to the sector. But it is still a dangerous place to be in. Some of the recent rally in equities has been in those downtrodden stocks, which covers financials and property stocks, and much of that rally can be attributed to recent easing measures.

With all the focus on reforms and how much those stocks have been depressed, it’s not surprising that the Chinese authorities have taken the route of easing pressure off the property sector, but being extremely selective makes a great deal of sense.

We had been expecting to see more defaults. But we saw only one trust default last year and then there was nothing. There is a whole range of analysis ranging from whether this is the start of something much bigger to whether this can be contained.

We are very cognisant of the interconnectivity of different financial channels and where the guarantees lie and are staying conservative on that side. But then, we’ve been positioned that way for some time now.

Gordon Ip – Value Partners

Head of fixed income

In the beginning of December 2014, media revealed that some of Kaisa’s projects in the southern city of Shenzhen got suspended by local authorities. We significantly reduced our position at an average price of $104 before the massive drop in the afternoon of 2 December, 2014.

However, we believe Kaisa is a company specific case and we do not think the recent disruptions and volatility challenged our confidence towards the sector in the medium to long term. Besides, one should also bear in mind that relaxation measures, such as interest rate cut and mortgage relaxation, remain supportive to the sector despite the effect still being hidden behind all the recent negative headlines. 

And in fact, as a result of the improving sentiment and stimulus measures, a lot of leading Chinese developers were benefitted and reported growth in contracted sales to wrap up the year of 2014.

To conclude, we think that the increasing headline risks are being offset by better fundamental and macro environment, therefore the overall risk in the sector is balanced. As the valuation is becoming more attractive, hence from a risk perspective, this sector presents an even better opportunity than before.

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