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Investors Can’t Get Enough of China Property Developer Bonds

Dollar bonds sold by China’s property developers are being lapped up by investors, lured by the companies’ stronger earnings and improving credit profiles.

Notes sold in July and August by Chinese developers attracted orders 6.3 times the issue size, compared with 2.5 times in May and June, according to data compiled by Bloomberg where deal statistics are available. The firms are taking advantage of the better sentiment, with bond sales rising to a record $35.2 billion this year.

“In China, we still like the property sector,” said Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd. Property companies’ sales and cash flows are pretty strong and their inventory levels have been improving, he said.

The revitalization of the Chinese property bond market, which has a track record of debentures and regulator scrutiny, has helped drive Asian high-yield issuance to a peak of $39 billion in 2017, with developer debt about 60 percent of that total. It’s also buoying the wider dollar bond market, with issuers in Asia excluding Japan selling a record $193.6 billion of dollar notes so far this year, an 80 percent jump from the same period last year.

Building companies’ fundamentals have been burnished in 2017, with Moody’s Investors Service saying it sees the number of negative outlooks in the sector declining slightly over the next six to 12 months. Ten leading developers that have reported first-half results saw gross margins expand to an average 30.2 percent, according to calculations based on earnings reports. Six of the ten developers, meanwhile, raised sales targets this earnings season, signaling ever-growing demand from buyers.

But while the bonds are finding favor with investors, the sector is still not devoid of risk, as the experience of Wanda Properties International Co. shows.

Falling Yields

The firm’s $600 million of notes due 2024 dropped by more than three cents on the dollar Aug. 28 after Chinese media reported the billionaire chairman of its parent company, Wang Jianlin, was stopped with his family at Tianjin airport near Beijing as they were about to depart for London. Dalian Wanda Group Co. later refuted the story, helping the bonds recover losses.

And at the end of June, Greenland Holdings Corp., China’s fourth-biggest developer by property sales, said it had overdue loans of 457.5 million yuan ($69.5 million) in some units in China’s northeast province of Liaoning.

Non-investment grade dollar-bond yields have been in retreat in Asia, slipping about 20 basis points from a recent high reached at the end of July, according to a JPMorgan gauge.

The subscription ratio for all dollar-denominated notes in Asia ex-Japan in August eased to 3.9 times from 4.1 times in July, according to data compiled by Bloomberg, where deal statistics are available. At 4.3 times, May had the highest subscription ratio this year.

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