Tear Sheet: Ping An Real Estate’s USD Notes YTM Up to 34% Likely Due to Liquidity Concerns, Exposure to Troubled Projects; ~27% Yield Differential vs Ping An Group Offshore Arm’s Notes Stands Out; CNY 4.5B of Offshore Assets May Provide Downside Protection

Relevant Documents:
Excel File on Reorg Analysis Page
2022 Annual Report
2023 Interim Financial Statements
$1 Billion Medium Term Note Programme OM
 

• Since June 2022, Ping An Real Estate Co. Ltd., or PARE, has used cash on hand and tapped short-term bank borrowings to meet its financing needs as higher onshore and offshore bond yields limit raising of capital in public debt markets;
• While PARE has CNY 53.7 billion ($7.31 billion) of debt investments as of June 30, collection of CNY 32.9 billion of such investments owed by Shenzhen Anchuang Investment Management Co. Ltd. and Tongxiang Anhao Investment Management Co. Ltd. may prove challenging given their exposure to projects by defaulted developers;
• Offshore assets carried at CNY 4.547 billion as of Dec. 31, 2022 and held through offshore notes issuer and guarantor Pingan Real Estate Capital Limited, or PARE Capital, provides some downside protection. Repayment of the company’s $300 million notes due July 2024 may be financed by proceeds from the proposed sale of a 50% stake in Salesforce Tower in Sydney and repayments of construction loans granted to finance the Southland project in Hong Kong; and
• PARE’s notes due July 2024 are currently indicated at a yield to worst of 34%, which is 27% higher than the offshore notes issued by China Ping An Insurance Overseas Holdings Ltd., or PAOH, a similarly-rated offshore arm of Ping An Insurance (Group) Company of China Ltd, or Ping An Insurance.

Ping An Real Estate Co. Ltd., or PARE’s offshore notes are indicated at a yield-to-maturity of up to 34%, probably due to standalone liquidity concerns and recent negative market sentiments affecting the broader Chinese real estate industry. However, the company is likely able to raise fresh liquidity from offshore investments, while relying on financial support from Ping An Insurance (Group) Company of China Ltd, or Ping An Insurance.

The significantly higher yield for PARE’s offshore notes as compared with those issued by China Ping An Insurance Overseas Holdings Ltd., or PAOH, stands out, given that both have similar balance sheet scale and are integrated business units of Ping An Insurance as subsidiaries. PAOH holds the majority of offshore investments of Ping An Insurance. Both PARE and PAOH are rated Baa2 by Moody’s.

PARE has an aggregate $1.1 billion in principal amount of offshore notes outstanding, which represents around 17% of the company’s debt stack as of June 30, as shown below:
 
PARE is 99.6% owned by Ping An Insurance (Group) Company of China Ltd., or Ping An Insurance. The offshore notes are issued by wholly owned subsidiaries Pingan Real Estate Capital Limited, or PARE Capital, and Fuqing Investment Management Limited (with a guarantee by PARE Capital), and are structurally senior to the onshore and asset-backed notes issued by PARE in respect of assets held by PARE Capital and its subsidiaries (more below):
 
PARE’s offshore notes traded down as market sentiments weakened in August following news of Country Garden’s missed coupon payments on two series of offshore notes (which has since been paid). As of Sept. 13, PARE’s three series of notes were indicated from 65 cents to 78 cents, with a YTM of between 20% to 34%, according to Refinitiv:
 
Liquidity Analysis

As of June 30, PARE had CNY 9.9 billion of unrestricted cash, representing 51% of the CNY 19.3 billion of borrowings due prior to June 2024. Current borrowings include:
 

• Short-term borrowings amounting to CNY 9.9 billion;
• Current portion of long-term loans amounting to CNY 2.1 billion;
• CNY 5.8 billion of bonds due prior to June 2024; and
• Around CNY 1.5 billion of short-term commercial paper due prior to June 2024.

Outstanding bonds payable declined from CNY 30 billion in December 2021 to CNY 22.1 billion in June 2023, while short-term borrowings increased from CNY 4.3 billion to CNY 9.9 billion during the same period:
 
Since June 2022, PARE has not raised new onshore bonds (excluding short-term commercial papers) and has relied on bank borrowings to refinancing its bond maturities, likely in response to higher borrowing costs from the bond markets. Borrowing costs also increased for PARE’s short-term commercial papers. PARE raised CNY 1.5 billion of five-month onshore commercial paper in April 2023 at a 5.5% coupon rate, significantly higher than the coupon rate of 3.18% for its CNY 1 billion eight-month onshore commercial paper issuance in January 2022.

As highlighted in Reorg’s earlier analysis, PARE’s liquidity is largely determined by bi-directional investment flows, with net investment outflows from December 2020 to June 2023 amounting to around 6x of EBITDA during the same period, as shown below:
 
As China’s property crisis began to unfold in the second half of 2021, cash paid on investments continued to rise from CNY 112.4 billion in 2021 to CNY 126.6 billion for the 12 months ended June 2023, outpacing cash received from investments during the same period. Net cash paid on investments climbed to a CNY 14.6 billion in 2022, the largest net outflow since 2018:
 
Debt, Equity Investments

Debt Investments

To the extent that upcoming bond maturities are not rolled over or refinanced using bank borrowings, PARE could look to collect on its debt investments to fund its debt obligations. The company’s debt investments have climbed to a two-year high of CNY 53.7 billion, almost all of which are maturing within one year:
According to the 2022 annual report, 84.6% of the CNY 49.1 billion of debt investments were owed by entities within Ping An group, 14.9% were owed by other related parties, and 0.5% were owed by third parties. The following six related entities owed an aggregate CNY 44.7 billion or 91% of the CNY 49.1 billion in total debt investments as of Dec. 31, 2022:
 
As above, an aggregate CNY 32.9 billion of debt investments are owed by Shenzhen Anchuang Investment Management Co. Ltd. and Tongxiang Anhao Investment Management Co. Ltd., both of which conduct property investment advisory businesses.

PARE’s investment advisory revenue declined 72% year over year in 2022 to CNY 512.9 million, from CNY 1.832 billion in 2021. Shenzhen Anchuang and Tongxiang Anhao recorded a full-year 2022 net loss of CNY 3.578 billion and CNY 2.489 billion, respectively, according to an onshore rating report by Shanghai Brilliance Credit Rating & Investors Service Co., Ltd. Both entities likely had negative book equity as of December 2022, according to the ratings report.

The losses incurred by PARE’s investment advisory business may be partly due to their exposure to projects by defaulted developers. As reported, Shenzhen Anchuang may have extended non-standard debt to CIFI Holdings as seen from its indirect stake in Tianjin Xingzhuo Real Estate Development Co. Ltd. CIFI Holdings missed payment of its non-standard debt at Tianjin Xingzhuo in September 2022.

With China’s real estate market sentiments unlikely to recover in the near term, collection of debt investments owed by Shenzhen Anchuang and Tongxiang Anhao could prove challenging. PARE may instead be required to inject more capital into both entities to sustain operations. The company’s debt investments to both entities increased by CNY 13.1 billion in 2022.

Apart from debt investments to affiliated property investment advisory entities, PARE also holds debt investments consisting of loans to certain projects managed by its co-developers. According to Chongqing Longhu Development Co. Ltd.’s onshore notes offering memorandum dated August 2023, PARE has granted an aggregate CNY 344 million of loans to Chongqing Longhu, an indirectly wholly owned subsidiary of Longfor Group Holdings, at an interest rate of between 4.7% to 4.8%. The loans mature between July 2027 to January 2028.

Equity Investments

Most of the co-developers of projects that PARE invests in are state-owned enterprises (such as
China Merchant Land and Yuexiu) or well capitalized Hong Kong developers (such as Sun Hung Kai and Hongkong Land), though the company has some exposure to privately-owned developers such as Powerlong Real Estate, Gemdale Group and Longfor Group Holdings. A non-exhaustive list of PARE’s more significant long term equity investments as of Dec. 31, 2022, is shown below:
 
In March 2023, Midea Real Estate Holding Limited announced that it had acquired PARE’s 38% stake in Wuxi Meiting Property Development Company Limited for a consideration of CNY 632.1 million plus an amount which allows PARE to make a 10% internal rate of return in its investment in Wuxi Meiting and certain foreign exchange adjustment amounts. In addition, a consultancy fee of CNY 0.8 million is payable on the closing date of the transaction.

PARE may be able to raise funds through sales of its equity investments, especially for similarly structured investments in projects with a fixed internal rate of return and from financially strong co-developers.

Offshore Investments

As highlighted in Reorg’s earlier legal analysis, PARE’s offshore notes, which are issued by PARE Capital and Fuqing Investment Management Limited (with a guarantee by PARE Capital), are structurally senior to the onshore and asset-backed notes issued by PARE in respect of assets held by PARE Capital and its subsidiaries.

PARE Capital and its subsidiaries hold various offshore development projects, including a 50% stake in Salesforce Tower - an AUD 2.4 billion ($1.53 billion) project in Circular Quay, Sydney - and Southland in Hong Kong, a residential project jointly developed with MTR Corporation and Road King Infrastructure Limited. PARE Capital’s offshore investments were carried on the balance sheet at CNY 4.547 billion as of Dec. 31, 2022:
 
The aggregate CNY 4.547 billion book equity value of PARE Capital’s offshore investments as of Dec. 31, 2022, represents around 60% of the $1.1 billion in principal value of offshore notes currently outstanding. The offshore notes are indicated at between 65 cents to 78 cents as of Sept. 13, according to Refinitiv.

Salesforce Tower

PARE had put its 50% stake in Salesforce Tower up for sale in February 2023 with the sale process being handled by Cushman & Wakefield and Savills. The stake was reportedly valued at AUD 1.1 billion, with interested parties including M&G Investments, Singapore-listed companies such as Keppel Corporation and OUE Limited, as well as Hong Kong-listed Link REIT. The sale process was paused in June 2023, as bids valued the 50% stake at AUD 1 billion (with a 5% capitalization rate) or 10% below the targeted sale price, according to the Australian Financial Review.

Residual proceeds from the potential stake sale at the PARE Capital level may be used to fund a repayment of the company’s $300 million 2.75% notes due July 2024 at the same level.

In June 2023, PAG acquired 44 Market Street - a Grade A office tower in Central Sydney - for AUD 393.1 million from Dexus, the first significant office transaction within Sydney’s central business district in 2023. The sale price reflects a capitalization rate of 6.6% and a 17.2% discount to the December 2022 independent valuation, possibly indicating weak market sentiments.

While gross effective rent increased 1.4% quarter on quarter in the second quarter of 2023, the vacancy rate for offices in Sydney’s central business district has remained elevated at above 12% since 2020 and hit a new high of 14.4% in the second quarter of 2023, according to JLL Research:
 

Southland

Through its 50% owned joint venture Ease Harvest Investment Limited, PARE provided construction loans for Southland, a residential project located at Hong Kong’s Wong Chuk Hang MTR station. According to the 2022 annual report, PARE’s investment in Ease Harvest Investment Limited is held on its balance sheet as a CNY 1.869 billion debt investment and a CNY 200.3 million long-term equity investment. Onshore rating reports suggest that PARE’s investment in Ease Harvest Investment Limited is carried at CNY 1.644 billion as of Dec. 31, 2022.

The remaining 50% stake in Ease Harvest Investment Limited is held by joint venture partner Road King. MTR Corporation would have a 35% share of any profits from the project as part of a structured transaction, according to Mingtiandi.

Sales data from an online real estate brokerage indicate that 631 of the project’s 800 units have been sold, while 154 units are being actively marketed as of Sept. 5. A further 15 units have yet to be launched.

According to the Register of Transactions dated June 2023, a significant majority of Southland’s units were sold in 2021. For year to date June 2023, the project achieved HKD 322 million in total sales transactions, albeit with a 12% discount in average selling price from HKD 40,000 per square foot, or sqft, in January and February to around HKD 35,000 per sqft in May and June:
 
Given that around two-thirds of the project were sold in 2021, PARE’s debt investment is likely fully collectible. This could provide an additional CNY 1.9 billion of liquidity ahead of the maturity date of its $300 million 2.75% notes due July 2024.

Ping An Group Support

PARE is the sole real estate investment and asset management platform and an important investment vehicle of Ping An Insurance, and is the third largest company within the Ping An Insurance by registered capital as of Dec. 31, 2022. PARE has a registered capital of CNY 21.2 billion as of Dec. 31, 2022, which is only smaller than Ping An Life Insurance Company of China Ltd. (registered capital of CNY 33.8 billion) and Ping An Financial Technology Consulting Co. Ltd. (registered capital of CNY 30.4 billion), according to Ping An Insurance’s 2022 annual report.

As highlighted in Reorg’s earlier legal analysis, there is unlikely to be any cross default linkages between PARE’s offshore notes and the offshore notes issued by other entities within Ping An Insurance, including the USD denominated offshore notes issued or guaranteed by Ping An International Financial Leasing Co. Ltd. and PAOH.

As at Sept. 13, PARE’s $300 million 2.75% notes due July 2024 are indicated at a yield to worst of 34%, which is 24% higher than that of Ping An International Financial Leasing’s $300 million 2.5% notes due 2024 and 27% higher than that of PAOH’s $300 million 3.625% notes due 2024:
 
The significantly higher funding cost for PARE as compared with that for PAOH stands out given that both PARE and PAOH are rated Baa2 by Moody’s as of September 2023, and enjoy a rating uplift given a high likelihood of financial support from Ping An Insurance. Any potential default of PARE’s debt could result in a rating downgrade for PAOH, which could in turn lead to higher borrowing costs.

Moody’s gives grounds for a three-notch uplift from PARE’s standalone credit rating based on Ping An Insurance’s 99.6% effective ownership and management control over PARE, the company’s close integration with the group, and the group’s history of extending financial support to PARE.

Separately, PAOH’s’ strategic importance to Ping An Insurance is explained by its status as the group’s only direct and wholly-owned offshore financing and investment platform, and that as the group’s third-party asset management business, it manages around one-third of the group’s total assets under management, according to Moody’s.

As of Dec. 31, 2020, PAOH had total assets and total book equity of HKD 108.9 billion (CNY 92.3 billion) and HKD 49.3 billion (CNY 41.8 billion) respectively, which is similar to PARE’s Dec. 31, 2020, total assets and total book equity of CNY 106.7 billion and CNY 48.4 billion, respectively.

Any potential default or liability management exercise for PARE’s offshore notes could have a negative impact on the value of the Ping An brand, which Ping An states is worth $44.7 billion as at January 2023. PARE’s $1.1 billion of offshore notes represent 0.4% of Ping An Insurance’s CNY 1.871 trillion of total borrowings (calculated as amounts due to banks and other financial institutions plus bonds payable) as at June 30, 2023.

Ping An Insurance has demonstrated its willingness and ability to provide financial support to PARE through equity injections, the most recent of which being a CNY 1.16 billion equity injection in November 2022 through its indirectly wholly owned subsidiary Shenzhen Pingke Information Consulting Co. Ltd.

Apart from equity injections into PARE, Ping An Insurance may also provide additional liquidity to PARE by paying down amounts owed to PARE or allow for an increase in amounts due from PARE. In 2022, PARE collected cash from a CNY 9.9 billion decline in its other receivables owed to it by entities within the broader Ping An group. In the second quarter of 2023, other payables (which are primarily owed to related parties) climbed by CNY 10 billion to CNY 15.6 billion as at June 30.