Chinese Developers and Kaisa Group
Recently, a mid tier Chinese developer called Kaisa suspended its stock. The Chairman and CFO resigned. To compound matters, HSBC recalled the HKD400m loan because of a clause that allows the bank to recall a loan if the Chairman resigns. Rumours on the internet are abound that Mr Kwok Ying Shing, the Chairman, is linked to Zhou Yongkang, the fallen former security chief. The company is financially sound.
- RMB93.7 billion of current assets as at 30 June 14, comprising RMB58.4b of properties under development, RMB10.5b of deposits for land acquisition and RMB9.4b of cash.
- It had RMB 52.0b of current liabilities, comprising RMB20.1b advance proceeds from customers, RMB11.0b advance deposits received, RMB8.0b of accrued construction costs and RMB6.0b of short term borrowings. If you strip out non cash items like advance from customers, the current liabilities is only RMB20b.
- This meant that Kaisa had in excess of RMB73b of working capital and its current ratio is around 4x.
- Operating profit is RMB2.1b 6m to June 14. Finance income is a positive RM28.5m. Net positive in terms of interest income puts the company in a very strong position. In the 6m to June 13, finance cost was RMB2.2b vs RMB387m of finance cost. The interest cover is nearly 8x.
It is a shame that due to politics, HSBC is willing to pull the rug under Kaisa's feet. In the next few weeks, it will be very crucial to see if other banks are willing to support Kaisa, and the government that locked up Kaisa's projects are willing to resolve the issues. Right now, no charges are even pressed on the company, which is very puzzling. With this incident, other Chinese developers' bonds and share prices could come under pressure as investors fear the political equation coming into play. If Kaisa falls, Chinese banks could come under pressure to write off their loans. There may be a chain reaction on the Chinese economy.
I've also read that the lock up of projects is to prevent asset transfer. This further reinforces the theory that Kaisa is being persecuted for legal reasons, or political reasons. The government does not want the company to transfer projects to friendly hands, but instead wishes to seize it.
Examples of Major Cities with Property Bubbles
When rental yields drop below borrowing costs (interest rates), it is a sure sign that prices have either risen or rents have fallen to unsustainable levels. If one cannot even service the interest from rental income, investment activities, which is usually backed by mortgages, will be shaky. Here is a list of a few cities on shaky grounds. 10 out of 11 cities are from Asia:
1. Taipei, Taiwan: 1.65% gross yields. Price to income ratio 25.79.
2. Macao, Maco: 1.88%. 30.5x
3. Yangon, Myanmar: 5.23%. 32.15.
4. Kowloon / Hong Kong, Hong Kong: 2.55%. 31.1x.
5. Makati, Philippines. 4.6%. 24.0x.
6. Beijing, China 2.7%. 33.1x.
7. Singapore: 2.5%. 35.1x.
8. Paris, France: 2.7%. 17.2x.
9. Shanghai, China: 3.0%. 26.7x.
10. Pattaya, Thailand: 3.3%. 27.9x.
11. Dalian, China: 3.4%. 28.8x.
Now where are the major global cities where there are no signs of bubble and therefore safe to invest in. I've left out the cities where most investors would not choose to live in for lifestyle reasons, and where the legal framework is not strong. E.g. Lagos Nigeria. Notice that all the cities are from OECD countries, and the US dominates 7 out of 11 cities:
1. Las Vegas, NV, US: 13.0%. 1.9x.
2. Houston, TX, US: 13.5%. 2.7x.
3. Boston, MA, US: 13.7%. 3.2x.
4. Chicago, IL, US: 10.5%. 3.6x.
5. Seattle, WA, US: 9.2%. 4.1x.
6. Miami, FL, US: 11%. 4.3x.
7. Birmingham, UK: 8.5%, 4.6x.
8. Wellington, NZ: 7.2%. 4.7x.
9. Los Angeles, CA, US: 8.5%. 5.2x.
10. Montreal, Canada: 5.5%. 5.5x.
11. Antwerp, Belgium: 7.5%. 4.7x.
Recently, a mid tier Chinese developer called Kaisa suspended its stock. The Chairman and CFO resigned. To compound matters, HSBC recalled the HKD400m loan because of a clause that allows the bank to recall a loan if the Chairman resigns. Rumours on the internet are abound that Mr Kwok Ying Shing, the Chairman, is linked to Zhou Yongkang, the fallen former security chief. The company is financially sound.
- RMB93.7 billion of current assets as at 30 June 14, comprising RMB58.4b of properties under development, RMB10.5b of deposits for land acquisition and RMB9.4b of cash.
- It had RMB 52.0b of current liabilities, comprising RMB20.1b advance proceeds from customers, RMB11.0b advance deposits received, RMB8.0b of accrued construction costs and RMB6.0b of short term borrowings. If you strip out non cash items like advance from customers, the current liabilities is only RMB20b.
- This meant that Kaisa had in excess of RMB73b of working capital and its current ratio is around 4x.
- Operating profit is RMB2.1b 6m to June 14. Finance income is a positive RM28.5m. Net positive in terms of interest income puts the company in a very strong position. In the 6m to June 13, finance cost was RMB2.2b vs RMB387m of finance cost. The interest cover is nearly 8x.
It is a shame that due to politics, HSBC is willing to pull the rug under Kaisa's feet. In the next few weeks, it will be very crucial to see if other banks are willing to support Kaisa, and the government that locked up Kaisa's projects are willing to resolve the issues. Right now, no charges are even pressed on the company, which is very puzzling. With this incident, other Chinese developers' bonds and share prices could come under pressure as investors fear the political equation coming into play. If Kaisa falls, Chinese banks could come under pressure to write off their loans. There may be a chain reaction on the Chinese economy.
I've also read that the lock up of projects is to prevent asset transfer. This further reinforces the theory that Kaisa is being persecuted for legal reasons, or political reasons. The government does not want the company to transfer projects to friendly hands, but instead wishes to seize it.
Examples of Major Cities with Property Bubbles
When rental yields drop below borrowing costs (interest rates), it is a sure sign that prices have either risen or rents have fallen to unsustainable levels. If one cannot even service the interest from rental income, investment activities, which is usually backed by mortgages, will be shaky. Here is a list of a few cities on shaky grounds. 10 out of 11 cities are from Asia:
1. Taipei, Taiwan: 1.65% gross yields. Price to income ratio 25.79.
2. Macao, Maco: 1.88%. 30.5x
3. Yangon, Myanmar: 5.23%. 32.15.
4. Kowloon / Hong Kong, Hong Kong: 2.55%. 31.1x.
5. Makati, Philippines. 4.6%. 24.0x.
6. Beijing, China 2.7%. 33.1x.
7. Singapore: 2.5%. 35.1x.
8. Paris, France: 2.7%. 17.2x.
9. Shanghai, China: 3.0%. 26.7x.
10. Pattaya, Thailand: 3.3%. 27.9x.
11. Dalian, China: 3.4%. 28.8x.
Now where are the major global cities where there are no signs of bubble and therefore safe to invest in. I've left out the cities where most investors would not choose to live in for lifestyle reasons, and where the legal framework is not strong. E.g. Lagos Nigeria. Notice that all the cities are from OECD countries, and the US dominates 7 out of 11 cities:
1. Las Vegas, NV, US: 13.0%. 1.9x.
2. Houston, TX, US: 13.5%. 2.7x.
3. Boston, MA, US: 13.7%. 3.2x.
4. Chicago, IL, US: 10.5%. 3.6x.
5. Seattle, WA, US: 9.2%. 4.1x.
6. Miami, FL, US: 11%. 4.3x.
7. Birmingham, UK: 8.5%, 4.6x.
8. Wellington, NZ: 7.2%. 4.7x.
9. Los Angeles, CA, US: 8.5%. 5.2x.
10. Montreal, Canada: 5.5%. 5.5x.
11. Antwerp, Belgium: 7.5%. 4.7x.
2014-09-27
Chinese Construction Quality in Question
Headline: Shabby construction, many buildings won't last 30 years.
盘点近年楼歪歪等豆腐渣工程：很多建成不到30年
盘点近年楼歪歪等豆腐渣工程：很多建成不到30年
In recent years, construction quality problems around the endless personal and property safety of the people to bring a huge threat. Reporters combed found that due to the past system is not perfect, low-cost illegal, inadequate supervision and other reasons, construction quality "rubbish" family "flourishing population," "House back down," "House crunchy" "House YY" and other phenomena are frequent.
- "House back down."
In April 4th morning, Fenghua Jinping residential street Ju Jing, Zhejiang Province, the first 29 residential buildings collapsed. 7 people were buried under the rubble, including a man died. From built to collapse, just 20 years. Residents reflect on the day before the building collapsed, dilapidated detected after testing organization said "the house to dwell in the past few years, no problem."
June 27, 2009 around 5:30 in the morning, Lianhua Road, Minhang District, Shanghai, Luo Yang intersection west of the "Lotus Riverside" in the district, 13-story residential building in a building under construction collapsed, killing one construction workers died. Not yet built a house, it has collapsed.
- "House crunchy"
April 2014, Zhengzhou Zhongyuan District Mutual Road and flowers Road intersection southwest corner, there is a resident house actually became a "martial arts master": when touched, in the brick wall on the "crisp", and gently a breaking, broken bricks on their feet a kick, became a slag. Inspection reports of Henan Academy of Building Research confirms that not residents "martial arts" is too high, but the poor quality of construction: the building floor to five gangue sintered porous brick wall used in large area burst, wall tiles burst depth, part brick has lost strength, there is a serious safety hazard. So "rubbish" project, developers, the construction side, supervision units pass the buck to the brick. Zhengzhou Great Wall of real estate developers, general manager, said: The main problem is the quality of the brick house.
December 9, 2011, Hankou District, Wuhan City, the largest affordable housing projects Purple Run Ming Garden broke many ground subsidence, wall cracks, leaks and other building issues. Such a "House crunchy" problem project, not only passed inspection multiple layers of quality control department, fire, special equipment testing, environmental, planning, etc., also won the local government construction projects awarded medals, the head of the security room construction site model name first.
- "House YY"
Compared to "House back down," "House crunchy", "House YY" phenomenon is more widespread.
August 2014, Yingze District, Sky Tower, Building 1 home district residents began to move a lot, a lot of people find indoor wall appear multiple fractures, the whole building was tilted backward, fear crooked floor collapse hit, Residents across the residential buildings have also moved away from the residence. Taiyuan relevant departments to identify, this building belongs to dangerous buildings.
August 2013, the village house village groups Kunming Xishan District lujia community about 30 buildings in varying degrees of tilt, tilt maximum at about 20 degrees, the concrete floor is also different degrees of cracking.
August 2013, Chengdu Pi waterfront Cannes two, submitted less than six months, it appeared the House of tilt became a "floor YY", where a unit was also found beams cracking. The local government response, crooked landlord if the building due to continuous rains lead to foundation settlement ......
President of the South China Institute of City Planning, Jinan University School of Management Professor Hu Gang, compared to other developed countries, the British virtues of hundreds of years of building the average life expectancy, built in China after the reform and opening up a lot of "80" "90" buildings have problems, thought-provoking.
In recent years, many cities set off a construction boom, and some places in order to GDP, the demolition of the building, built in the demolition, too fast at the expense of pursuing big project quality, and now all over the frequency is the "tofu" construction, both for the quality of the original neglect retaliation reflect, it is a warning to future generations ruins monument.
Some netizens suggested that construction quality and accountability mechanisms of the State Council to establish lifelong traceability is very important, only strengthen the sense of responsibility, a responsibility to let people have a problem, "Zhaimao child", "penalty tickets" and even "squatting chant" punishment intensity and legal deterrence in order to avoid the "House back down," "House crunchy" and "House YY" re frequent trouble.
On Poor Quality: Corruption and Construction in China
As someone who works in the building industry in China, I am often asked why the quality of construction of most new buildings is so poor. The people who usually ask are expatriates from places like Europe or America; rarely does someone native to China who hasn’t spent time overseas pose the same question.
This perhaps has to do with the fact that building quality in China is relative. Most Chinese first-time home buyers moving into brand new housing tower blocks do not have the frame of reference to evaluate finish material quality. This is exacerbated by the fact most housing developers sell units as empty concrete shells, leaving it up to the owners to fit them out with finishes and fixtures.
This is not to suggest that the thousands of recently built high-rise towers across Chinese cities are on the verge of collapse. On the contrary, structural engineers in China tend to err on the side of caution when designing structural systems and from what I’ve seen on construction sites, they do not skimp on steel rebar reinforcing (especially here in Chengdu where the destruction from the 2008 Wenchuan Earthquake is still very fresh in memory).
The quality disconnect comes at the level of finish materials; both on the building’s exterior and interior. Unfortunately, architects and designers have very little say in the final finish materials used in their projects in China. In the U.S., quality control is managed through the process of construction administration, where there is ongoing communication between the owner, general contractor, and architect during the construction process.
Architects practicing in the U.S. typically create what is known as a specifications (‘spec’) book to go along with a working drawing set, together which serve as instructions for the general contractor on how to construct the building. The level of detail in spec books varies, and final material selection is ultimately up to the general contractor and owner through bidding processes with building material suppliers. Yet architects maintain a say throughout the process through submittals (of material samples and shop drawings to the architect) and change orders. This creates a system of checks and balances between the owner, general contractor, and architect throughout the construction process leading to better quality control.
The process described above is virtually nonexistent for most new projects in China. One reason has to do with the fact that architects in China are still seen as ‘big idea’ guys rather than technical experts. During the construction phase, the representatives from architecture firms who go out to construction sites to check up on work are typically trained engineers, checking mostly for structural integrity. Designers looking for finish quality are usually not welcome.
The second, more widespread reason that construction projects do not follow strict communication protocols between interested parties is due to corruption. Construction projects require huge budgets and bank loans- by cutting corners here and there, developers and contractors can pocket large sums of money. This means skimping on things like wall insulation, substituting quality exterior and interior cladding materials for inferior ones, and even using cheaper plumbing and electrical equipment.
So in a sense, the complexity and lack of communication is by design. This observation is confirmed in a World Bank report about the construction industry in China, with one of the key challenges facing the industry being:
“The respective roles of the “employer”, the “engineer”, and the “contractor” need to be defined and separated. Current overlapping in the roles of owner, contractor, and engineer in government hampers the development of competitive bidding and effective contract management. The required separation in roles will require extensive training programmes.“
Unfortunately it does not appear that this will change anytime soon. The real estate development business in China is still like the wild west, and developers who have long-term vision are not easy to come by. Most are still looking to make a buck as fast as possible before the frenzy slows down.
By the time this happens, this may be be a good thing for building integrity as upwardly-mobile Chinese families start demanding higher quality out of their living and working spaces.
