Ronshine China:Recent updates on Ronshine;maintain Buy on RONXIN19P18s

Equity placement announced, to bring in net proceeds of around HKD1.2bn.

    Yesterday, Ronshine announced a share placement of up to 142.5mn shares(representing 10.5% of Ronshine’s pre-placement share capital) to “not lessthan six independent professional, institutional, and/or individual investors”.

    The planned use of net proceeds of around HKD1.2bn is for the company’sdevelopment and general working capital. While we view this as a mildlycredit positive event, we would have preferred if Ronshine intends to use theproceeds to pay down some existing debt.

    Good but expensive landbank.

    We consider Ronshine’s landbank as good-quality. Most of its vintagedlandbank in Fujian Province has cheap land cost, but we see some of its 2016and 1H17 acquisitions in Yangtze River Delta and Szechuan as on theexpensive side. In 1H17, the company registered a sizeable net operating cashoutflow figure due to high acquisitions; but management plans to slow downlandbanking in 2H. In 3Q, it only bought a few small plots and announced aproposal to acquire 55% in Ningbo Hailiang and Anhui Hailiang for aconsideration of around RMB2.9bn. As of end-June, Ronshine’s total landbankwas about 13mn sq m, or on an attributable basis, 7.8mn sq m, and spansacross 18 cities. We see the landbank as sufficient for about 2.5-3 years’development.

    In our view, Ronshine’s FY17 contract sales may reach RMB40bn, surpassingits FY17 target of RMB32.5bn by over 20%.

    Since early August (for July sales), Ronshine started announcing its monthlycontract sales which we welcome as it provides more corporate transparency.

    Over 9M17, Ronshine achieved RMB30.1bn of contract sales (excludingcontract sales of JVs and associates), locking in 93% of its FY17 contract salestarget of RMB32.5bn. Its 9M17 contract sales ASP was RMB22,627/sq m(lower vs. 1H17 contact sales ASP of RMB25,855/sq m). The sales pace so farthis year has been stronger than our expectations. While the overall propertymarket looks to be slowing down, Ronshine has more new launches in 2H than1H, which should facilitate its sales momentum in the reminder of the year.

    Leverage is very highOur calculated total debt/LTM EBITDA for Ronshine was 26x and totaldebt/total capital was 70% as of end-June. We expect Ronshine’s leverage tomodestly drop at end-2018 vs. end-2017 as we expect higher GPM projects tobe booked next year and completion to pick up. Earlier in June, Ronshine hadissued a 364-day USD150mn bond at 6.5%.

    Maintain our Buy on RONXIN 2019P18s (ask price: 98.75, yield-to-put: 8.15%,Z+649bp).

    Ronshine is a very highly levered company with a short history as a listedcompany (IPOed in January 2016). We maintain our Buy on RONXIN2019P18s as we continue to expect the developer to be able to repay this bondwithout problem and the yield-to-put looks attractive to us. Upside risksinclude better-than-expected sales or margins, an improvement in liquidity,and slow-down in landbanking. Downside risks include negative credit ratingaction(s), tighter-than-expected liquidity, and aggressive acquisitions.