Dalian Wanda Commercial Properties Co.,Ltd:Not overly worried about potential early repayment of off

Recent negative rating actions.

    Last Friday, Moody’s downgraded Dalian Wanda Commercial Properties’(“DWCP”) company rating from Baa3 to Ba1; and also downgraded WandaHK’s corporate family rating from Ba1 to Ba3. Recall that in late Sept, S&Pdowngraded DWCP from BBB- to BB and its subsidiary Wanda HK from BB+to BB- on uncertainty over strategic transition. The rating agency has anegative outlook on DWCP and Wanda HK on the back of uncertainty aroundA-share IPO timing and increased risks of access to funding.

    Potential early repayment of off-shore loans? We are not overly worried.

    Moody’s reported that the downgrade of DWCP “reflects our concerns overthe company’s weakened liquidity position … arising from potential noncomplianceof certain maintenance requirements related to the company’sexisting borrowing obligations” per a Bloomberg article. The potential noncompliancerefers to that for off-shore bank loans (from multiple banks)totaling around USD1.7bn, not to DALWAN USD bonds. Moody’s did notdisclose the specific requirement on which Wanda Commercial Properties waspotentially non-compliant. We think it is highly likely for the company to get awaiver from banks in the event of a breach of a requirement or requirements ofsome of its off-shore loans, and we are not overly concerned that the issuerwould need to early repay its off-shore bank loans.

    Looking at DWCP’s balance sheet as of end-June 2017, it had RMB137.7bn ofcash (up 37% HoH, partly thanks to issuance of on-shore MTNs in 1H17),though we reckon most of this cash would be on-shore. The company’s shorttermdebt rose by 20% HoH to RMB29.4bn as of end-June, and its totalcash/short-term debt was 468%. If some of its lenders of the syndicated loansrequire early repayment, then the company would need to transfer somemoney from on-shore to off-shore or to obtain additional money off-shore.

    Guangzhou R&F, the purchaser of 77 hotel assets from DWCP, estimates itsown blended average cost of borrowing from both on-shore and off-shorechannels to pay for the acquisition of some DWCP hotels is around 6%.

    Having said that, we expect all or most of the payments from Guangzhou R&Fto DWCP for the hotels transaction to occur on-shore. Operation wise,DWCP’s contract sales look in-line with our expectations. According to CRIC,Wanda’s Jan-Aug total contract sales figure (which could differ from thecompany’s official figure) aggregated to RMB69.5bn (ranked #14 in China).

    Bond recommendations and risks.

    We maintain our Buy on DALWAN 4.875% 2018s (issue rating of Ba3, B+, andBBB by Moody’s, S&P, and Fitch respectively; ask price of 99.75 as we write,YTM: 5.1%) as we continue to believe the company will be able to repay itsUSD600mn 2018s without problem. We also maintain our neutral rating onDALWAN 7.25% 2024s (ask price: 100.75, YTM: 7.1%) as we believe the longtermgrowth outlook of DWCP is uncertain given its shrunk landbank postassetdisposals to Sunac and R&F. Downside risks include delays or inabilityto get A-share listing, worse-than-expected liquidity or access to funding, andhigher-than-expected acquisitions. Upside risks include successful A-sharelisting by Sept 2018, stronger-than-expected liquidity or access to funding,better sales or margins, and conservative acquisitions.