Ronshine China:Our new issue thoughts

This morning, Ronshine announced a proposed issuance of 3-year puttable 2-year USD bonds, with Bloomberg reporting initial price guidance of 9.25% area.

    Ronshine is rated at B2/B/B+ in issuer rating by Moody’s/S&P/Fitch, withnegative outlooks from Moody’s (since Sept 2017) and S&P (since Aug 2017).

    Looking at China property HY companies under our coverage, we see Xinyuan(issuer rating of B/B from S&P/Fitch, stable outlooks) and Guorui (issuer ratingof B/B from S&P/Fitch, with a negative outlook from S&P) as reasonablecomparables of Ronshine. We believe Ronshine should trade wider thanXinyuan as we see XIN as having lower total debt/EBITDA and higher marginsthan Ronshine, but trade tighter than Guorui. All three companies have roughlysimilar total debt/total capital ratios at end-June, 2017 (Ronshine: 70%,Xinyuan: 74%, and Guorui: 68%) but Ronshine’s reported GPM was lowestamong the three for 1H17 (19% vs Xinyuan’s 22%, Guorui’s 46%). We believeRonshine has stronger sales execution in China. We expect Ronshine to traderoughly 40-70bp wider in yield than Xinyuan for the same maturity, given theformer’s credit metrics, more aggressive landbanking, despite Ronshine’shigher growth in contract sales and bigger GFA in landbank. As of end-June,2017, RONXIN had 76 projects with an attributable landbank of 7.6mn sq m.

    Xinyuan Aug 2019s trade at ask YTW of 8.1%, and Xinyuan Nov 2020s trade atask YTW of 8.8%, and we believe a theoretical Xinyuan early 2020 USD bondshould trade at about 8.3% yield. Thus, we believe the proposed Ronshine2021P20s with a puttable option in early 2020 should trade at fair value of8.7%-9.0% in ask yield and we view it more as a two-year bond given the putoption. Ronshine has much refinancing needs this year. RONXIN 2019s USDbonds (USD400mn) are puttable in Dec of this year; its 364-day USD150mnwill mature in June of this year, and it has some on-shore bonds that areputtable this year, but we expect the company to refinance or repay these debtwithout problem. We maintain Buy on RONXIN 2019P18s (ask price: 99.125,ask YTP: 8.0%, Z-spread: 600bp), given its attractive valuation for a short-datedpaper with only less than 11 months to go to the put date. Downside risksinclude a rating downgrade by credit rating agency, higher-than-expectedlandbanking, and tougher-than-expected policy. The proposed USD bonds willbe used for refinancing and Fitch has assigned B+(EXP) to these bonds.