20210924-招银国际-Evergrande_How_far_can_the_spill-over_reach__11页_1mb

Evergrande: How Far Can the Spill-Over Reach?

Core Content

This report explores the potential implications of Evergrande's financial troubles on the broader Chinese property sector and the banking system. It concludes that while Evergrande's default may cause some disruptions, it is unlikely to trigger a global financial crisis like that of Lehman Brothers in 2008. The report also provides insights into the impact on the sector and specific investment strategies.

Main Points

1. Global Financial Crisis Risk?

• Not Likely: Evergrande's leverage is significantly lower than that of financial institutions or Lehman before its bankruptcy.
• Government Intervention: The Chinese government is expected to guide Evergrande to a "soft landing" to prevent widespread damage.
• Comparison with Lehman: Evergrande's equity-to-total asset ratio is 8.03% (vs 3.02% for Lehman), and its total liabilities are RMB302,544bn (vs RMB668,573bn for Lehman).

2. Systemic Risk in the Banking Sector

• Limited Risk: Evergrande's domestic bank borrowings amount to RMB220bn, which is only 0.14% of total outstanding bank loans in China.
• Capital Adequacy Impact:
  • Base Case: Core T1 CAR declines by 9bps to 10.41%.
  • Worst Case: Core T1 CAR declines by 33bps to 10.17%.
• Regional Banks: None of the listed regional banks will fall below the 7.5% regulatory threshold.
• Systemically Important Banks: May need to replenish capital due to higher minimum core T1 requirements (8.5%).
• Non-listed Banks: Likely to see core T1 CAR drop below 7.5% and require capital replenishment.

3. Impact on the Chinese Property Sector

• Operational Impact: Limited, as most developers are not directly affected.
• Funding Access: A more pressing issue, with USD bond issuance declining by 27% YTD to USD32.7bn.
• Near-Term Maturities: USD27bn of offshore bonds will mature among 47 developers in the remaining of 2021 and 1H22.
• Sector De-rating: The sector has experienced a sharp de-rating, returning -17% YTD, vs -6% for the Asia HY market.

4. Regulatory Environment

• No Material Loosening: Tightening measures are unlikely to be relaxed in the near-term.
• Focus on Stability: The central government prioritizes social stability and timely project delivery.
• Key Monitor: The pace of mortgage approval process.

5. USD Bonds Positioning

• Spill-Over Diminishing: The market de-rating is more or less complete.
• Decoupling Picks: Developers with improving credit stories and diversified funding channels include China South City, Dafa, Jiayuan, Kaisa, Redsun, Yuzhou, and Zhenro.
• Short-Dated Ideas: Bonds with high certainty on refinancing include DEXICN'22s, GRNLGR'21-22s, MOLAND 22s, REDPRO 22s, and RISSUN'8.95%'22.
• Replacement: FTHDGR'21s are replaced with GZFPR 5.75%'22 due to higher funding certainty.

6. Property Stocks Positioning

• Valuation: At historical lows due to tight policies, weakening fundamentals, and contagion risks.
• Policy Loosening: Expected in late October 2021 after key data points like property investment and standing bureau meeting.
• Preferred Stocks: CR Land and Longfor due to their strong balance sheets, high-quality land banks in Tier 1-2 cities, and stable rental income.

Key Information

• Evergrande's Funding Issues: Affects the near-term refinancing environment for developers, especially smaller and B-rated ones.
• Credit Strategy: Focus on developers with diversified funding and improved credit profiles.
• Equity Strategy: Emphasizes quality names with strong fundamentals and resilience to market volatility.
• Capital Adequacy Analysis: Scenarios include base case, worst case, and best case, with detailed assumptions on recovery ratios and capital deductions.

Conclusion

Evergrande's default is unlikely to trigger a global financial crisis or systemic risk in the Chinese banking sector. The impact on the property sector is more about funding access and market volatility. The report suggests a cautious approach to USD bonds and a preference for quality stocks in the sector as it awaits potential policy changes.