Chinese high-yield US dollar bonds from the property sector have traded up in the secondary market since November as China exited its zero-Covid isolation and the government rolled out more supportive economic measures. But some investors, who forecast an uneven recovery path, think the bonds have become overvalued even though many still offer double-digit yields.
Dalian Wanda Commercial Management Group on Tuesday benefited from the strong sentiment to print its second dollar bond deal in less than a month. Both transactions, rated Ba3/BB (Moody's/Fitch), attracted global high-quality funds, with US$830m of orders for the most recent US$300m trade and US$1.4bn for the first US$400m bond, sources said. Both issues paid a reoffer yield of 12.375%.
Wanda is not representative of the whole sector as it focuses on shopping mall management and not residential property construction, so that its success may be hard to replicate in the near term. But the bonds of other high-yield developers have benefited from better investor sentiment in the past three months.
The ICE BofA Asian Dollar High Yield Corporate China Issuer index climbed 89% to 216.74 on Wednesday from 114.54 on November 3. Some of Country Garden Holdings’ longer-dated dollar bonds are up from seven cents in the dollar in November to between 50 and 60 this week, while Agile Group Holdings’ dollar bonds are up from below 20 to around 60.
“Since the beginning of the year, buyers are coming in. There is long-only money that has been underweight since last year, and needs to chase performance when the market rallies," said Gordon Ip, co-chief investment officer for fixed income at Value Partners. "Fast money also takes advantage of momentum trading. There should be new money from Europe and the US that thinks the market has bottomed out and Chinese credits provide a relatively good value as the world decouples.”
Hedge funds were among the first to take action, but some long-only funds and private banks which had said last year they were no longer buying China high yield are also returning, said a Singapore-based analyst.
Funds all want the opportunity to book gains, but their risk appetites differ. The analyst said some of the lower-rated names are mainly supported by Chinese asset management companies specialising in distressed assets, while other Chinese investors are more conservative and only favour the high-grade investment property names with government links.
Ip said many bonds still pay a premium over other credits and are worth holding, but investors should evaluate name by name, as some state-owned and "safer" names have become expensive.
For example, bonds of Triple B rated China Vanke and Longfor Properties, seen as the top two privately owned developers, are trading around 90 and 80 cents in the dollar respectively and yielding around 6% to 7%.
Outside of property, high-yield industrial names like aluminium producer China Hongqiao Group, China Grand Automotive and Fosun International still offer juicy returns compared to tightly traded investment-grade names, while allowing investors to diversify away from the real estate sector. But secondary market activity in industrials seems to be muted, apart from some existing bondholders who are willing to increase exposure, said a Hong Kong-based fund manager.
Too late to buy
Some investors are asking whether even high-yield property bonds have become too expensive to buy now, given the continuing risks in the sector. The upward trend was boosted by China’s fourth "arrow" measure, which allows banks to provide offshore refinancing loans to developers, and the country's reopening, but the uncertainty over China's economic recovery has marred the outlook for property bonds.
There was already some selling of Double B rated Country Garden early this week, as the company's 2030s dropped up to six points between Monday and Tuesday, sending the yield up 40bp to 13.7%. Other names like Seazen Group and Sino-Ocean Group were also down around three points.
“Many are switching out from the expensive China property names to hold Macau casinos,” said the fund manager. Macau's casino revenues dried up due to pandemic-related restrictions, but are set to recover as Chinese tourism resumes.
Studio City, which operates a Hollywood-themed resort and casino, has 2027 bonds bid at 8.1%, while Wynn Macau's 2026s are bid at 8.2%. The respective bonds are rated Ba3/B+ and B2/B+ by Moody's and S&P.
Distressed developers’ restructurings, further policy easing and new issuance from other developers could drive up bond prices, but the disappointing contracted sales numbers in January have made many pessimistic about the outlook.
Seazen Group’s contracted sales were down 27% year on year in January, Country Garden was down 39% and Vanke 20%. But part of the drop was due to the early Chinese New Year in January this year, compared to February last year.
“The property sector is not out of the woods yet, and we may still see some companies having liquidity issues, so name selection is important,” said Ip.
Joyce Bing, investment manager for fixed income Asia at abrdn, thinks it is unlikely the market will return to the “good old days” in the near term.
“We need to monitor if sales can pick up in later months, as property sales proceeds are the largest source of liquidity for developers,” said Bing in an email. “Funding access has improved for some big developers, but given the large refinancing needs for this year, they still need to restore more funding access. For the weak developers, the liquidity situation remains challenging, though marginally improved from last year."
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