Possible privatization of Future Land Development Holdings, the HK list
co.

    Future Land Development Holdings (1030 HK) announced a trading halt
for itsstocks yesterday, “pending the release of an announcement
pursuant to theCodes on Takeovers and Mergers and Share Buy-backs, which
involves apossible privatization of the company”, according to the
company’s filing onthe HKEX. Before the HK-listed company’s stock
suspension, its market capwas HKD15.9bn with stock closing at
HKD2.81/share last Friday and year-tolastFriday it was up 76.7%. Future
Land Development Holdings’ market cap isnot big, in our view, and the
public floating portion was worth HKD4.4bn as oflast Friday. We believe
that there is a high chance that a potential privatizationmay happen. In
the Chinese real estate sector, the past few privatizationattempts saw
mixed results. For instance, Glorious Property (845 HK) failed inits two
prior privatization efforts by the largest shareholder, while
GoldinProperties Holdings (283 HK) has made another attempt at
privatization. DalianWanda Commercial Properties did manage to privatize
last year. Ifmanagement of certain companies feel their stocks are
undervalued, this couldpotentially trigger a desire to privatize,
especially if they have another listedplatform (e.g., on the A-share
market) or if they believe de-listing would notadversely affect their
funding capability. The greater China consumer spacehas seen various
examples, with privatization of consumer companiesincluding New World
Department Store China (825 HK) under progress. If theexperiences of
other companies are a guide, then it could take a few months orlonger
before the final outcome of privatization is seen, as an EGM would
haveto be conducted, where minority shareholders can vote on the
privatizationmatters and HKEX approval is also required.

    We see minimal impact of HK-listed company’s privatization on its
creditratings.

    Future Land Development Holdings does have its major subsidiary
listedonshore. A-share listed Future Land Holdings Co.’s (601155 CH)
market cap(before its suspension) was RMB39.9bn (the share price was
CNY17.67/shareas of Friday’s close, with the A-share’s stock price up
50.4% year-to-lastFriday). Future Land Development Holdings (the issuer
of the 2017 and the2020 USD bonds) has largely functioned as a holding
company for the group,with the A-share listed entity being the main
subsidiary and generator ofoperating cashflows. As of 31 December 2016,
founder Mr Wang Zhenhua’sfamily owned 72.56% of the HK-list company and
he owned 67.10% of theChina-list company. We see minimal impact on
Future Land’s credit ratings byrating agencies even if Future Land
Development Holdings is privatized. Even ifthe HK-listed company is
privatized, we see limited impact on its access tofunding as well as
corporate transparency, especially given its already sizeableoperating
scale, historically good communication with investors, and
solidrelationships with commercial banks.

    We see positive signaling effect.

    Based on the limited information from the announcement, we think
theprivatization offers a positive signal to the robust cashflow
situation of thecompany and the largest shareholders. Historically, the
Future Land Group hasbeen good with communication and investor relations
efforts. It is also a wellpreparedcompany, and hence, it should have a
well-thought out plan forpotential funding sources for its possible
privatization. Furthermore, we do notrule out the possibility that if
the HK-listed company is privatized, there could be some additional
business(es) to Future Land Development Holdings. Webelieve Future Land
will likely keep its A-share listed status even if itsuccessfully
privatizes the HK-listed company. Note that according to theofficial
NDRC website, Future Land Holdings Co. has registered for offshorebonds,
and we note that it is the A-share listed company that has
beenregistered.

    Potential make-whole scenario on FUTLAN2020s.

    We have been impressed by Future Land’s strong sales execution,
improvingrecurrent income from its rental properties and diversified
funding channels.

    The group attained robust contract sales of RMB49.1bn in 1H17, up
75% YoY.

    Earlier this year, the A-share listed subsidiary had issued some
2017 MTNsonshore, e.g., in March, it issued RMB1.5bn for a 3+2-year bond
at 5.4%.

    From an economic perspective, it may not necessarily make sense for
FutureLand to make-whole on the 2020 bonds. However, there could
beconsiderations of potential strong cashflow from contract sales,
USD/CNYcurrency risks, and the desire to create a win-win situation.
Historically, FutureLand has been a bond-investor-friendly company, in
our view.

    We have received some investor query around a potential
make-wholesituation for FUTLAN2020s. We attribute a potential make-whole
as a scenariowith about 64% probability. We believe there is a 80%
probability that the HKlistedcompany will be privatized, and 80%
probability of the company makingwhole on its 2020 bonds if
privatization is successful; hence deriving a roughly64% probability of
Future Land making whole on its USD350mn 2020 bonds.

    The ask bond price of FUTLAN 2020s have gone up by about
2.75pointsyesterday and another 1ppt today as we write. We see the
current price ofFUTLAN2020s (mid-price: 104.25, YTW of 3.28%, Z+155bp as
we write) asfactoring about 70% probability of the company making whole
on the bonds.

    There is an applicable premium of 100bp over the adjusted treasury
rate for thescenario of the company making whole on the bonds. We
calculate the makewholeprice on the FUTLAN 2020s to be around 106 after
incorporation of100bp spread on top of 3-year treasuries. We initiate on
FUTLAN 2020s with aHold as we believe the current price has factored in
high probability of thecompany making hold on the bonds vs. the company
allowing 2020s to maturein February 2020. We also maintain our Hold
rating on FUTLAN 2017s. Upsiderisks include: Future Land making whole on
its 2020 bonds, better-thanexpectedsales and/or margins, and
de-leveraging. Downside risks include: nomake-whole scenario for FUTLAN
2020s, aggressive acquisitions, and harsherthan-expected policies.

    Other companies that are listed or the Mainland exchange as well or
have aparent/subsidiary listed onshore.

    Elsewhere within China property, it is interesting to note that 1)
secondaryshare placements by institutional shareholders of China Vanke-H
and Jinmaohappened recently, and 2) a shareholder of China Jinmao sold
281mn shares ofJinmao at HKD3.01/share recently, according to Bloomberg.
That leads to thequestion that whether the largest shareholders or
senior management of Chinaproperty companies see value in their
companies vs. the equity investors. Sofar, there has been no recent
primary share placement by China property highyieldissuers we cover. In
fact, some China property companies had boughtback some shares earlier
this year. We note the number of China propertycompanies which currently
have dual-listed platforms or parent/subsidiarycompanies listed on HK
and Mainland exchanges are limited, including Vanke,Oceanwide, Future
Land, Greenland Group/Greenland HK, and Fantasia/HomeE&E. Evergrande is
under progress in its proposed reorganization withmainland-listed
Shenzhen Real Estate. China Overseas Land’s parent ChinaState
Construction Engineering Corp is also listed on the A-share market.

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