20221219-招银国际-China_South_City__CSC__Equity_injection_from_SZ_LGFV_at_Xi_an_project_3页_409kb

CMBI Credit Commentary Summary

Core Content

This document is a credit commentary from CMBI Fixed Income Department, focusing on the financial situation and strategic developments of China South City (CSC), particularly in relation to its state-owned shareholder SZCDG and its equity injection and asset sale activities. The commentary provides an analysis of CSC's current valuation, financial support mechanisms, and potential future performance based on market conditions and company strategies.

Main Points

1. Equity Injection from SZCDG

• SZCDG has announced a plan to subscribe new shares of Xi'an China South City for RMB5bn.
• After the share subscription, SZCDG's holding will increase to 69.35%, while CSC's ownership will decrease to 30.65%.
• SZCDG has a put option to repurchase the stakes from CSC starting from the 54th month post-transaction, contingent on sales and profit margin targets not being met.
• The proceeds from the equity injection will be used to repay RMB2.86bn in related party loans, allowing CSC to upstream cash to its holding company.

2. Sale of Property Management Interests

• In July 2022, SZCDG acquired 50% of CSC's property management operations for HKD1.46bn (USD185mn).
• CSC received 60% of the sale proceeds, with the remaining 40% expected to be received by March 2023.
• The transaction is expected to be completed by March 2023.

3. Financial Support from SZCDG

• In October 2022, SZCDG provided RMB200mn in 3-year entrusted loans to CSC through China Merchant Bank, SZ branch.
• The loans are secured by CSC's storage assets in Chongqing, with a NAV of RMB147mn as of March 31, 2022.
• The interest rate is 4.35%, which is well below CSC's weighted average funding costs of over 8.5%.
• The loans will be amortized in installments of RMB2mn every 6 months, with the final installment of RMB190mn due at maturity.

4. Strategic Cooperation and Asset Sales

• CSC signed two strategic cooperation agreements with SZ SOE/LGFV in February 2022.
• In early April 2022, CSC sold its logistic assets in Hefei and Zhengzhou to Shenzhen International Holdings, a SZ SOE, for RMB1.7bn.
• These actions indicate ongoing financial restructuring and support from SZCDG.

5. Valuation and Investment Outlook

• CSCHCNs (CSC's credit instruments) have rebounded 13-25pts since the end of October 2022.
• At 60ish and a YTM of 30%+ to 50%+, the valuation of CSCHCNs is considered very attractive.
• Even with a "harsh" discount rate of 20%, the expected trading price is in the high 80s.
• The low YTM compared to other LGFVs in higher tier cities (5-6%) supports the attractive valuation argument.

Key Information

• SZCDG is the largest shareholder of CSC and has been actively providing financial and strategic support.
• The equity injection and asset sale strategies aim to improve CSC's financial health and reduce leverage.
• The valuation of CSC's credit instruments is highly favorable, suggesting potential upside.
• There are legal and regulatory disclosures regarding the distribution of the report, conflicts of interest, and investment risks.

Conclusion

CSC is positioned as a survivor in its sector, supported by state ownership and SZCDG's active financial backing. The equity injection and asset sale initiatives are expected to enhance its liquidity and reduce debt, while the current valuation of its credit instruments is seen as very attractive. Investors are advised to consult professional advisors and consider the risks associated with the investment.