20210222-招银国际-EHOUSE_–_Diversification_play_in_Chinese_High-Yield_3页_501kb

CMBI Credit Commentary Summary

Core Content

This document provides an analysis of Ehouse's credit profile and investment opportunities within the Chinese High Yield (HY) market. It highlights Ehouse's position as a diversification alternative to traditional property developers, focusing on its service-fee business model and strong liquidity position. The report also discusses the broader market dynamics in the Chinese HY sector, including the shift in investor preference toward non-property assets due to increased risks in the property industry.

Key Information

• Ehouse Credit Ratings and Yields:

  • EHOUSE '22: 100.875/100.375, YTM: 6.8%
  • EHOUSE '23: 96.625/9.3%, YTM: 3.9%
  • Ehouse '23 is recommended as a tactical buy, given its potential for yield improvement and the company's repayment of Ehouse '21 on 28th Feb 2021.

• Financial Performance (FY2020):

  • Ehouse's operations recovered in the second half of 2020.
  • Revenue and EBITDA were flat year-over-year (YoY) in 2H2020 compared to 2H2019.
  • Full-year 2020 revenue declined by 15%–25% YoY due to the impact of the pandemic in Q1.
  • EBITDA is estimated to have fallen by 30%–40% to RMB 1.0–1.1 billion.
  • Net profit declined by 50%–60%.
  • Positive operating cash inflow continued, increasing slightly from RMB 833 million in 1H2020.

• Liquidity and Funding:

  • Ehouse has a high cash balance of over RMB 10 billion by end-2020, compared to total debt of RMB 8.5 billion.
  • The company maintains a small net cash position, especially after consolidating Leju, which had RMB 1.8 billion in cash and no debt.
  • In November 2020, Ehouse raised HKD 1 billion in convertible bonds (CB) and HKD 828 million in share issuance from Alibaba, enhancing its liquidity.
  • These funds are expected to be used for investments in its joint venture (JV) with Alibaba over the next 2–3 years.

• Sales and Customer Concentration:

  • Ehouse's sales are heavily concentrated among its three major shareholders: Evergrande, Country Garden, and Vanke.
  • Related-party transactions accounted for 33% (2018), 36% (2019), and 43% (1H2020) of total sales.
  • Management expects a gradual decline in sales from Evergrande, from 18% in 2019 to 23.9% in 1H2020.

• Market Rotation and Investment Opportunity:

  • With the liquidity issues of CHFOTN, there has been increased demand for non-property HY assets.
  • Non-property HY bonds such as BEDUUS 7.45 22, BTSDF 5.625 24, and FOSUNI 6.75 23 are yielding significantly higher than comparable property HY bonds.
  • Ehouse '23 is seen as a trading opportunity to diversify into non-property assets without sacrificing yield.

Main Points

• Diversification Play: Ehouse offers a service-fee model and a strong balance sheet, making it a viable diversification option for investors.
• Liquidity Strength: High cash reserves and funding from Alibaba provide Ehouse with a buffer to navigate the tightening property industry.
• Sales Dependency: Ehouse's sales are heavily reliant on its major shareholders, which may pose risks in the event of reduced support.
• Market Shift: The Chinese HY market is showing a shift toward non-property assets, with Ehouse '23 being an attractive option for yield and diversification.

Risk Factors

• Margin Erosion from Competition: Ehouse faces the risk of margin erosion due to increasing competition in the market.
• Investor Risk: The report is intended for specific investors and is not a recommendation for general public investment.
• Regulatory and Legal Considerations: The report includes important disclosures regarding the distribution and use of the information, with restrictions based on the investor's location (UK, US, Singapore).

Conclusion

Ehouse presents a compelling opportunity for investors looking to diversify from the property sector while maintaining yield. Its strong liquidity and strategic funding from Alibaba support its financial stability, but its reliance on major shareholders and potential margin pressures remain key considerations. The report underscores the importance of non-property HY assets in the current market environment and highlights Ehouse '23 as a strategic investment choice.