Relevant Documents:Audited 2019 annual reportUnaudited Q1’20 report OM dated March 25Change of name and ownership structureSubsidiary Sanju’s unaudited Q1’20 report
Beijing Haidian State-Owned Assets Investment Group Co. Ltd. became a widely discussed name among onshore creditor communities lately due to the fact that the company’s debt facilities are yielding significantly above the levels of its LGFV peers, according to buyside sources with knowledge of the situation.
Formerly known as Beijing Haiguo Xintai Investment Holding Center, or HGXT, Beijing Haidian State-Owned Assets Investment Group tried to appease investors during an April online presentation, saying that it has accelerated de-leveraging with goals to fully exit non-core business and raise up to RMB 20 billion ($2.824 billion) by the end of this year. It is also seeking refinancing offshore to lower its financing costs, two buyside sources who attended the presentation told Reorg.
HGXT said it has no plans to make early redemption of its $500 million 4.3% offshore notes due Oct. 8, 2022, and nor does it intend to issue any new dollar bond this year, according to the sources. The offshore notes were indicated at around 90.6/90.8 on May 12, according to data compiled by
Refinitiv.
The company earlier this year raised $300 million of loan facilities bearing an interest rate of 3% from unspecified lenders when Libor was low, the sources said citing the company during the presentation. As of early April, about $100 million was drawn down from the facilities.
HGXT said it would continue looking for similar opportunities this year in order to replace the “high-cost onshore debt” with new “low-cost offshore financing” in the form of syndicated loans or offshore borrowings with guarantee from domestic entities, according to the sources.
The company’s current financing cost was around 5.5% onshore, primarily due to high costs at its underperforming real estate subsidiaries, HGXT explained during the presentation, the sources said.
Mitigating factors include the company’s strong connections with the Haidian government and the importance of the district, which is known for being home to some of China’s most prestigious education and research institutions including Peking and Tsinghua universities. Its LGFV status has proven pivotal to investor confidence in the company, sources said, adding that investors are nonetheless monitoring the situation closely. Meanwhile, trading volume on the secondary market in HGXT’s onshore bonds remains moderate.
The investors’ concern is concentrated around the company’s debt-to-asset ratio, which is higher than 70%, compared with an industry average of around 62%. Total debt was roughly RMB 126.075 billion as of March 31. In addition to the $500 million offshore notes, HGXT has 19 outstanding onshore bonds totalling RMB 20.2 billion, including RMB 8.271 billion in principal and interest amount due within a year.
Government Support
As Reorg wrote in an
analysis of LGFVs, or local government financing vehicles, investors need to ascertain whether an LGFV is a bona fide government entity or the government connection is more superficial.
According to the company’s 2019 annual report, HGXT is the financing vehicle of the Haidian district government in Beijing and primarily engages in energy, pollution management and land development businesses as well as education and third-party payment processing. It also helps the government to support other state-owned enterprises, as well as providing public services such as demolition of sub-standard building structures in Haidian district, although the non-profit part of its business is small relative to other operations, note the sources.
Sources told Reorg that because the company has invested in privately-owned companies, many of which are based outside of Beijing, there has been discussion among the creditors as to whether HGXT is a bona fide LGFV.
Investors now tend to agree that it is solidly backed by the Haidian government. In fact, the sources noted that the company is the largest SOE in the district and one of the oldest LGFVs in Beijing that traces its roots back to a government financing platform launched in 1992.
More importantly, sources pointed out, HGXT’s total assets, revenue and profit each accounted for over 50% of the corresponding numbers of Haidian State-Owned Assets Supervision and Administration Commission, or SASAC.
HGXT is wholly owned by Haidian State-Owned Assets Operation and Management Center, or Haidian Management Center, which is in turn 100% owned by Haidian SASAC, according to the OM dated March 25. It operates under the direct management of Haidian SASAC, with all seven board members appointed by Haidian Management Center, according to buyside sources briefed by the company during the presentation.
On March 30, HGXT was renamed Beijing Haidian State-Owned Assets Investment Group Co. Ltd. and saw its ownership structure changed to “limited liability company (legal person sole investment)” (有限责任公司法人独资) from “ownership by all people” (全民所有制). The change was seen by sources as an indication that it is now a solely state-owned company.
Although company management told investors during the April presentation that “Haidian Management Center imposes no limit on its support” for the company, buyside sources said they are monitoring impact from the ownership structure change.
The company was rated B for stand-alone credit profile by S&P in September but was assigned BBB for its long-term issuer credit rating due to “extremely high likelihood of receiving extraordinary government support” from the Haidian district government, said S&P in the
report.
Leverage and Liquidity
HGXT reported unaudited current liabilities of RMB 60.953 billion as of March 31, compared with RMB 65.703 billion as of Dec. 31.
Of them, RMB 14.526 billion were short-term borrowings, RMB 1.033 billion were bills payable, RMB 3.675 billion were accounts payable, RMB 1.447 billion were accounts collected in advance, RMB 18.095 billion were non-current financing (including trust, financial products and financial leasing) maturing in one year and other accounts payable of RMB 12.155 billion.
Unaudited total assets were RMB 178.689 billion as of March 31, bringing the debt-to-asset ratio to approximately 70.6%. The level was slightly down from a high of 72% as of Q3’19 but still significantly above the industry average, noted one buyside source.
In terms of upcoming maturities, HGXT said during the roadshow that the group and its subsidiaries face consolidated RMB 22 billion of non-standard financing maturing in 2020, of which it repaid RMB 5.2 billion during the first quarter, with the remainder RMB 17 billion to be paid with cash generated from operation and that collected in the next few months, as well as new refinancing.
Additionally, HGXT has 19 onshore bonds with a total of RMB 20.2 billion of principal outstanding, including RMB 8.271 billion in principal and interest due within a year.
By comparison, the company had bank revolvers of RMB 60 billion as of September, about half of which remained undrawn.
Cash balance as of March 31 stood at RMB 15.905 billion, compared with RMB 13.314 billion as of Dec. 31, including RMB 15.102 billion of cash and cash equivalents.
Exiting Non-Core Assets
One of the company’s primary focuses this year is to fully exit non-core real estate business, which it manages through indirectly owned subsidiary Beijing Badachu Real Estate Co. Ltd. (八大处地产), according to HGXT.
The goal is to collect RMB 20 billion of sale proceeds by the end of 2020, a process that was disrupted by the outbreak of Covid-19, noted HGXT.
Accordingly, the company has lowered its target for asset disposal and instead is now looking to raise RMB 5 billion by the end of June, according to the sources.
Haidian SASAC will lead the coordination and supervision of asset transfer, said HGXT during the presentation, according to the buyside sources.
In addition to real estate development, HGXT principally engages in the energy sector through its Shenzhen-listed subsidiary Beijing Sanju Environmental Protection and New Material Co. Ltd. (300072.SZ), which manufactures and sells desulfurization purificant, desulfurization catalyst, antichlor and hydro arsenic catalyst and counts China National Petroleum Corp. and China Petroleum & Chemical Corp. and other SOEs among its clients, according to the company’s Q1’20 report.
The subsidiary has seen significant senior management turnover this year so far and recorded a 48% year-over-year decline in Q1’20 unaudited revenue with a net loss attributable to shareholders at RMB 81.7 million, which the company attributed to the impact of Covid-19, according to its Q1’20 report.
Other subsidiaries of HGXT include Beijing Haike Rongtong Payment Services Co. Ltd., a manufacturer of an electronic payment device; and Beijing Kaiwen Education (002659.SZ), formerly known as Jiangsu Zhongtai Bridge Steel Structure, which principally engages in steel structure engineering and international education.
For the first quarter of this year, the company posted unaudited consolidated revenue of RMB 5.679 billion, up 6.1% over a year earlier, while operating loss widened to RMB 164 million from the year-ago level of RMB 20 million.
For 2019, HGXT’s audited consolidated revenue was RMB 27.849 billion, down 14.8% from year-ago level of RMB 32.683 billion. Consolidated profit for 2019 was RMB 999.1 million, down from 2018’s RMB 1.911 billion, according to the annual report.
--Skylar Chen