How I avoided China's biggest bond default

williekeng

Publish date: Sun, 16 Feb 2025, 04:15 PM

In 2016, I told myself:

“Stay away from this Chinese company at ALL cost.”

It was a Thursday. I was in a room filled with high-level executives dressed in black suits - the company's chief financial officer, finance managers, bankers, analysts and fund managers were there.

It was a big, important meeting.

I sat by the corner of the long, brown wooden table, laid my notebook down, and flipped to a fresh page. I stuck my ears close as the translator spoke why the CFO wanted to raise more money for the company.

You see, I started my analyst career when interest rates were almost zero.

Back then, even Chinese property developers from blue-chips to junk-rated companies all wanted to raise debt. China’s skyline was dominated by the grey, skeletal skyscrapers wrapped in scaffoldings. Tower cranes with long, mechanical arms swung on these buildings — there were noise of rapid urban growth.

And China’s property bond market was hot like an iron.

It was common to have 3-4 such company meetings in a single day. These were eye-opening — and very exciting times, as developers rushed to raise as much “cheap debt” as possible.

You see, investing is also asking the right questions and listening.

When Warren Buffett ran his hedge fund, The Buffett Partnership, he followed what Philip Fisher did - Scuttlebutt. This is a process of gathering as much information about a company by talking with the company management and staff.

Buffett would travel across the country to speak to managers, industry insiders and peers to gain first-hand knowledge of companies. That's how he uncovered high potential ideas - Sanborn Map, Dempster Mill Manufacturing - and avoided traps.

He learnt to invest by asking the right questions. I learnt that too.

And in 2016, I saw the early warning signs of China's bigger property developer, Evergrande…

Btw, looking at this is also key to safely build a dividend portfolio

During that management held on Thursday, I concluded its leverage was too high…

In 2021, Evergrande defaulted.

It triggered massive negotiations with its creditors. It had to restructure its business.

That year, shares of Evergrande plunged over 80%.

This morning, I've dug out some short-cut questions from my old notebooks:

How do you make money? (where are your sources of revenues from?)
Why are your profit margins higher/lower than your competitors?
How are you reinvesting your excess free cash flow? (growing capacity? buying back shares? dividends? etc.)
How much capex are you spending over the next 3-5 years? Why?
How are you doing differently from your competitors?
What’s your plant’s running capacity? Can you increase more?
Why is your competitor doing X but you’re doing Y?
Why are you keeping so much cash in your bank?
Cash >> Debt: why not use cash to pay down all your debt?
Why not pay out excess cash as dividends, or buy back shares?
How much debt are you refinancing over the next few years?
Who are your main bankers?
How do you hedge your interest rates? At what cost?
How much committed credit facilities you have with banks?
Why are you borrowing X debt, what are you using for?
What are your succession plans? (for family-owned businesses)
How does the light asset model projects work?
How are base management fees calculated? Can it be terminated anytime?
What's the background of these parties who engage your services?
What's your current order book size? How do you plan to grow it?
Please share your licensing arrangement with subsidiary A
Which malls are below 90% occupancy rate? What are you doing about it?
How are you planning to refinance your short-term loans and who are the lenders? At what interest rate? Is it possible to get "secured" and "unsecured" funding?
Why can't retailers just source directly from suppliers (Li & Fung)
Are you offering more e-commerce services to retailers?

I believe asking the right questions helps us frame our investing approach. It will help us during AGMs, or meeting management

More important, these questions helped me uncover new investment ideas no one paid attention to, smell a rat from miles away, and assess management quality.

I hope you’ll find these useful.

xoxo

Sometimes, investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

The post How I avoided China’s biggest bond default appeared first on Dividend Titan.

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