• Disposes loan assets to JV
• Efforts to lower leverage
• To continue monitoring gearing

Lightens on HK and PRC Assets

China State Construction International (CSCI) earlier announced that CSCF, a wholly owned subsidiary, has entered into a HK loan sale agreement with a JV company (50-50 owned between CSCI and Sunrise Cayman) in which CSCF will sell assets (HK loan assets) to the JV at a price of US$127.5m which is similar to the book value of the assets.

Grand Wealth, another wholly owned subsidiary of CSCI, also entered into a PRC loan sale agreement with the JV company in which Grand Wealth will sell assets (PRC loan assets) to the JV at a price of US$356.6m which is also similar to the book value of the assets. CSCI has also agreed to provide a standby letter of credit facility to the JV company up to US$800m should funds be required for an asset purchase or liquidity drawdown (interest rate 5.7% p.a.).

Off-balance Sheet Structure to Lower Leverage

Sunrise Cayman had recently issued US$500m worth of fixed rate notes (5.25%, due 2024) to finance the transactions. This is a special purpose vehicle whose share capital is held by Walkers Fiduciary Ltd as share trustee on trust for charitable purposes, and the off-balance sheet structure means that with the above transactions, CSCI is likely able to lower its leverage, which is what the market has been monitoring with regards to its capital recycling efforts. Still, investors are likely to continue to watch out for the group’s accounts receivables which have been building up as CSCI undertakes projects which require more working capital.

At this point in time, the group has to strike a balance between pursuing growth and maintaining healthy cashflows and a manageable balance sheet position. With efforts to lower its leverage and improvement in overall market sentiment, we increase our P/B valuation to 1x book, and our fair value estimate rises from HK$5.55 to HK$8.54. Risks include equity raising as the share price appreciates along with the broader market recovery.

Source: OCBC Research - 13 Mar 2019