News Release - the DBS Vickers Securities Equities Research

March 12, 2013
KAISA_new issue note (desk assessment)
At this stage, pricing guidance for the proposed 5NC3 benchmark issue has been whispered at 8.875%
(down from earlier guided 9.125%). The proposed issue is rated B1 & B+ by Moody’s and S&P
respectively. The proceeds will be used to partially refinance the 13.5% US$648mn ’15 notes, as well as
to finance existing and new property projects and for general corporate purposes
As discussed in our last commentary (HK/PRC - Looking for Hidden Gems at the Right Entry Points;
Feb 20 2013), we are OW on the Kaisa complex, on expectation of the group’s ability to manage its
execution capability and margin enhancement on higher contributions from its projects in Shenzhen and
other high tier cities. For this year, the group is expecting pre-sales to be at least 30% better than the
FY12 targeted level. FYE12, the group recorded presales of Rmb17.3bn, which was 105% of its annual
sales.
Currently, Kaisa 17s were seen indicated at 7.6% (mid indic ytw) and the 20s at 9.4% (mid indic ytw). If
the proposed issue closed at guided pricing, certainly it makes rational sense for investors to consider
switching out of the shorter dated complex and into the longer-end. Along the Kaisa curve, at current
levels, the 20s, in comparison to the 17s, provide yield pick-up of more than 170bp (for a slightly longer
duration of 2.33 years) – working out to c.74bp for a year extension. In parallel, the proposed and
assumed benchmark 5NC3 issue (and at guided pricing) would provide an attractive c.127bp yield pick
for a relatively short extension. If the proposed issue pricing tightens, (which may not be too surprising
but may not be optimal considering the number of new issues that got done at tight pricing ends and
now trading below par), anything below 8.5% would be just fair value (in our view). Benchmarking
against other ‘B’ range rated issues – KWG 13.25% 17s were seen trading at 7.7% (mid indic ytm).
Although, in term of credit profile, KWG is less levered and has slightly better credit metrics (in
comparison to Kaisa).
Key credit highlights
Strategizing to achieve a better portfolio balance towards tier-one cities: As of 1H12, the bulk of
Kaisa’s land bank resided in tier-three and lower cities (75.7%), followed by tier-two cities (17.1%)
and tier-one cities (7.2%). The group’s total land bank doubled to 23.9mn sq m as of 1H12 from
12.5mn sq m at end FY09. Up to 10M-2012, total considerations for land acquisitions were about
RMB4.8bn (RMB6bn in FY2011). The acquisitions included land purchases in Shanghai and
Guangzhou. While this does not represent a shift in its diversification strategy, management has
advised that it is seeking a better balanced portfolio focus towards tier-one cities. This is premised
on the outlook that land costs there are more reasonable now
Expect pre-sales momentum to continue into FY13: As with most developers last year, Kaisa’s
contracted sales accelerated in the last two quarters. In Dec’12, the group’s pre-sales rose to
RMB2.4bn (+9% m-o-m). This compares with averages of RMB1.5-1.7bn seen in previous months.
This culminated in YTD pre-sales of RMB17.3bn which exceeded the full year target of RMB16.5bn.
In terms of GFA sold, it amounted to 2.58 mn sq m (+18% y-o-y). Though, this came at the expense
of compressed margins - ASP for the year was RMB 6,730/sq m (-4% yoy). The decline in latter
DBS Bank Ltd
Group Research
Nancy Koh, Fixed Income
nancykoh@dbs.com
Tel: 65.6878 2140
Co. Reg. No. 196800306E
www.dbs.com

was mainly attributable to the group’s strategy to focus on churning their landbank, while achieving
geographical diversification to areas outside of first-tier cities where ASPs are generally lower.
In Jan this year, the group recorded pre-sales of RMB1.9 billion, down 21% mo-m. The m-o-m
decrease was mainly on the back of a 22% decline in contract area to 172,000 sq.m. However, with
the market stabilizing and influenced by the shift in product mix and geographical distribution, the
group is focusing increasingly on quality, leading to ASP rising by 2% to RMB11,047/ sq m. This
represented the highest ASP over the past year. This increase in ASP was largely supported by
higher contributions from projects in Shenzhen and other high tier cities. Contract sales in Pearl
River Delta Region also rebounded strongly, and contributed c.66% of the contract sales for the
month, following by Western China Region of 17%. Overall, management is estimating overall ASP
for the year to be better at c.RMB8-9k/sq m, underpinned by a better geographical mix (regional).
On expectations that its sell through-rate could be maintained at a 50-55% level or better, the group
is targeting pre-sales of RMB22bn for the year. As long as the group is able to sustain its sales
execution capabilities, we think this is achievable on the back of planned saleable resources of
RMB45bn for the year, of which c.RMB1bn has been brought forward from last year. The group’s
completed but unsold stock is about RMB1.1/1.2bn, which is less than their average monthly
contract sales. The group has un-booked sales of about RMB10-11bn, of which more than twothirds
will be recognized this year, thereby helping to underscore Kaisa’s earnings visibility for
FY2013
Liquidity profile expected to improve: On expectations that its sell through-rate could be maintained
at 50-55% level or better, management has guided estimated pre-sale collections (cash inflow) for
the year of around RMB22bn. This compares with the company’s estimate on major cash outflows:
construction cost (c.RMB8-9bn), land premium payments (RMB3bn), SG/A (RMB1.5bn), interest
expense (RMB1.5bn), taxes/LAT (RMB2.5-3bn). This would still provide an adequate buffer for land
acquisitions to be made during the year. As of end FY12, Kaisa’s cash totaled almost RMB4.7bn
(compared with almost RMB4bn in FY’11). This level is expected to improve, considering the
expected increase in sales collections and upon successful sale of proposed notes. At the same
time, the group’s debt maturity profile has also improved. Currently, the group has undrawn banking
lines of about RMB1.5bn, and short-term debt of c.RMB3.1bn
Credit metrics to sustain: As proceeds from its 10.25% seven-year US$500mn notes (done in Jan
this year), were largely used to refinance the 13.5% US$120mn exchangeable term loan and the
RMB2bn senior guaranteed bonds (both due in 2014), the group’s credit metrics will not be
materially impacted by the issuance. However, with the expected improvement in cash flows, we
would expect the group’s leverage (as denoted by adjusted debt to total capitalization) to be around
50-55% level and EBITDA interest coverage to hover around 2-2.5x (FY12: 50.7% and 1.5x
respectively).
Transaction: certain key terms
- Notes will be guaranteed by subsidiary guarantors
- Will rank pari passu with all other unsecured, unsubordinated indebtedness of company, subsidiary
guarantors
- Effectively subordinated to existing and future secured obligations of the company
- CoC: 101 put option
- Optional redemption: 20xx & 20xx at par
- Fixed Charge Coverage Ratio not < than 3x
DBS Bank Ltd
Group Research
Nancy Koh, Fixed Income
nancykoh@dbs.com
Tel: 65.6878 2140
Co. Reg. No. 196800306E
www.dbs.com

- Indebtedness Incurred by the company or any Restricted Subsidiary not to exceed an amount equal
to 20% of Total Assets
- Limitation on Asset Sales: at least 75% of the consideration received consists of cash
DBS Bank Ltd
Group Research
Nancy Koh, Fixed Income
nancykoh@dbs.com
Tel: 65.6878 2140
Co. Reg. No. 196800306E
www.dbs.com

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Nancy
Group Research, Fixed Income
DBS Bank Ltd
Group Research
Nancy Koh, Fixed Income
nancykoh@dbs.com
Tel: 65.6878 2140
Co. Reg. No. 196800306E
www.dbs.com