High-rolling ‘Fujian gang’ caught up in China’s real estate crisis
(Bloomberg) — “Work hard when you’re young or enjoy no reputation later in life.” So goes a famous saying from the Chinese province of Fujian.
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Ou Zongrong supported him, building a real estate empire with his roots in the province.
At first things went well. Now the tide has turned.
In February, Ou’s Zhenro Properties Group Ltd. spooked investors by saying he might not have the money to redeem a perpetual note, just weeks after promising he would. In fact, he said he might not have enough cash to pay off other short-term maturities.
It came as a shock to investors in a developer that had weathered China’s massive property crisis relatively well, never missing a government debt payment until then.
Zhenro’s stock tumbled on the news, taking its decline for the year to 77%, while its dollar bonds fell to about 20 cents on the dollar against parity in January. Ou transferred about a third of his stake in the company’s real estate services unit to settle loans following a forced sale of some Zhenro shares. Market watchers have begun to question the company’s transparency, eroding already fragile trust in the sector’s corporate governance.
The latest blow came on Wednesday, when Fitch Ratings Ltd. downgraded Zhenro to restricted default.
Zhenro’s fallout is a warning to investors of the so-called “Fujian Gang”: publicly-listed developers whose bosses hailed from the province and are famous for their risk-taking, outpacing even some of the biggest Chinese builders. In doing so, their debt skyrocketed, leaving them exposed when the government launched a nationwide drive to deleverage the sector that sparked a wave of failures.
The clan, which includes at least 11 developers traded in Hong Kong and mainland China, includes some of the most troubled names. Yango Group Co. and Yuzhou Group Holdings Co. are responsible for at least $3.24 billion in defaults on dollar bonds this year – more than half of the industry’s total – as many have asked investors for more time to repay their debt.
“Fujian-based developers such as Ronshine, Yuzhou, Zhenro have been aggressively financing land acquisitions with debt,” said Dan Wang, credit analyst at Bloomberg Intelligence. “This has made them vulnerable in a housing market downturn and in a scenario where capital markets close.”
China’s private housing market grew rapidly after its liberalization in the 1990s, driving prices up for one of the few secure investments available to the country’s emerging middle class. Developers in Fujian, a province originally famous for its garment and manufacturing businesses, were relatively behind in the real estate game and had to use leverage to catch up.
To help gain scale, many companies originating in the province moved their headquarters to larger cities, as their founders or executives sought to gain political clout. Ou, who created Zhenro’s predecessor in 1998, moved the company’s main offices to Shanghai in 2016 and is a delegate to one of China’s top advisory bodies, alongside four developer bosses with roots in the Fujian.
Although generally smaller than giants such as China Evergrande Group and Country Garden Holdings Co., aggressive land acquisitions have allowed Fujian businesses to grow rapidly. In 2016, Zhenro made headlines for buying a package from Wuhan at a record price, outbidding some of the biggest names in the country, including Sunac China Holdings Ltd. with premiums exceeding 400%. In the same year, Ronshine China Holdings Ltd. – founded by Ou’s younger brother – set a national record by spending 11 billion yuan ($1.73 billion) for a site in Shanghai, while Sansheng Holdings (Group) Co. in 2020 paid the most. never per square meter for land in the eastern city of Wuxi.
The strategy paid off: Group company revenues increased more than 10 times at Zhenro and Ronshine in the six years to 2020. Today, five of China’s top 30 developers have their roots in Fujian, against two in 2012.
But the rapid expansion has led to a pile of debt, including a large amount of money borrowed from global investors. Annual dollar bond sales by developers with roots in Fujian jumped ninefold from 2016 to peak at $16.7 billion in 2019, accounting for more than a quarter of all debt in dollars sold by the industry that year. As of March 31, the group had $32 billion in dollar bonds outstanding.
None of the 11 automakers responded to requests for comment.
As China eased some of its rules to ease the burden on the property market, Country Garden’s results showed the gap is widening between the best-funded developers and the rest. For many, the outlook remains bleak as home sales continue to decline and access to finance remains difficult.
In addition to investor concerns, Shimao Group Holdings Ltd., Powerlong Real Estate Holdings Ltd. and Ronshine are among those who delayed the release of their 2021 financial results, citing reasons including auditor resignations and the impact of Covid-19. Ronshine, which until a few months ago was considered one of the safest bets to comply with the government’s three red lines policy, was downgraded to deep junk in March by Moody’s Corp. and Fitch. Meanwhile, the chairman of Tahoe Group Co. is being questioned for an undisclosed offense.
“Liquidity pressure in China’s real estate sector is expected to cast a shadow over the land market,” Bloomberg Intelligence analysts Kristy Hung and Lisa Zhou wrote in a note. “Debt issues for private developers are expected to sap their appetite to invest, as their near-term liquidity outlook does not improve even after policymakers shift to a favorable tone.”
An additional problem is that Fujian developers have often joined forces to win big projects and share the debt burden. This means that if one is in trouble, it can easily spread to others. Zhenro has joint developments with builders such as CIFI Holdings Group Co., Yango and Shimao, and the latter two’s dollar bonds are trading at record highs.
“It’s common for second-tier developers to team up to compete with the best,” said Kenny Ng, strategist at Everbright Securities International in Hong Kong. But when general market sentiment cools, “it could trigger a chain effect.”
The crisis has cost Fujian bosses billions. Shimao’s Hui Wing Mau, Zhenro’s Ou, and CIFI’s Lin Zhong have all seen their fortunes plummet. Or is no longer a billionaire, according to the Bloomberg Billionaires Index.
Zhenro managed to buy time with a debt swap to cover five of his tickets. On Thursday, it pledged to accelerate asset sales after announcing that its financial situation had weakened.
Still, builders in Fujian face other hurdles as the crisis unfolds. Dollar bonds are trading at highly stressed levels, even for developers who haven’t defaulted.
“We have been cautious with bonds issued by Fujian developers, as they are generally more aggressive than their counterparts,” said Zhijun Zhang, chairman of private fund manager Beijing DingNuo Investment Management Co. more bond defaults.”
(Updates with Zhenro results in the third paragraph from the bottom)
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