Mainland Developer China South City Says Full-Year Loss Could Reach $640M

China South City Holdings warned Monday that its fiscal 2023 after-tax loss could range from HK$4 billion to HK$5 billion ($510 million to $640 million), with the alert coming on the heels of the Shenzhen developer’s latest loan defaults last month.

Factors in the expected loss include markdowns on investment properties, asset impairment of receivables and falling rental income, China South City said in a filing with the Hong Kong stock exchange.

The result would represent a swing from the HK$700 million profit recorded by China South City in the fiscal year that ended on 31 March 2023. Those earnings had been boosted by the sale of a 70 percent stake in the group’s Xi’an projects for $717 million.

China South City announced in February that it had missed payments on offshore bonds due in April, bringing its aggregate defaulted principal to more than $3.2 billion. The developer of logistics and trade centres in eight mainland cities has been holding talks on debt management strategies with creditors and the holders of bonds on which it has defaulted or cross-defaulted.

Offshore Creditors Circling

Reuters reported on 23 February that a group of China South City’s offshore creditors planned to file a lawsuit against Shenzhen SEZ Construction and Development Group, seeking to recover payments from the developer’s biggest state-owned shareholder under the bonds’ keepwell provision. Keepwell is an informal guarantee that a parent company will support its subsidiary’s debt obligations.

The suit would be the first filed against a state-backed developer for recovery of payments owed to creditors under the keepwell provision since China’s property crisis began, Reuters said.

China South City’s profit warning follows last week’s downgrade of fellow Shenzhen builder China Vanke by Fitch, which became the second agency to do so after Moody’s assigned the company a junk-level corporate rating earlier this month.

Also on Monday, Glorious Property Holdings filed its own profit warning with the HKEX, foreseeing a wider loss of RMB 2.5 billion ($350 million) for the year that ended on 31 December 2023. The Shanghai-based developer had reported a RMB 297.4 million loss for the previous year.

Glorious said it completed and delivered just one project in Shanghai in 2023, resulting in a likely 60 percent drop in recognised sales revenue for the year. The group also expects to record a fair value loss on investment properties of roughly double the prior-year fair value loss of RMB 893.3 million.

Shimao Debt Plan, Take Two

In other troubled-developer news, Shimao Group on Monday detailed the terms of a new debt restructuring plan after creditors baulked at a proposal released in December.

The latest plan would see Shanghai-based Shimao repay creditors via four options: short-term notes, long-term notes, zero-coupon mandatory convertible bonds or a combination of the various instruments.

Shimao’s chairman and controlling shareholder, Hui Wing Mau, has provided loans amounting to HK$3.96 billion to the group and HK$3.84 billion to subsidiaries. Under the plan, Hui would exchange $600 million of the outstanding principal of the shareholder loans into the same amount in new long-term notes and less than $600 million of the outstanding principal into the comparable amount of mandatory convertible bonds.

Reuters reported this month that Deutsche Bank, a Shimao creditor, was preparing a liquidation lawsuit in Hong Kong against the group after the German lender found the terms of the December plan unacceptable. Shimao’s offshore debt load amounts to about $11.7 billion.