Less than three months after revealing that it had defaulted on more than RMB 1.1 billion ($174 million) in debts, beleaguered Chinese real estate developer Zhonghong Holdings is struggling to explain a deal with Shenzhen-based Kaisa Group that could bring the company much needed financial relief, but only if Zhonghong can answer some questions from the Shenzhen Stock Exchange first.
On 8 July, Zhonghong Holdings signed an agreement to transfer 100 percent of the shares in its Ruyi Island Project in Hainan province to an indirect subsidiary of Kaisa Group, at a price of RMB 1.4 billion ($200 million).
However, after receiving a request from the Shenzhen Exchange last Thursday to submit supporting information regarding the proposed equity transfer by July 18th, Zhonghong today asked for an extension until July 23.
The inquiry from the exchange had questions for Zhonghong regarding the intended use of proceeds from the equity sale and the development status of the project. The authorities were also interested in knowing more about the financial details and beneficiary ownership of the Kaisa unit, Hainan Luosheng Special Investment Co., Ltd.
Zhonghong Now RMB 4.4 Bil in Arrears
The holdup in Zhonghong’s asset sale is critical to the Beijing-based developer’s financial viability, as RMB 2.2 billion of the company’s shares held by its offshore affiliate, Zhonghong Zhuoye have been frozen since December last year.
In a separate announcement to the Shenzhen exchange today, Zhonghong Holdings revealed that its overdue debts and interest obligations have now reached around RMB 4.37 billion in total.
Creditors have been going after Zhonghong chairman Wang Yonghong’s personal debts too with the Hong Kong branch of auction house Christie’s suing the property tycoon for HK$120 million last year after Wang failed to pay up for his record-setting HK$140 million purchase of a celadon vase at auction in 2016.
Selling Off the RMB 12.9B Crown Jewel
In announcing the agreement to sell its Ruyi Island Project to Hainan Luosheng to the stock exchange on July 11th, Zhonghong indicated that the equity transfer would bring the company RMB 73 million in cash, as well as over RMB 1 billion in investment income, which could be used to reduce its liabilities and financial expenses.
Zhonghong set up the Ruyi Island project as a joint venture with China Railway Group in 2012, with the JV paying RMB 3 billion to purchase the resort site. In its 2017 annual report, Zhonghong said that it had invested over RMB 5.4 billion into the project to date, which was expected to cost the company a total of RMB 12.9 billion by its scheduled completion in December 2019.
As of September 30, 2017, the total assets of the Ruyi Island project were listed at RMB 5.7 billion, and the project accounted for over 17 percent of Zhonghong’s audited total assets at the end of 2016.
However, the Ruyi Island reclamation was suspended in August 2017 because of environmental problems and funding issues. In March this year, Zhonghong announced the project was suspended again for policy reasons.
Cleaning Up the Asset Before the Sale
In its notice to Zhonghong last week the stock exchange inquired concerning necessary planning approvals for the Ruyi Island project, with the development still needing to secure rights to reclaim land for the man-made island.
The exchange also requested details of how Zhonghong would repay its creditors using the proceeds of the proposed equity sale, while raising questions about apparent irregularities in the accounts for the Ruyi Island project
Kaisa Financial Resources Also in Question
In addition to looking into Zhonghong’s health and the status of the resort project, in its notice to Zhonghong last week the stock exchange asked for clarification of the relationship between Kaisa Group and Hainan Luosheng, which had been established on June 20th with registered capital of RMB 10 million.
Hainan Luosheng lists five shareholders, w held by two investment companies directly controlled by Kaisa Group.
The new spinoff is said to be 40 percent owned by Kaisa, with local media reports indicating that Kaisa Group CEO Kwok Ying-shing arranging the transaction. However, the exchange demanded evidence that the beneficiary owners guaranteed adequate financial support to allow Hainan Luosheng to take over the project, as well as requesting details on the nature of its assets.
Hong Kong-listed Kaisa is best known for its own default episode in early 2015, and the company still has a debt to equity ratio of 85.9 percent, beyond the industry-recognized red line of 80 percent. The company’s 2017 annual report showed total assets of RMB 213.4 billion while total liabilities reached RMB 183.4 billion.
Policy Risks Cast Shadow Over Hainan Project
Should Kaisa ultimately succeed in acquiring the Ruyi Island project, it could soon find itself facing fresh difficulties due to changes in home sales policies on Hainan Island, which the government declared in April would become a free trade zone by 2020.
In March, the Hainan government banned non-locals from buying homes in the island unless they can prove payment of local social security obligations for at least 24 months.
With Hainan popular more as a resort destination than as a place of employment, non-local buyers accounted for 88 percent of the island’s home sales in the first half of last year.