Builders buying into new ventures fuels creditor worry

Chinese property developers investing in new ventures outside their core business are hurting their bonds.

The notes of Sunac China Holdings Ltd and Dalian Wanda Commercial Properties Co. may come under more pressure this year as the groups branch out into non-core businesses. Purchases by highly leveraged Chinese developers unrelated to real estate raise the “knee-jerk question” of whether they might be having problems with their existing business, said Bryan Collins, a fixed-income portfolio manager at Fidelity International in Hong Kong.

Chinese builders face increased competition and tighter profit margins at home as urban developments have mushroomed in recent years in a maturing market, according to MUFG Securities Asia Ltd. Moody’s Investors Service expects government measures to slow sales growth in China’s property market this year after hitting a record high in 2016.

“Whenever a company goes outside their core business, it invites questions about their strategic focus and how their credit profile will evolve over time,” said Clement Chong, senior credit analyst in Singapore at NN Investment Partners. “We would be concerned about what the new ventures would do to the business risk and financial risk profiles.”

Sunac China’s 2019 notes fell the most since August after it announced its first investment outside of property on Jan. 13. Dalian Wanda’s 2018 and 2024 bonds fell when billionaire shareholder Wang Jianlin said last year the parent is planning five substantial acquisitions to focus more on entertainment and sports.

Calls to Sunac and Dalian Wanda’s media departments during the Chinese New Year holiday went unanswered. Bloomberg