China’s property developers are playing a government sponsored game of pass the parcel. Dalian Wanda Commercial Properties, whose parent is under state observation for being too leveraged and acquisitive, is flipping roughly Rmb30bn ($4.75bn) each of hotel and theme park assets along with associated debt to Sunac, a medium-sized developer. Sunac adds to its rapidly growing portfolio while Wanda trims its own leverage.
Wanda has pledged to cut debt and shift to an “asset-light” business model, developing real estate assets without any balance sheet exposure. Progress towards this goal has so far been slow. In December S&P rated Wanda’s commercial properties unit at just above junk. Yet a regulatory filing revealed on Tuesday that it has pledged to “procure” a Rmb30bn loan for Sunac to help it complete the hotels and parks deal. Depending on whether Wanda actually lends Sunac any money or simply pull strings at a bank on the buyer’s behalf, this could be a good deal for both sides.
Nomura estimates that the theme parks come with Rmb40bn of debt, and that the two businesses between them contain Rmb30bn of cash. On analyst assumptions that the hotels are debt-free, Wanda’s net debt should reduce by Rmb10bn. The theme parks generate solid profits; the filing reveals a 15 per cent return on assets in the past year, more than Sunac’s ROA in any of the past 10 years. So the Tianjin-based company could diversify its exposure beyond residential property and improve its returns.