Since September 30, 2014, Chen Zhuolin, Chairman of Agile Property, has been under residential surveillance and controlled by the Kunming People's Procuratorate. We are convinced that this incident will undermine the Company's operation and financing capabilities, and bring more uncertainty to the Company's further development.

As of the end of this June, the Company's short-term debt has amounted to RMB14.6 billion, while its current cash reserve in banks was only RMB13.9 billion. The poor collection of payment in property sales and tight bank credit policy pose a tough challenge for the short-term solvency of Agile Property. When industry prosperity in recession, rights issue at a discount becomes a major method for a company to obtain funds with high efficiency but low cost, yet it's only used for urgent financial crisis. We expect that, in the coming fourth quarter, Agile Property will get cash by substantial promotion campaigns and project transfer to ensure its short-term financial security.

How we view this

The greatest pressure in short term is from the refinancing risk from the $475 million bridge loan due in December, 2014. On the morning of October 16, Agile Property released an financing announcement to raise fund totaling HKD1.65 billion on the basis of one rights share for every eight existing shares, thus to replace the previous financing package totaling HKD2.8 billion on the basis of one rights share for every eight existing shares, which was suddenly terminated in early October. The sudden termination of financing is directly related to Chen's residential surveillance by the Yunnan Procuratorate. After the incident of Chen, Agile Property released a new financing announcement in a short period of time, and the amount of financing has decreased dramatically by 40%. This reflects that the Company's financing need is urgent, and that payment collection in real estate sales is awkward.

Another financial risk that might be triggered by Chen's incident is that Agile Property may fall in a default situation over the control rights of the unexpired bank loans and bonds. Chen has been a major leader and participant in Agile Property's strategic decision-making and operations. This event will force the Agile Property management to change the modification terms on the internal control rights, thus they have no choice but to accept higher financing costs and more stringent repayment conditions. Overall, Chen's incident will make Agile Property's business and financial condition much worse: the company¡¦s management will have to face more difficulties and challenges, and the Company's reputation and the investors` confidence also need more time to recover.

Over the past few months, even though frequent markdown measures were taken, Agile Property's sales were still unsatisfactory. This is related to the sluggish market in the whole. However, it's more concerned with Agile Property` product positioning and regional layout. In the current weak macroeconomic environment, sales of leisure products, which are with greater demand elasticity, are fairly risky. In the next few months, the Company will unavoidably continue its markdown promotion strategy, the gross margins will continue to decline, and residential property sales are hardly to be optimistic, therefore the annual sales target of RMB48 billion may force the Company to sell its hotels and its commercial real estates.

Investment Action

We believe that Agile Property is likely to raise enough funds to pay short-term debts, but the financing prospects may deteriorate with high cost, which would bring negative impact on the Company's business. As to the annual sales target, we believe it can be hardly achieved. Overall, we will give Agile Property a "Neutral" appraisal, and the target price for the next 12 months is HKD3.8.

Click Here for PDF format...