Initiate on FANHAI’20 with Buy and FANHAI’19 with Hold

We initiate on Oceanwide (“FANHAI”) ‘20C18 with a CreditBuy and FANHAI’19C17 with a CreditHold. The FANHAI curve is slightly inverted; having saidthat, we favor FANHAI’20C18 as FANHAI’19C17 has a much higher dollarprice. The coupon on the FANHAI’20 USD bond is 9.625% but there is athereafter potential step-up of 0-100bps should the issuer chooses not to callthe bond at the end of the third year (i.e., Aug 2018). Overall, while we thinkFANHAI’s credit profile is weak with high leverage, it is set to benefit from itsapproved but pending share placement (whose size is up to RMB5.75bn, ofwhich RMB0.75bn is slated for debt repayment) and potential sales and ASPupside from the Beijing, Wuhan, and Shanghai projects. Its finance businessshould benefit from the re-opening of A-share IPOs or improvement in capitalmarkets sentiment. We believe the weak credit profile has been priced in; thecompany’s debt maturity profile and cost of borrowing have been improving.

We see no pure comparables to FANHAI. We compare FANHAI’20C18 tosingle-B Chinese developers and find its valuation attractive. E.g., it offers~60bp of pick-up in Z-spread (ask Z-spread of ~729bp; ask price of 103.25;YTM of 8.8%) vs. CHINSC’20C18 (ask Z-spread of ~668bp). It trades close toTPHL’20C’18 in Z-spread. FANHAI’s USD bonds are guaranteed by OceanwideHoldings Co., Ltd (000046.CH). The parent China Oceanwide Holdings Grouphas provided a keepwell for the ‘19s to provide liquidity support if necessary.

Favorable vintaged landbank & longer-term transformation into a conglomerate

We like FANHAI’s good and vintaged landbank in China, especially in Beijingand Wuhan which should help to achieve considerably above-sector averagemargins. We expect FANHAI to achieve above-sector contract sales growth in2016. FANHAI has not landbanked in China for a long time, and instead, newlandbanking has been in the U.S. and it has also expanded into varioussegments in the finance and insurance sectors. We believe the U.S. projectlocations are satisfactory; e.g., the two New York projects are in SouthernManhattan, and its First and Mission project is not far from the Embarcadero.

The investments in various segments of the financial industry (includinginsurance, brokerage, asset management, and investments) could bringexecution risks. Having said that, we have seen an improvement in thecompany’s cashflow in 9M15 and Fitch expects its cashflow from operationsto be positive from 2016, according to an August press release. Animprovement in A-share market and/or re-opening of A-share listings couldalso benefit FANHAI’s finance operations, in our view.

Upside risks include successful equity fund raising(s), better execution inproperty sales and/or finance businesses, and longer-term asset monetizationvia listing of some finance business. Downside risks include more-thanexpectedaggressive expansion, and unfavorable policy or political changes.