June 5, 2012 / 12:31 PM / 5 years ago

Bond investors say Zoomlion hype unmerited

SINGAPORE, June 5 (IFR) - Zoomlion, the Chinese manufacturer of heavy equipment used in the construction industry, is the subject of intense market chatter following the company's application for credit facilities of up to CNY140bn (USD21.97bn).

However, numerous market players are of the opinion that hedge funds, which are short the stock, are attempting to use the credit facility application as evidence that the company faces a liquidity squeeze, in order to push down Zoomlion's stock in Hong Kong and Shanghai. Meanwhile, several stock analysts are quite bullish on the stock.

In fact, according to online financial information service ET Net, on May 31, 21.5% of the Zoomlion stock that traded was used for short positions.

Two weeks ago, on May 18, more than 30% of the stock trading was shorted. The rumor on the Street is that some 20% of Zoomlion's free float is out on loan in order to facilitate coverage of short positions, the bulk of which have been placed by fast money, with the stock having fallen 5.5% and 3.8% yesterday in Hong Kong and Shanghai respectively on the back of ongoing hedge fund shorting.

The application, revealed at a shareholders meeting last Sunday, comes at a time when there are concerns regarding the availability of credit for China's corporates in the face of contracting onshore bank lending.

According to Fitch ratings, Total Societal Financing (TSF) in China will fall to Rmb16.5trn-Rmb17trn this year, from 2011s Rmb17trn, representing the first decline in credit growth in the country since 2008.

Despite the hefty credit application bond investors seemed unconcerned, and the company's USD400m due 2017 bonds were last rock solid at 99/100 and yielding 6.84% on the offered side.

"Zoomlion's outstanding offshore bond, although tightly priced at launch last March in our opinion, was widely placed with PRC banks and trades technically tight for that reason as well as being deeply illiquid," said a Hong Kong-based fund manager.

"Despite the eye-popping number on the proposed credit, Zoomlion has pretty solid metrics and although there have been rumours that the company is engaged in extending credit to cash-strapped customers in order to pad sales, there is no hard evidence of that at this stage."

He added that there has been talk in the markets since the bond was issued in March that Zoomlion would seek to tap it for up to USD600m. But he said he would not be drawn in even with the most generous new issue concession, given that Double B five-year PRC US dollar paper is available at yields 2%-3% above where Zoomlion's bond is trading.

A further damper to the hype that has been whipped up on the credit application is that it represents an extension of the CNY100bn in credit lines the company has already secured from onshore and offshore banks last year. According to the fund manager it will, if drawn, be devoted to the company's capex needs to fund its expansion, which has been turbo-charged in recent years.

Zoomlion has enjoyed heady revenue growth over the past three years, registering plus 53% in 2009, 55% in 2010 and 44% last year, with a 14.6% reduction in its net debt helping propel Ebitda growth last year to 59% year-on-year.

Still, with China's construction industry facing sluggish earnings on the back of the country's declining property market, retaining these healthy metrics will be a challenge going forward.

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