First Wanda then Zhongnan, PAG is aggressively attacking China's real estate market.

PAG Group, which once "helped" Wang Jianlin, has now set its sights on Zhongnan Construction.

On the afternoon of April 20, Zhongnan Urban Construction, the controlling shareholder of Zhongnan Construction, held talks with PAG Investment Group, Jiangsu Asset Management, and other institutions regarding debt resolution and equity transactions.

It is understood that this cooperation aims to address Zhongnan Urban Construction's debt issues and achieve mutual development through equity transactions.

The market generally believes this is another rescue effort by PAG for a Chinese real estate developer following its involvement with Dalian Wanda Commercial Management. Whether Zhongnan Construction can revive its fortunes remains uncertain, but at least it may quickly extricate itself from its massive debt burden.

Zhongnan Construction Deep in Debt Crisis

According to the 2023 performance forecast disclosed by Zhongnan Construction earlier this year, its net profit attributable to shareholders in 2023 is expected to record a loss of 3 to 5 billion yuan, with an adjusted non-recurring loss of 3.5 to 5.5 billion yuan. This marks the third consecutive year of losses for Zhongnan Construction. In 2021 and 2022, its net profits attributable to shareholders were -3.382 billion yuan and -9.771 billion yuan, respectively.

Of course, in the just-concluded year of 2023, Zhongnan Construction's losses have narrowed. The company attributes this to increased completion scale and higher revenue from its real estate business, but difficulties in collecting payments and recognizing revenue from its construction business have risen, leading to increased impairment provisions and an overall annual loss.

Currently, Zhongnan Construction's operations show little sign of improvement. In the first quarter of this year, its cumulative sales amounted to only 4.73 billion yuan, a year-on-year decline of 38%.

Continued sales declines will inevitably affect future cash flow, making its debt reduction efforts even more challenging.

At present, all four of Zhongnan Construction's outstanding dollar bonds have defaulted, totaling $464.6 million. Domestically, it has five outstanding bonds worth 5.1 billion yuan, three of which have been extended to after 2028: "H9 Zhongnan 03," "H0 Zhongnan 02," and "H1 Zhongnan 01." The other two bonds, "20 Zhongnan Construction MTN001" and "20 Zhongnan Construction MTN002," totaling 2.677 billion yuan, will mature within a year.

Although Zhongnan Construction has actively pursued debt restructuring, progress has been slower than expected.

In February this year, Zhongnan Construction announced an extension of its deadline to resolve overdue interest-bearing debt risks to the end of 2024.

Previously, to advance its 2023 private share placement, the company pledged to resolve interest-bearing debt risks maturing by the end of March 2023 within six months. However, some bank and non-bank loans remain unresolved, and its overseas subsidiaries' senior note restructuring faces opposition from certain investors and liquidation risks.

Disclosed data shows that as of the end of Q3 2023, Zhongnan Construction's total assets stood at 280.576 billion yuan, with total liabilities at 256.158 billion yuan, resulting in a debt-to-asset ratio exceeding 90%. Current liabilities amounted to 230.679 billion yuan, while the company's cash on hand was only 9.114 billion yuan.

Additionally, Zhongnan Construction has been listed as a 被执行人 (enforced party) 14 times in the past year, with total enforcement amounts reaching 2.038 billion yuan. Its actual controller, Chen Jinshi, is also a 被执行人， involved in cases worth approximately 1.39 billion yuan, with 177 消费限制 (consumption restriction) records under his name.

Poor performance and high debt levels have eroded investor confidence in Zhongnan Construction. With its stock price remaining below par value for 10 consecutive days, the company faces delisting risks.

Zhongnan Construction's latest announcement states that as of April 18, its stock price had closed below 1 yuan per share for ten consecutive trading days. According to exchange regulations, this poses a risk of termination of listing.

Zhongnan Construction's debt pressure has also affected its controlling shareholder, Zhongnan Urban Construction. Currently, Zhongnan Urban Construction's shares in Zhongnan Construction have been largely frozen. As of April 16, approximately 1.444 billion shares were frozen, with another 1.295 billion shares pledged, accounting for 88.80% of its holdings.

It is reported that Zhongnan Urban Construction will auction 39.75 million unrestricted tradable shares (1.04% of total shares) on a judicial auction platform on May 16-17.

Since August 2022, Zhongnan Urban Construction and its affiliates have faced continuous forced liquidation of their holdings.

According to a July 10, 2023 announcement, 87.6029 million shares held by Zhongnan Urban Construction were forcibly liquidated, representing 5.19% of its holdings and 2.29% of Zhongnan Construction's total shares. Among these, 354,700 shares were liquidated by 财达证券 (China Securities), 30.22 million by 中邮证券 (China Post Securities), 527,200 by 长江证券 (Changjiang Securities), 1.1187 million by 国联证券 (Guolian Securities), 54.15 million by 上海浦东发展银行南通分行 (SPDB Nantong Branch), 7.25 million by 华夏银行南通分行 (Huaxia Bank Nantong Branch), and 13.9 million by 国民信托 (Guomin Trust).

The Unignorable "Middleman"

To address the crisis, Zhongnan Construction has recently engaged in frequent discussions with local governments and investment institutions.

It is reported that just days before the talks with PAG and Jiangsu Asset Management, on April 17, Zhongnan Construction held a research event attended by Zhou Guoqiang, Standing Committee Member and Executive Deputy District Chief of Haimen District, Nantong City, Jiangsu Province, Deputy District Chief Zhang Wenjin, as well as representatives from Shenwan Hongyuan Securities, Soochow Securities, and Huaying Securities.

Notably, before the Spring Festival, the head of Nantong's Financial Regulatory Bureau visited the company to assess operations and coordinate solutions. Post-festival, local authorities formulated seven measures to help the company address capital market risks:

1. Establish a government-enterprise task force to create a rapid coordination mechanism for market volatility.

2. Facilitate negotiations with financial institutions to secure better terms and reduce debt burdens.

3. Promote project-level cooperation between local state-owned enterprises and the company, supporting its participation in major local construction projects.

4. Support social capital in establishing investment funds via market mechanisms to introduce strategic investors and increase shareholdings.

5. Explore asset revitalization under market and legal frameworks to provide necessary liquidity support.

6. Assist shareholders in communicating with financial institutions and coordinate judicial plans to reduce share pledge risks.

7. Accelerate the implementation of 白名单 (whitelist) projects to ensure delivery and livelihood protection.

Now, Nantong's district government is gradually implementing these measures.

On April 2, Nantong Construction and Transportation Group ("Nantong Jianjiao"), a local state-owned enterprise, signed a strategic agreement with Zhongnan Construction's subsidiary Zhongnan Architecture for technical, general contracting, and subcontracting collaborations.

Additionally, local authorities recently guided the company in discussions with the Shenzhen Stock Exchange and Jiangsu Securities Regulatory Bureau regarding share buybacks and executive share purchases.

Regarding delisting risks, Zhongnan Construction stated in its announcement that directors and senior executives have already purchased shares worth 2.07 million yuan, with plans to continue post-disclosure of periodic reports. The company is also negotiating systemic solutions with creditors to maximize resource value and reduce expenditure pressure.

Notably, the talks with PAG and Jiangsu Asset Management were also led by the Haimen District People's Government of Nantong.

Local officials stated that these measures should help address current challenges: "We believe national policies, investor support, and company efforts will overcome short-term difficulties, and the stock price will better reflect its value."

Will PAG Ride to the Rescue?

Market observers note that since Zhongnan Urban Construction's cooperation with PAG involves equity transactions, it entails complex legal and financial issues. Final outcomes also require regulatory approvals, suggesting progress may not be as smooth as with Dalian Wanda Commercial Management. "PAG typically demands controlling stakes in equity deals—whether state-owned entities will concede remains doubtful, implying further negotiations lie ahead."

If successful, this cooperation would significantly alleviate Zhongnan Urban Construction's debt pressure while offering PAG another opportunity to deepen its investments in China's real estate market.

PAG, specializing in Asian investments and dubbed "Asia's Little Blackstone," operates in private equity, real estate, and credit. Since inception, it has invested over $70 billion, exiting $40 billion. Notable investments include Zhenai.com, Dalian Wanda Commercial Management, Universal Studios Japan, Tencent Music, and Nayuki Tea.

Recently, its most prominent investment was in Dalian Wanda Commercial Management.

In late March, PAG, CITIC Capital, funds under Ares Management, Platinum Peony (a subsidiary of Abu Dhabi Investment Authority), and Mubadala Investment Company announced a 60-billion-yuan strategic investment in Zhuhai Wanda Commercial Management. While this rescued Wang Jianlin from financial distress, it cost him majority control.

Post-investment, PAG and other investors collectively hold 60% of Zhuhai Wanda Commercial Management, while Dalian Wanda Commercial Management's stake dropped to 40%.

PAG's entry also birthed a new platform—Dalian New Alliance Commercial Management—whose subsidiary, Zhuhai Wanda Commercial Management, oversees 496 large commercial plazas, making it one of Wanda's most critical assets.

Market sources indicate the 60-billion-yuan deal will close in Q2 2024, with board restructuring and investor appointments to follow.

Whether Zhongnan Construction becomes the next Wanda remains uncertain, but China's real estate market is clearly a focal point for PAG.

Real estate is one of PAG's three core businesses, though its Chinese property investments over the past decade have been relatively low-key.

Notable deals include: the 2013 acquisition of a 65% stake in Shanghai YueDa 889 Plaza; a 2015 consortium with Vanke and Tishman Speyer to buy Shanghai Corporate Avenue 3 from Shui On Land for 3.57 billion yuan, plus $509 million in financing; and a 2017 joint venture with China Merchants Shekou to establish a 1.6-billion-yuan fund (PAG held 80%), which later acquired stakes in Shanghai China Merchants Tower, Shanghai China Merchants Plaza, and Beijing China Merchants Tower for 5 billion yuan.

PAG is also the second-largest shareholder in Spring REIT and twice invested in 华南城 (South China City).

After this, PAG's Chinese real estate activity waned until its 2023 move on debt-laden Wanda reignited its prominence.

Despite China's economic fluctuations and a sluggish property market, PAG remains bullish on both.

In late March, PAG's chairman, Shan Weijian, argued that China's housing market isn't severely oversupplied but remains unstable due to policy-suppressed demand and prices, hindering equilibrium. He advocated immediate deregulation to restore market self-correction, prevent prolonged stagnation, and revive confidence in property values and consumption to spur growth.

In February, PAG signed an agreement with Suzhou High-Tech District to establish its China headquarters there, coordinating asset management operations nationwide.

Clearly, PAG is poised for further aggressive moves in China's real estate sector.