The Chinese property crisis is the consequence of a slowing Chinese economy and is hitting local companies as well as triggering worldwide anxiety over potential contagion.

What is happening in China

Companies in China continue to miss payments to their lenders and struggle with significant debt. Amidst the falling sector-wide prices, the Chinese property giant Evergrande experienced its share prices falling by 21 per cent on Monday after missing another debt payment. The company has previously defaulted on $300 billion of debt in 2021.

Evergrande has also filed for U.S. bankruptcy and is now worth just 5.3 billion Hong Kong dollars, while back in 2017, it used to be worth 420 billion Hong Kong dollars.

Another China-based property development company, Country Garden, has experienced its dollar bonds falling below 10 cents on the dollar. Country Garden`s spokesperson has said that this month the company is expecting to lose up to 7.6 billion dollars. The company has been previously regarded as one of the safest Chinese property developers.

On September 18, a Bermuda court ordered the liquidation of Chinese property company Oceanwide’s assets due to the company’s inability to pay off debt.

These developments are starting to spread through the Chinese financial system, in particular the banking sector. China’s Minsheng Bank, where Oceanwide is a shareholder, has filed a lawsuit against the company, as it was also unable to pay off debt to the bank.

Commodity prices are reacting to the news in China with declines in major base metals. Chinese Iron ore prices fell 4 per cent on Monday, creating further ripple effects across financial assets.

Li Daokui, a former People’s Bank of China adviser said in an interview with Bloomberg that property sales will take up to a year to recover.

“The property market will come back as an important driver for the economy, however the magnitude of the impact of property as a growth engine will be much smaller,” he said.

Worldwide spill-over effect

China has been a major driver of global economic growth, responsible for more than 40 per cent. Now, as the crisis looms over the country and the growth rate drops, most European stock market indices are susceptible to headlines from the Chinese property sector.

A weakened economy in China will mean less demand for oil and other natural resources, which has significantly hit UK-listed companies such as Rio Tinto and Anglo American again on Tuesday.

Bowleven shares crashed on Tuesday after the oil exploration company said they were considered a deeply discounted placing as operations at their sole asset showed no signs of providing meaningful cashflow in the near term.

Bowleven has a 25% stake in the Etinde oil field which is operated by New Age African Global Energy. Bowleven’s problems stem from New Age seeking to sell its stake and operations effectively halted in the interim.

Despite months passing since New Age African Global Energy signed agreements to sell its 37.5% stake in the Etinde project and operatorship to Perenco, the transaction remains incomplete.

Several conditions must still be met, most critically approval from Société Nationale des Hydrocarbures, Cameroon’s national oil company. Their consent represents the next milestone, yet has been outstanding for an extensive period with uncertainty around if or when a decision will be made.

Although not party to the transaction discussions, Bowleven believes New Age and Perenco continue working to progress despite passing the formal long-stop date.

Bowleven will receive little income from the project until this situation is resolved.

Fundraise

Bowleven Cash reserves stand at approximately $1.25 million as of 23rd September 2023 after divesting remaining financial investments this year. A significantly reduced cost base was also noted in March. Per projections, these resources will only fund operations through calendar Q1 2024 assuming Bowleven’s Etinde contributions remain at current low levels, which may or may not occur pending transaction completion.

As announced in July, fundraising planning continues in 2023 with consideration of capital raising options to fund the Group. The Board originally expected an earlier transaction close.

Bowleven is currently reviewing a deeply discounted fundraising proposal from a shareholder that would allow all current shareholders to participate at the same price. While early stage, there are no certainties around if, structure or terms of any such fundraising.

ASOS is undergoing a transformation strategy in an effort to boost profitability at the expense of sales by reducing discounting and improving stock management.

The company’s sales fell 11% in the year to 3rd September but profitability and cash flow improved dramatically, especially in the second half.

ASOS’ adjusted H2 EBIT rose more than 100% compared to the same period a year ago and cashflow increased by £140m.

ASOS is implementing strategies to boost basket sizes and reduce the cost of servicing their least profitable customers. The company is also tackling problems with returns by placing restrictions on buy now, pay later purchases.

However, for all the progress in their transformation, the market seems unimpressed with the update and shares were down 1% at the time of writing.

ASOS shares are down 24% in 2023 and trade close to the lowest levels in over a decade.

“ASOS released a full-year trading statement and profitability rather than growth continues to be the order of the day. Sales were down 15% over the final quarter of the year as a wet July and August helped drive a slowdown in the UK clothing market,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

“Despite this, there’s some good news on the profitability front. Gross margins are heading back in the right direction as freight costs have pulled back from 2022’s peaks.

“The oversized inventory levels have also been brought back down to earth faster than expected, falling around 30% last year. And as a sign that the group’s profitability drive is taking shape, 9% lower customer numbers were being offset by a roughly 35% increase in profit per order. That’s expected to put operating profit at the lower end of the group’s £40-£60m full-year guidance, but should provide continued tailwinds for the bottom line moving forward.”

Belluscura has secured approval for the distribution of its X-PLOR portable oxygen unit from the Hong Kong Department of Health.

Hong Kong falls under the coverage of the exclusive licensing agreement signed last month with their Chinese distribution partner. Belluscura also said they have already received their first purchase order from Hong Kong.

Belluscura has entered into an exclusive licensing agreement worth up to $55m in royalties over a ten-year period covering China, Hong Kong, Macau and Singapore.

“We are very excited to receive the approval and begin sales in Hong Kong,” said Bob Rauker, Chief Executive Officer, Belluscura

“I am very pleased with our operations, quality control and sales teams receiving approval ahead of schedule. Hong Kong is phase one of our joint expansion with Innomax into Asia.”

Belluscura shares were over 2% higher in early trade on Tuesday. 

The FTSE 100 fell on Monday as fears around China hit the natural resources sector and sapped confidence from London’s Bluechip index.

We wrote last week that confirmation of the Bank of England’s and Federal Reserve’s decisions to keep interest steady at the current level would swiftly see attention shift back to global growth.

And that it did on Monday. Concerns about China swept over markets sending the FTSE 100 0.9% lower in early trade.

China has shown some signs of positivity in recent weeks after consumer prices surprised to the upside and returned to inflation, while manufacturing data came in slightly better.

However, any hopes China was on a better footing were dashed over the weekend by more bad news from the Chinese property sector.

“China is set to go down in history as being 2023’s biggest disappointment for investors. Having started the year in everyone’s good books amid expectations of a big economic rebound, the Asian superpower has failed to deliver. Economic growth has become a struggle compared to the levels it generated a decade ago and government stimulus initiatives have lacked bite,” said Russ Mould, investment director at AJ Bell.

“The property sector has been at the centre of the country’s troubles and it’s going from bad to worse. Evergrande is back centre stage after saying it was struggling with its debt restructuring plan following poorer-than-expected sales, causing its shares to dive and taking the Hang Seng index down for the ride. The index’s real estate sector fell by 2.5% on the day, with Evergrande’s shares down by a quarter at one point.

“The property sector is very important to China’s economy and therefore associated problems will weigh on the stock market. Investors are losing faith in China and this situation is only going to make matters worse for the markets.

“Anything bad in China typically has a negative knock-on effect to UK-listed diversified mining stocks, explaining why Rio Tinto and Anglo American were among the top fallers on the FTSE 100.”

Sentiment was hit across Europe and major indices were trading deep in the red on Monday. The German DAX was down 0.76% while the French CAC gave up 0.67%.

FTSE 100 gainers were few and far between. The top riser was CRH who announced the shift of their primary listing to the NYSE.

Entain was the FTSE 100’s biggest casualty with a drop of 11% after the gambling group said adverse sporting results hit margins during September and they saw slower growth in Australia and Italy.

Tekcapital shares were nearly 10% higher in early trade on Monday as the technology investment company built on a rally that commenced in late August.

Tekcapital is a UK intellectual property investment group focused on creating valuable products that can improve the lives of a great number of people.

Its portfolio companies are driving innovations in autonomous vehicles, electric vehicle efficiency, healthcare, food technology and smart eyewear.

In the absence of any ‘new’ news released on Monday, here are several factors at play that could be driving the Tekcapital share price higher.

MicroSalt IPO

Tekcapital’s portfolio company MicroSalt appointed Zeus Capital as their nominated advisor for an AIM IPO in late 2022. Understandably, the IPO has not yet taken place – probably because of poor market conditions so far in 2023.

However, after ARM’s successful IPO in the US, sentiment towards initial public offerings is increasing, and one may speculate that MicroSalt could use this as an opportunity to push through its listing.

Although no date is set for the IPO, Tekcapital said in an update in August that MicroSalt ‘has been making steady progress towards its planned IPO’.

The MicroSalt IPO will crystalise value for Tekcapital shareholders and anticipation around the event will likely support Tekcapital shares.

Tekcapital has a 97% stake in MicroSalt.

Guident spin-out

Autonomous vehicle safety and electric vehicle efficiency company Guident has taken the notable step to spin out their regenerative shock absorber technology into a new entity, ReVive Energy Solutions.

Spinning out regenerative shock absorber technology into ReVive Energy Solutions provides the opportunity to create clearly defined value attributed to this technology, separate from Guident’s autonomous vehicle remote control safety centres.

Speaking to the UK Investor Magazine in a recent podcast, Guident CEO Harald Braun alluded to successful tests with a leading tire manufacturer and positive conversations with EV manufacturers.

The regenerative shock absorber technology can potentially increase an EV’s range by 9 to 12 miles, a substantial increase and a major opportunity for adopters.

Tekcapital owns 100% of Guident.

Bellsucura contract wins

Portable oxygen unit developer and manufacturing company Belluscura has reported a step change in commercial traction with $15m worth of orders from US distributors and a separate royalty agreement with their Chinese partner worth up to $55m over ten years.

Tekcapital has around an 11% stake in AIM-listed Belluscura. Belluscura has a market cap of £46m.

Innovative Eyewear’s licensing agreements are set to come online

Smart eyewear technology company Innovative Eyewear has inked licensing agreements with leading lifestyle and fashion brands Reebok, Nautica and Eddie Bauer.

The products covered by these licensing agreements are set to be released to the market in the coming months.

While there is no indication of potential revenues, one would think these licensing agreements greatly boost sales.

Tekcapital owns around 40% of Innovative Eyewear, listed on the NASDAQ.