No stranger to failure, the founder of Sunac China is struggling to save his property empire

More than a decade ago, Sun Hongbin was forced to sell his real estate business to a competitor after a Chinese government crackdown on rising house prices left him running out of money.

The Chinese-born businessman said he learned lessons from failure and made a comeback with another company, Sunac China. It sold apartments in mostly affluent cities like Beijing and Shanghai and grew into one of the country’s largest developers, with the equivalent of more than $93 billion in contracted sales last year.

Mr. Sun, a naturalized American citizen in his late 50s, is now trying to prevent Sunac from suffering the same fate as China Evergrande Group EGRNF -4.73%

and other competitors that have defaulted on government-imposed borrowing restrictions.

Sunac’s Sun Hongbin in Hong Kong in 2019.


Photo:

Paul Yeung/Bloomberg News

Sunac’s fate has changed drastically in just a few months. As recently as last fall, many investors — and global rating agencies — considered Tianjin-based Sunac to be one of the strongest private real estate developers in the country. But a sell-off in Chinese home bonds and dwindling homebuyer confidence have fueled continued market dislocation and an industry slump that has threatened many real estate companies that had previously raked in billions from dollar bond sales.

The economic environment has deteriorated this year. In Shanghai, one of Sunac’s biggest markets, a lockdown for the city’s 25 million residents has halted pre-sales of apartments, a key source of income for developers. Sunac’s contracted sales fell 54% year over year in March after falling 33% in February.

Last week, Sunac missed a $29.5 million interest payment on a U.S. dollar bond for the first time and is attempting to cobble together funds within a 30-day grace period to stay afloat, according to people familiar with the matter . The company also missed the March 31 deadline to release its 2021 results, resulting in a trading suspension for its Hong Kong-listed shares. Sunac’s dollar-denominated bonds were recently bid at about 21 cents on the dollar, according to Tradeweb, a level implying a default is very likely.

Mr. Sun declined to comment on a Sunac spokesman. Late last year, he reached into his own pocket and provided Sunac with a $450 million interest-free loan, demonstrating “his long-term confidence and commitment to the group,” according to a company filing. In recent days, Sunac has also told offshore bondholders that the company intends to make its missed dollar interest payment, according to people familiar with the matter.

“He’s lost a business before, so he doesn’t want the same thing to happen again,” said James Wong, executive director and fixed income portfolio manager at GaoTeng Global Asset Management in Hong Kong. “You can see he’s trying very hard to pay it back and isn’t lying flat,” Mr Wong added.

Mr. Sun is no stranger to adversity. In the late 1980s, after earning his master’s degree in engineering from Tsinghua University in Beijing, he worked for the company now known as Legend Holdings GmbH.

, which controls Chinese computer giant Lenovo Group. Shortly after leaving the company, Mr. Sun was found guilty by a Beijing court of embezzling 130,000 yuan (about $20,153) during his tenure and sentenced to five years in prison.

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The Sunac Resort project under construction in Haiyan, China earlier this year.


Photo:

Qilai Shen/Bloomberg News

He was released after about a year and a half and eventually managed to have his 1992 conviction overturned. After his release from prison in 1994, Mr. Sun founded a real estate developer called Sunco Group. It grew rapidly by amassing land and building middle-income housing in Tianjin and more than a dozen other cities, while borrowing heavily.

Average home selling prices have almost doubled over the next decade, according to data from China’s Bureau of Statistics. By 2005, however, Beijing had taken many measures to cool down the market.

Sunco’s liquidity was constrained and to prevent the company from collapsing, Mr. Sun sold most of it to a Hong Kong-based developer in 2006 and 2007.

“Failure is failure and no apologies are needed. We made mistakes in areas like cash flow management and expanded too quickly,” Mr. Sun mused on Chinese social media some five years later, referring to Sunco’s problems.

Mr. Sun turned his attention to Sunac, which he founded before Sunco was sold, and rode the wave of another housing construction wave in China. By focusing on high-end residential complexes — with gyms, movie theaters, swimming pools and manicured gardens — in economically prosperous cities, Sunac’s contracted revenue has grown from the equivalent of $3 billion in 2011 at current exchange rates to nearly $90 billion. dollars in 2020.

Mr. Sun, who used to be a prolific blogger on Weibo, documented some of the company’s milestones.

“I got a call from an investor this morning,” he wrote one day in January 2012, the day after Sunac announced it would buy a majority stake in a real estate development project from a competitor. The investor had wondered about Sunac’s cash position and whether it was stable. “I said don’t worry about cash flow. I will not trip over the same stone twice,” Mr. Sun wrote.

In the same year, he also mused that “doing business in real estate is like planting crops. If the weather is good and the rain comes at the right time, we will all have good harvests. When there is drought or flood there can be no harvest.”

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Apartment blocks in the Sunac Resort project earlier this year.


Photo:

Qilai Shen/Bloomberg News

In 2017, Sunac was well funded and spending billions to expand into entertainment and tourism. It paid $9.3 billion for Chinese conglomerate Dalian Wanda Group’s hotel and theme park facilities and invested in a company that mainly does film production. Mr. Sun predicted that “as consumption increases, industries such as big culture, big tourism and big entertainment will grow explosively.”

According to industry data provider CRIC, Sunac was China’s third-largest developer by contract sales late last year. Mr. Sun’s net worth also increased to more than $9 billion in 2021, according to Forbes. Meanwhile, Sunac’s borrowings also grew to $47.5 billion through June 2021, due in part to a spate of bond sales in previous years and the company’s acquisitions.

Last July, Sunac raised $500 million by selling dollar bonds with coupons that were under 7%. Fitch Ratings, which gave the bonds a highly speculative rating of BB, cited Sunac’s strong selling and ongoing efforts to deleverage.

Then, in September, market sentiment changed. A document circulated on the internet appeared to show a request for government help to alleviate liquidity problems at one of Sunac’s subsidiaries. Sunac was quick to say the leaked letter was a draft that was never sent. Over the next several months, its stocks and bonds continued to plummet.

Sunac acted quickly to sell assets and has so far raised more than $3 billion through asset sales, including a minority stake in New York-listed Chinese real estate brokerage Ke Holdings inc

and a portion of his ownership of a real estate services company. It has also transferred stakes in some projects working on unfinished real estate to state developers and trusts.

But no developer can stay in business long when credit channels are closed, sales have plummeted for months and faces a wall of maturing debt. This month, Fitch retired its Sunac rating after it was lowered to CC, which is one notch above default. It said the company had billions of dollars in debt this year and that “shrunken investor confidence” could further limit its access to finance.

Yao Yu, founder of YY Rating, an independent Chinese credit research firm, said if Sunac defaults and has to go through a long and complex restructuring like Evergrande, it could have a bigger negative impact on market sentiment because it has been managed a much more cautiously, but it became a victim of the market downturn.

“Mr. Sun is a person of integrity, but all Chinese private developers have accumulated leverage in the past and are now facing the same liquidity problem,” Mr. Yao said.

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Earlier this year, a motorcyclist drove past the Sunac Resort project.


Photo:

Qilai Shen/Bloomberg News

write to Rebecca Feng at rebecca.feng@wsj.com and Cao Li at li.cao@wsj.com

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