Listed Chinese developers flag higher sales to gain rank

Hong Kong

THE publication of eye-catching sales targets by many Chinese developers this year has contributed to a sharp rise in their share prices as investors built in rosy expectations for the companies.

The targets by the developers with listings in Hong Kong are included in monthly sales updates required by the stock market regulator, and in other statements.

But analysts and fund managers say investors, especially retail investors, need to read the statements carefully because in many cases the developers are highlighting the sales expected from their operations plus joint ventures, referred to as headline sales.

Those figures can be more than double the sales that these firms can book in their financial results as attributable sales.

"Professional investors know they need to adjust accordingly," said Alvin Cheung, associate director of Prudential Brokerage in Hong Kong. "But I'm not sure whether retail investors also know."

The developers are not flouting any rules and analysts say that while share prices are rising, investors are not taking much notice.

"Once the market turns around, then the problem will surface," Mr Cheung said.

Country Garden, China's biggest developer by headline sales, publishes a monthly sales figure that incorporates its joint ventures and associates. Greentown China provides both headline and attributable figures.

Agile Group, changed the reporting on its monthly income statements last November from sales of "the company and its subsidiaries" to sales of "the group, together with its joint ventures and associates". It also provides attributable figures in footnotes.

A Reuters calculation based on 2017 sales data provided by real estate research firm CRIC, shows that headline sales are between 30 per cent and 170 per cent higher than attributable sales in 18 of the top 50 property companies by headline sales.

"Of course we use the bigger figure; everyone is fighting to be the top 10," said a Beijing-based developer, who declined to be identified given the sensitivity of the topic.

When Shanghai-based CIFI Holdings first announced it was targeting a 35 per cent rise in headline sales in 2018 to 140 billion yuan (S$29 billion), its shares jumped to record high the next day.

In 2017, its attributable sales of 55 billion yuan were 55 per cent of its headline sales.

Country Garden has declared headline sales of 550 billion yuan for 2017. Stripped down, the attributable sales would be 396 billion yuan, CRIC data showed.

When asked if the Hong Kong Stock Exchange was concerned that investors could be confused by the headline sales figures, a spokesman said "under the Listing Rules issuers are obliged to release periodic financial statements prepared under applicable accounting standards. In addition to this, issuers' regulatory documents must be accurate and complete in all material respects and not misleading or deceptive".

Country Garden said that it would not consider including attributable figures in its sales statements "because most of the companies in the industry do not report attributable figures".

"It is part of the game that companies present the data in a way that's most positive to them, that's why investors cannot blindly take in what companies tell them and have to do their own homework," said Victor Yeung, chief investment officer of Hong Kong based Admiral Investment, which mainly invests in real estate investment trusts (Reits).

Investors and credit ratings agencies also face a difficult task in calculating how much debt property developers hold.

"It brings into question whether Chinese developers should follow the disclosure practice in more sophisticated capital markets; higher transparency helps to lower stock volatility," Mr Yeung said. REUTERS