China Vanke warns of 9 billion yuan loss on country’s housing slump
The homebuilder resorts to price discounts to reduce inventory and boost cash flow, squeezing profit margins
CHINA Vanke warned of hefty losses in the first half, as the country’s property downturn took a toll on the closely watched developer that is trying to secure cash to pay off debts.
State-backed Vanke expects to post a first-half loss of seven billion yuan (S$1.3 billion) to nine billion yuan, it said in a filing late on Tuesday (Jul 9). The projected loss signals a sharp downturn from the first quarter, when it lost 362 million yuan.
The homebuilder resorted to price discounts to reduce inventory and boost cash flow, squeezing profit margins.
Investment in some projects “has been over-optimistic”, it pointed out. “The company deeply apologises for the performance loss,” it added.
At the same time, Vanke noted it has made “repayment arrangements” on onshore bonds due in the second half of this year, and has no offshore notes maturing in the period.
Vanke’s update is the latest sign that China’s years-long property crisis continues unabated, as the government’s supportive policies have yet to materially reinvigorate homebuyer demand. The company, once considered one of the more sound players in the industry, has been raising funds and looking to sell assets to calm investor concern over liquidity stress.
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The state-backed developer has not reported a loss in H1 since at least 2003, according to Bloomberg data. In H1 2023, Vanke had a profit of 9.87 billion yuan.
The earnings warning “came significantly behind our expectation”, Jefferies Hong Kong analysts led by Calvin Leung wrote in a note. “We believe the cash flow mismatch could widen, in turn lifting reliance on asset disposal and new financing.”
Vanke said that many of its projects were developed on land acquired before 2022 that had relatively high purchase costs. Because they were sold during the subsequent market downturn, sales and gross profit margins were lower than expectations, shrinking profits.
Other developers that bought land before the property slump intensified – such as Longfor Group Holdings and Greentown China Holdings – may also issue profit warnings, according to Bloomberg Intelligence analysts Andrew Chan and Daniel Fan. “Major Chinese developers could write down their inventory as falling new-home prices are unlikely to turn around in the near term,” they wrote in a note.
Vanke noted that a package of plans was formed during H1 this year for business reformation and risk mitigation. It also sought to slim down and achieved “positive progress”. Also, 74,000 homes were delivered and Vanke “ensured repayment of open market debts on schedule”.
On the bright side, executives told some analysts on Tuesday that Vanke has reduced some of its short-term debt, according to minutes of the meeting published online by the builder.
Debt refinancing and new financing has totalled 60 billion yuan this year as over 50 billion yuan of debt has been paid.
In a separate statement on Tuesday, Vanke said that it has a combined 4.3 billion yuan of onshore bonds due in the second half of this year and has made “repayment arrangements”. It added 10.5 billion yuan of offshore bonds were repaid in H1 and that no such notes are due the rest of this year.
Vanke, whose major shareholder is a state-owned firm in Shenzhen, is one of the few distressed Chinese developers that have yet to default. Others such as Country Garden Holdings and Shimao Group Holdings face winding-up hearings in Hong Kong courts, while former giant China Evergrande Group has been ordered to liquidate.
Vanke continues to face headwinds as its home sales growth stalled in June. Its month-on-month contracted sales rose 7.9 per cent, much slower than the average 36 per cent increase at the 100 biggest real estate companies in the country.
The builder’s June sales reached a breakeven level of 25 billion yuan, Jefferies estimated, but part of it was driven by front-loaded purchases following the easing of home-buying rules in May. With diminishing room for cities to further relax property measures, analysts including Leung remain sceptical on the sustainability of sales into H2.
The preliminary interim loss is likely to extend into a full-year one, according to JPMorgan Chase property analyst Karl Chan. “As Vanke’s priority is to prevent a bond default, we think the margin squeeze will continue as Vanke would likely have to prioritise cash flows over profitability,” Chan added.
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