Evergrande's steep holiday discounts could squeeze margins

[NEW YORK] China Evergrande Group shares fell after the embattled developer completed about 71 per cent of it sales target in the two months through October, offering its steepest discount in history that could squeeze margins.

The shares fell as much as 2.7 per cent after it said contracted sales were 142 billion yuan (S$28.69 billion) between Sept 1 and Oct 8, according to an exchange filing on Friday. It generated 173 billion yuan for the two months through October last year.

The world's most indebted developer is trying to cut debt by bolstering sales, offering steep discounts at 800 projects across the nation during the Golden Week holiday, traditionally a popular time for home-hunters to buy. With US$120 billion in debt - of which at least US$5.8 billion is due in the next two months - it is under pressure from investors and regulators to curb leverage.

"The latest strong sales performance, coupled with previous settlement with most of strategic investors for its listing restructuring and its upcoming two IPOs (initial public offerings), should be largely to ease the concern about its default or liquidity risk," said Raymond Cheng, a property analyst at CGS-CIMB Securities.

Evergrande is planning to conduct a secondary listing of its electric vehicle unit in China and spin off its services management unit.

Evergrande could sustain its price cuts throughout the year and squeeze gross margins to 24 per cent compared with the consensus forecast of 27 per cent, according to Bloomberg Intelligence analysts Kristy Hung and Patrick Wong.

The sales figure translates into average selling prices at 8,627 yuan per square metre during the period, 11 per cent lower than the level in August. The average price is also the lowest since August 2016, according to data compiled by Bloomberg.

Its year-to-date contract sales reached 592 billion yuan, 91 per cent of its full-year target. The company expects to reach its 2020 target of 650 billion yuan by the end of October and may aim for a higher internal goal of 800 billion yuan, it said in a statement.

The Shenzhen-based developer offered the biggest discounts since it was founded - a base cut of as much as 30 per cent - to boost sales, promising an additional cut if people made a lump sum cash payment. The company, with net-debt-to-equity of 199 per cent at the end of June, needs to comply with China's latest "three red line" regulation that dictates new debt thresholds.

Evergrande skirted a US$13 billion cash crunch last month, after persuading investors to waive their right to force repayment if it failed to win approval for a backdoor listing of its main real estate assets in China by Jan 31. The crisis spooked the nation's largest banks and financial institutions.

It's an issue of "kicking the can down the road, and the regulator is unlikely to allow it to go belly up", said Hong Hao, Bocom International head of research, adding that national property sales have been lacklustre.

Cash proceeds from project sales this year may reach 720 billion yuan, assuming it can keep converting nearly 90 per cent of sales into cash inflow just like in the first half of the year.

Evergrande's yuan bond due 2022 rose 1 per cent to 94.5 yuan as at 9.45am, and its yuan bond due 2023 rose 2.33 per cent to 92.1 yuan.

BLOOMBERG