Worst China property earnings since 2008 signal more stock angst

CHINA’S property developers posted their worst first-half earnings in over a decade, an outcome that will likely pressure stocks further even as the government boosts efforts to stabilize the sector.

Total net income for the 136 real estate companies that reported earnings in Hong Kong and China slumped 87 per cent in the first 6 months of the year to just 17.6 billion yuan (S$3.6 billion), Bloomberg data showed. That makes it the worst half year since data was available in 2008.

A clampdown on leverage, China’s strict Covid Zero policy and a weakening economy was to blame for much of the fallout in the property sector this year. Country Garden Holdings, the largest builder by sales, warned that the crisis has yet to bottom after reporting net income tumbled by a record 96 per cent. Logan Group swung to a net loss of 540.6 million yuan.

Government plans to lower mortgage rates and offer guarantees on some upcoming onshore bond offerings have done little to lift sentiment, with a gauge of property developers down 27 per cent so far this year. The cash crunch has pushed China’s corporate-bond defaults to a record. 

“We continue to struggle to get a true sense of the bottoms for earnings given developers’ flexibility to slow completions (as cash flows remain tight), which hurts revenue bookings, and price cuts, which hurt margins,” HSBC analysts led by Michelle Kwok wrote in a note on Wednesday (Aug 31). The bank added it is making meaningful cuts to its 2022 earnings estimates. 

Great divide

The earnings season offered greater clarity into the winners and losers from the ongoing property woes. State- and semi-state-owned firms such as China Vanke managed to fare better than their privately-owned peers thanks to their strong cash positions and ability to navigate the many pitfalls. 

“China’s real estate development market will likely become dominated by SOEs (state-owned enterprises), supplemented by healthier private firms that are obedient to the authorities,” said Naoto Saito, chief researcher at Daiwa Institute of Research.

Private firms’ liquidity woes deepened in the first half of the year, said UBS Group, with cash holdings down 19 per cent compared with a 2 per cent drop for state-owned companies such as China Resources Land and China Overseas Land & Investment.

State-owned firms were also able to borrow more in the first half of the year, the bank added. These companies’ total debt rose 11 per cent compared to their private peers, whose levels fell by 5 per cent. All this has implications for chances of survival, analysts including John Lam wrote in a recent note. 

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Investors said the best end game is a consolidation of the sector to avoid a deflationary spiral where too many companies compete in a shrinking market. That would also take pressure off housing prices. Before then, there will be little opportunity for upside.

“What we need to see from China is more of a targeted approach in terms of the property space, meaning that the most effective way I think in the near term would be some sort of sector consolidation,” said Ben Luk, a senior multi-asset strategist at State Street Global Markets. He added the firm has essentially avoided the sector altogether for some time. BLOOMBERG