China developers already weak before pandemic

An analysis of 10 large real estate firms' full-year earnings showed margins declined and liquidity buffers weakened

Shanghai

DEVELOPERS in China were in a weakened state even before this year's coronavirus hit, adding to challenges as they head into what is shaping up to be the worst economic slump in more than four decades.

A Bloomberg analysis of 10 large real estate firms' full-year earnings showed margins declined and liquidity buffers weakened in the 12 months ended Dec 31 last year.

Now, property companies are facing more turbulence, with apartment showrooms still shuttered amid the pandemic and buyers unwilling to make home purchases.

Market watchers say some developers will have to offer deep discounts to meet sales targets, which is likely to further erode margins.

At the same time, many companies have big debt loads they need to service.

The nation's 14 trillion yuan (S$2.82 trillion) new-home market may slump as much as 15 per cent this year, Shimao Property Holdings' president Hui Sai Tan said.

Shimao has refrained from setting an ambitious 2020 sales target due to Covid-19, he told reporters at an earnings briefing last week.

Average profit margins at the 10 developers sank to the lowest in three years on surging land costs and home-price caps imposed by authorities, Bloomberg calculations showed.

The heads of China Vanke and China Resources Land both cautioned that a decline in gross margin will be a long-term sector trend, raising concerns about future earnings growth.

It is particularly worrying considering developers are going to have to offer steep discounts this year to spur sales.

China Evergrande Group, the nation's biggest residential developer by revenue, was offering discounts of up to 25 per cent on many of its projects in February.

The cash reserves of the 10 real estate firms averaged 1.3 times short-term debt as of Dec 31, the least since 2018.

Developers nationwide have the equivalent of around US$340 billion in local currency and US dollar bonds due by the end of 2021.

Averting a cash crunch is a top priority for homebuilders. A slump in transactions since late January, when the virus began spreading in China, is making companies rethink the minimum cash buffers needed to withstand unforeseen shocks, Bloomberg Intelligence analyst Kristy Hung said.

On a positive note, most developers have been paring leverage to prepare for a tougher 2020.

Net debt to equity, a key measure of gearing, declined to the lowest since 2012 last year at the 10 firms.

Evergrande and Sunac China Holdings, among the nation's most-indebted developers, recognised that risk.

At its earnings briefing last month, Evergrande unveiled an aggressive three-year strategy that includes cutting its total debt load by half. Sunac's de-leveraging efforts will include offloading some tourism assets.

Most top developers outlined sharply lower sales-growth goals.

Smaller firms including China SCE Group Holdings even cut forecasts made at the start of the year.

Investors, meanwhile, have never been so downbeat on the outlook for Chinese developers.

Shares of 22 major developers listed in Hong Kong are trading at about 4.2 times their forecast earnings, near a record low.

An index tracking the firms has underperformed the benchmark Hang Seng for most of the past three years. BLOOMBERG

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