China developers face harsh liquidity test with looming curbs

Beijing

CHINESE developers are facing the biggest liquidity test in more than four years, exacerbating challenges brought on by stringent funding restrictions and a prolonged profitability drop.

Cash reserves of China's 50 largest listed homebuilders were just enough to cover short-term debt as of June 30, the least since 2016, when China began deleveraging its economy, going by recent earnings data compiled by Bloomberg.

That metric fell below 0.5 for eight companies - the most in four years, signalling greater risk.

Homebuilders also face renewed financing restrictions after a brief relaxation during the Covid-19 outbreak, as policymakers sought to prevent asset bubbles that could destabilise the economy.

"It's a bad signal for developers' cash flow," said Deng Hao, the chief executive of Beijing GEC Asset Management.

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"The authorities are tightening the residential sector even with the pandemic," he added. "Developers that didn't actively cut debt to control liquidity risks will face a stringent test."

China's housing watchdog and the central bank said last month that they created draft rules to monitor developers' capital.

The proposal may lead to a tightening of overall financing, said S&P Global Ratings.

Already, China's regulator of the vast interbank market took a step to curb the amount developers can raise, people familiar with the matter have said.

It is bad timing for developers. Real estate firms nationwide face a record maturity of debt in the first quarter next year.

An equivalent of around US$41 billion in local currency and US dollar bonds are due.

This may heighten repayment pressure for builders with annual sales lower than 100 billion yuan (S$19.9 billion), S&P analysts wrote in a note earlier this week.

Their debt structure has also worsened. Among the top 50 developers, short-term borrowing was equivalent to 63 per cent of long-term borrowing as of June - the highest proportion in five years.

Investors are monitoring credit risks after Tahoe Group, a high-profile luxury developer, and a unit of Tianjin Real Estate Group, a state-owned residential builder, defaulted on local bonds, Mr Deng said.

Almost all developers toed the party line at their earnings calls, vowing to pare borrowing or keep leverage in check.

The most indebted builder, China Evergrande Group, pledged a substantial debt cut on all possible fronts by year's end after a temporary failure to remake itself as a leaner company.

Its plans to rein in debt will be hurt by the weakest profit growth in at least five years.

The novel coronavirus slowed its pace of construction and stringent home-selling rules damped margins, raising concerns on the outlook.

Earnings at the top 50 edged up just 0.04 per cent in the first half, the narrowest since at least 2015.

Gross margin at the three largest players - Country Garden Holdings, Evergrande and China Vanke - shrank at least 2.9 percentage points from the year before.

"As the government aims to keep the home market stable, it is not very likely for developers to expand gross margin in future," Country Garden's chief financial officer Wu Bijun said.

"We aim to increase net profit by controlling expenses and costs," he said.

Vanke, which saw its gross margin fall by 4.4 percentage points, estimated a further compression by the end of this year.

Investors have been downbeat on Chinese developers.

Shares of 12 major Chinese developers listed in Hong Kong are trading at about 4.3 times forecast earnings, close to a nine-year low. BLOOMBERG