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China Evergrande seeks to sustain profit margin

Property developer says it will stay away from small cities and expensive land

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Evergrande shares ended down 2 per cent ahead of the results, lagging a 0.3 per cent gain in the benchmark share price index.

Hong Kong

CHINA Evergrande Group , the country's second-largest property developer by sales, said it will stay away from small cities and expensive land to sustain margins after posting the industry's highest-ever first-half profit.

Core profit, which excludes revaluation gains and non-recurring items, doubled to 55.01 billion yuan (S$11 billion) in the first six months of 2018, in line with its forecast, helped by lower expenses and an increase in the number of properties delivered.

The result comes as major Chinese developers such as China Vanke and Country Garden Holdings also post record first-half profit, after sales of apartments built on land purchased cheaply a few years prior.

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Profit attributable to shareholders jumped 63.6 per cent to 30.81 billion yuan, while revenue rose 59.8 per cent to 300.35 billion yuan. Net profit margin improved 5.4 percentage points to 17.7 per cent.

"Our future goal is expanding in core tier-one and tier-two cities, and tier-three cities with economic growth; we don't plan to expand into tier-four cities," vice-chairman and CEO Xia Haijun told an earnings conference on Tuesday, saying the firm would build its land bank by targeting large, cheap land.

Evergrande's net gearing ratio was 127.3 per cent at June 30 from 184 per cent at the end of 2017, with total borrowings down as much as 8 per cent from the end of December at 671.13 billion yuan.

In August last year, the developer, with one of the highest debt ratios in the industry and one of the highest debt piles in China at the time, pledged to cut its net gearing ratio to about 70 per cent by June 2020 from 240 per cent in June 2017.

To de-leverage, Evergrande has slowed down land purchases, analysts said, citing industry data.

Commenting on China's property market, Mr Xia said government policy measures have helped promote steady development of the sector, and that he expected these non-market measures to be phased out when home prices eventually stabilise.

Evergrande shares ended down 2 per cent ahead of the results, lagging a 0.3 per cent gain in the benchmark share price index. They have gained nearly 10 per cent so far this year.

The developer is planning a so-called backdoor listing in China, where valuations are usually higher than in Hong Kong, by injecting almost all of its property assets held by Hengda Real Estate Group into Shenzhen Real Estate.

Mr Xia said the developer is in "smooth communication" with China's securities regulator. He did not disclose a time table citing volatility in the A-share market. REUTERS