China Developers Were in Weakened Position Even Before Virus Hit
China Developers Were in Weakened Position Even Before Virus Hit
(Bloomberg) --
Developers in China were in a weakened state even before this year’s coronavirus hit, adding to challenges as they head into what’s 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. 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 ($2 trillion) new-home market may slump as much as 15% this year, Shimao Property Holdings Ltd.’s 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.
Here are four charts that illustrate developers’ financial state before the outbreak:
1. Margins Decline
Average profit margins at the 10 developers sunk to the lowest in three years on surging land costs and home-price caps imposed by authorities, Bloomberg calculations show.
The heads of China Vanke Co. and China Resources Land Ltd. both cautioned that a decline in gross margin will be a long-term sector trend, raising concerns about future earnings growth.
It’s 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% on many of its projects in February.
2. Cash Coverage Drops
Cash reserves of the 10 averaged 1.3 times short-term debt as of Dec. 31, the least since 2018. Developers nationwide have the equivalent of around $340 billion in local currency and U.S. 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.
3. Healthier Leverage
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 Co., among the nation’s most-indebted developers, recognized 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 deleveraging efforts will include offloading some tourism assets.
| For more on China developer earnings: |
|---|
Evergrande Vows Aggressive Debt Cutting in Strategy Overhaul Evergrande’s Aggressive Plan to Cut Debt Met With Skepticism China’s Largest-Listed Builder Sees ‘Substantial’ Virus Strain Country Garden Confident About China’s Home Market Despite Virus |
4. Modest Sales Targets
Most top developers outlined sharply lower sales-growth goals. Smaller firms including China SCE Group Holdings Ltd. 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.
©2020 Bloomberg L.P.
With assistance from Bloomberg