China’s Biggest Developer Hits 5-Year Low on Industry Woes

(Bloomberg) -- If you want to see just how bad sentiment has gotten toward Chinese property firms, take a look at the share-price performance of China Vanke Co., the nation’s largest listed residential developer.

Vanke ranks among the minority of real estate firms that haven’t breached a single of the country’s “three red lines” on debt and leverage. The company remains profitable even as earnings and sales decline this year, with after-tax gross margin at 16%. Vanke had about 147 billion yuan ($23 billion) of cash on hand as of the end of September, with CICC analysts calling Vanke’s financials “solid” in a recent note.

None of that helped the shares. They plunged 17% in a seven-day rout through Tuesday in Shenzhen to close at their lowest level since August 2016. The losing streak mirrored a slump in the Shanghai property stock index. Stress has yet to spread to its dollar bonds, which have remained at par.

News that the government plans to expand property tax trials to cities beyond Shanghai and Chongqing has frayed investors’ nerves at a time when the industry is being pummeled by tough rules on leverage and slumping sales. Officials have yet to provide details on where the tax will be levied or how large it will be. Residential prices fell for the first time in more than six years in September.

Yet Vanke’s year-to-date sales through October only fell 5%, according to a Citigroup Inc. note citing data from research firm China Real Estate Information Corp. The drop is 30% for China Evergrande Group and 13% for Guangzhou R&F Properties Co., the note showed.

Vanke’s yuan shares were 2.3% higher at the midday break. The company is rated investment grade at Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, with a stable outlook at all three credit assessors.

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