Under the policy dividend, real estate enterprises are facing a turning point? 70 profit and loss statements reveal the truth

Introduction: The road to reversal in the real estate industry is obstructed and long.

Author | First Finance and Economics Sun Mengfan Zhang Huimin

In the first half of 2023, the real estate industry is still seeking hope amidst uncertainty.

Recently, various policies regarding the sales of real estate have been implemented one after another, from "recognizing houses but not loans" to reducing the interest rates of existing housing loans. After the introduction of heavyweight policies, the temperature of the real estate sales side has generally risen, and the reaction of the capital market has been relatively rapid. On September 4th, the Hong Kong real estate sector led the rise with a growth rate of over 5%, with nearly 30 real estate companies experiencing a growth rate of over 10%.

Industry insiders have stated that the recent rise in stocks of key real estate companies in the Hong Kong stock market is mainly due to the continuous release of industry benefits from real estate policies, especially the rapid improvement of sales performance and financial conditions for real estate companies due to the lack of recognition for loans. Previously, real estate stocks were oversold, and with the current situation improving, the stock market is bound to perform well.

However, in the first half of this year, the number of A+H share loss making real estate companies reached 72, and real estate companies continued to become major players in profit difficulties. At the same time, the overall solvency of A-share listed real estate companies has declined, and the debt risk and liquidity issues of real estate companies cannot be ignored. At present, whether it is developers or the entire industry, in order to truly overcome difficulties, it is necessary to solve the two mountains of profitability and debt.

As the Chairman of Vanke's Board of Directors, Yu Liang, recently mentioned, real estate has resilience and new business opportunities, but it will take a relatively long time to achieve a complete transformation.

The balance sheet is still deteriorating

Looking back at the past, this round of real estate reform began with that wave of "deleveraging". Three years ago, in August 2020, in order to control the scale of interest bearing debt of real estate enterprises, regulatory authorities introduced new regulations called "three red lines". After deducting prepayments, the asset liability ratio should be greater than 70%, the net debt ratio should be greater than 100%, and the cash to short-term debt ratio should be less than twice, serving as the "red line" for the operation of real estate enterprises.

To achieve the above indicators, real estate companies have collectively launched a grand deleveraging campaign, and the industry has also briefly experienced a slight decrease in leverage ratio. However, from January to July this year, the industry added seven real estate companies with substantial debt defaults, which once again raised questions about the solvency of current real estate companies: has the balance sheet of real estate companies improved or continues to deteriorate?

From the data of the past five years, it seems that the balance sheets of real estate companies have not improved significantly. According to data from Kerui, from 2018 to 2022, the net debt ratios of sample real estate companies were 72.1%, 67.44%, 57.72%, 60.47%, and 73.52%, respectively; It can be seen that the net debt ratio of real estate companies had a significant decline in 2020 and began to recover again after 2021.

Tao Shuru, the head of enterprise research at Zhongzhi Research Institute, told First Financial that in 2022, with the market downturn, most private real estate enterprises will face a cooling down in refinancing, and both sales and financing cash inflows will be significantly affected, resulting in a significant decrease in enterprise cash compared to the decrease in total interest bearing liabilities. However, some large central state-owned enterprises and regional deep cultivated private enterprises have increased their leverage ratios due to counter trend expansion; In the downward cycle of the industry, the number of insurance companies is rapidly increasing, and the average cash to short-term debt ratio of listed real estate companies continues to decline, weakening their short-term solvency.

As of the first half of 2023, the mid-term performance data of real estate companies has been released. Journalists have conducted a panoramic scan of the asset liability ratios of A-share and H-share real estate companies through Wind data. The data shows that the overall asset liability situation of A-share real estate companies has not significantly improved, and the liquidity situation has also deteriorated.

Among the 110 A-share real estate companies surveyed, the average overall net debt ratio of real estate companies from 2020 to 2022 and mid-2023 was 66.79%, 73.73%, 79.06%, and 82.62%, respectively. The average net debt ratio of A-share real estate companies in the first half of this year increased by 3.56 percentage points compared to the end of 2022; The asset liability ratio and the asset liability ratio excluding accounts receivable have not changed much in recent years.

Specifically, in the first half of the year, the net debt ratio of 31 real estate enterprises, including Financial Street, Jinke Shares, CCCC Real Estate, China Wuyi, Rongsheng Development, Nanguo Real Estate, Gree Real Estate, Yunnan Urban Investment, Tianfang Development, Huaxia Xingfu, Shoukai Shares, Qixia Construction, Everbright Jiabao, Lujiazui, Tiantianyuan, Beijing Investment Development, the Pearl River River Shares, Suzhou Hi tech, exceeded 100%; In addition, a total of 38 real estate companies have an asset liability ratio greater than 70% after deducting advance payments, and 45 real estate companies have a cash to short-term debt ratio less than twice.

The debt ratio of H-share real estate companies is also poor. As of mid-2023, the net debt ratio of 22 real estate companies, including Huayannian, Jianye Real Estate, Yingda Real Estate, Jiazhaoye Group, Rongchuang China, Shimao Group, Yuzhou Group, Zhengrong Real Estate, Yuanyang Real Estate, Times China, R&F Real Estate, Longguang Group, and Rongxin Zhongguo, exceeded 100%.

"The current deterioration of the balance sheet is the result of the market shifting from an upward trend to a rapid downward trend, and still requires market recovery and digestion, which is not the industry norm. It is worth noting that losses caused by blind investment may still worsen the asset condition of some listed real estate companies, and cannot be compensated by market recovery." Tao Shuru believes.

The China Finance Forty People Forum recently posted on its official WeChat account that the cash flow situation of the real estate sector in the second quarter has deteriorated compared to the first quarter. Since August, large real estate companies such as Country Garden and COSCO SHIPPING have successively defaulted on their debts, reflecting that the current cash flow pressure in the real estate industry is still significant, and the corresponding debt risks have not been substantially resolved. The deterioration of the balance sheet is still ongoing.

An industry real estate analyst told reporters that among some of the companies he is currently focusing on, the net debt ratio of some conservative private enterprises and central state-owned enterprises is decreasing, and the cash to short-term debt ratio is also decreasing; But the situation is the opposite for other companies. The cash to short-term debt ratio indicator is mostly unsightly, generally around 1 or below, and some even carry regulatory funds. In fact, liquidity pressure is greater.

There are quite a few billion dollar loss making households

In addition to the deterioration of the balance sheet and debt paying ability, real estate enterprises continued to become a major source of profitability difficulties in the first half of 2023.

According to Wind data statistics, a total of 100 companies in the Shanghai and Shenzhen real estate sector have released mid-term performance. From the perspective of net profit, the profit situation of real estate companies can be described as "ice and fire". Among them, 37 real estate companies have net profits in a loss state, and 63 have achieved profitability.

In the loss making camp, * ST Oceanwide, Shoukai Shares, OCT A, Jinke Shares, * ST Xinlian, and Huaxia Happiness have net profit losses exceeding 1 billion. The largest loss in the half year operating revenue of * ST Oceanwide was approximately 4.787 billion yuan, with a net profit loss attributable to shareholders of the listed company of approximately 4.202 billion yuan and a basic loss of 0.8086 yuan per share; The loss of Shoukai shares was 1.5 billion yuan.

There are 12 real estate companies with losses ranging from 100 million to 1 billion yuan, including Financial Street, Nanguo Real Estate, Huayuan Real Estate, Zhongnan Construction, CCCC Real Estate, Everbright Jiabao, ST Shimao, Gree Real Estate, Zhonghua Enterprise, Tianfang Development, and Wuyi, China; 19 other companies, including Wantong Development, Sanxiang Impression, and Airport Group, have incurred losses of no more than 100 million yuan.

In terms of Hong Kong listed real estate companies, according to Wind data, a total of 64 H-share listed real estate companies have released their mid year 2023 performance, of which 35 companies have net profits in a loss state after tax. Country Garden, China Evergrande, COSCO Shipping Group, Rongchuang China, and Shimao Group have incurred losses exceeding 10 billion yuan.

According to the mid-term performance announcement of Country Garden in 2023, the group achieved a total revenue of approximately RMB 226.31 billion in the first half of the year. Due to the arrangement of balancing the quantity and price of some assets, as well as the gradual entry of low gross profit projects into the settlement cycle and the increase in impairment provisions for property projects, the gross profit and profit during the period were under pressure. The pre tax loss was about RMB 46.148 billion, and the loss attributable to the company's shareholders was about RMB 48.932 billion.

According to the mid-term financial report of China Evergrande, the group achieved a revenue of approximately 128.18 billion yuan, a gross profit of approximately 9.8 billion yuan, and a gross profit margin of 7.64% in the first half of the year. During the period, the operating loss was 17.38 billion yuan, the non operating loss was 15.03 billion yuan, and the income tax expenses were 6.84 billion yuan, with a total net loss of 39.25 billion yuan.

As a real estate enterprise with a major shareholder background in state-owned assets, COSCO Shipping Group's performance in the first half of the year was also under pressure, with the company's owners accounting for a loss of 18.369 billion yuan. In the first half of the year, the owner's share of losses for Rongchuang China was approximately 15.37 billion yuan, with a core net loss of approximately 9.14 billion yuan. Shimao Group had a net loss of 11.592 billion yuan in the first half of the year, with a loss of 12.058 billion yuan attributable to the company's equity holdings.

In addition to the above real estate enterprises, 15 domestic real estate enterprises, including Zhonghe Jingtaifu Group, Yuzhou Group, Jiazhaoye Group, R&F Real Estate, Yajule Group, China Aoyuan, Hongyang Real Estate, Huayuannian Holdings, Rongxin China, Longguang Group, Zhengrong Real Estate, Times China Holdings, Jingrui Holdings, Jianye Real Estate, and Zhongjun Group Holdings, suffered losses of between 1 billion and 10 billion in the first half of the year, and another 10 real estate enterprises suffered losses of between 100 million and 1 billion, while five real estate enterprises suffered losses of less than 100 million yuan.

"In the first half of 2023, the average operating income of listed real estate companies decreased year-on-year, the average net profit decreased year-on-year, and the overall profitability of the industry continued to weaken." Tao Shuru said that the profit performance of real estate companies was largely affected by the transfer of development projects, and was also affected by other factors, such as high prices in the early stage since 2016, price limits in key cities, and a decline in real estate sales prices, which were the key factors leading to sustained pressure on gross profit margins; Since 2021, housing prices have fallen, and most real estate companies have carried out asset impairment, which has had a significant impact on the current profit level; In the past two years, due to the fluctuation of the epidemic and weak consumer demand, the rental income of shopping centers has not increased significantly, and the profits of some real estate companies that hold more properties have also been affected.

At the same time, it should also be noted that there are still a small number of real estate companies that have achieved positive profits, such as Vanke A and Poly Development in the A-share sector with net profits exceeding 10 billion yuan, and China Resources Land and China Overseas Development in the domestic housing sector with net profits exceeding 10 billion yuan. Other real estate companies such as Longhu Group, Greentown China, Hesheng Chuangzhan, Yuexiu Real Estate, Xincheng Development, China Merchants Shekou, Greenland Holdings, Huafa Group, Xincheng Holdings, Jindi Group, and Binjiang Group have net profits exceeding one billion yuan.

Industry scale reduction is far from over

The two major challenges of high debt repayment pressure and difficulty in making money from real estate development have become two major obstacles in front of real estate developers. At the recent performance meeting, real estate leaders expressed their thoughts and concerns about the industry environment.

The management of Zhongnan Construction stated that currently, private real estate companies are far from ending their scale reduction, industry risks have not been lifted, land investment is still at a low level, consumers lack confidence, and market demand is still in a historical position. "We have done our best to wait for the dawn."

The management of Yuexiu Real Estate stated that since the beginning of this year, the government has introduced relevant policies and the central government has been emphasizing the need to ensure the healthy development of the real estate industry. However, since the second quarter, the overall market situation seems to have not experienced a major "V". "It's still a matter of confidence. Have customers' expectations of the current market housing prices, especially from an investment perspective, not yet reached their target?"

Yu Liang bluntly stated at the mid-term performance meeting that the real estate market has clearly fallen too far now. He stated that in the first seven months of this year, the new construction area of commercial housing in China decreased by 60% compared to 2020, and has returned to the level of 2007, which is 16 years ago; Based on this degree of decline, it is expected that the new construction area this year will only be 660 million square meters, returning to the scale of 2006.

The management of Greentown China believes that there have been four changes in the real estate market. One is that there have been significant changes in the development stage of real estate, from the incremental era to the stock era. Secondly, there is a change in the supply-demand relationship, from a stage where supply is less than demand to a stage where supply exceeds demand. Thirdly, there has been a change in market structure, shifting from a focus on basic needs to a focus on improvement. Fourthly, the function of the house has changed, returning from financial attributes to residential attributes.

In summary, after years of rapid development, the real estate industry has found it difficult to achieve a sales scale of over one billion yuan. The overall scale has declined, and the total cake volume has decreased. Coupled with high prices and limited housing prices, profit margins are limited, making it difficult to turn around the industry reality in the short term.

In order to boost the market, various policies regarding real estate sales have been implemented recently.

On August 31st, the People's Bank of China and the State Administration for Financial Supervision announced a reduction in the interest rate on first-time housing loans, with an average decrease of about 0.8 percentage points. In addition, the minimum down payment ratio for commercial housing loans across the country will be unified, and there will be no distinction between cities where "purchase restrictions" are implemented and cities where "purchase restrictions" are not implemented. The minimum down payment ratio for the first property shall not be less than 20%, and for the second property shall not be less than 30%.

As of September 1st, all four first tier cities in Beijing, Shanghai, Guangzhou, and Shenzhen have officially announced the policy of "recognizing a house but not a loan", which means that families who have a loan record but do not have a house can enjoy the down payment ratio and loan interest rate for their first home, reducing the threshold for purchasing a house and the cost of funds. In addition to first tier cities, many places such as Xiamen, Zhongshan, Foshan, Jiangmen, Huizhou, Dongguan, Wuhan, Ezhou, Chengdu, Chongqing, Jiangsu Province, and Wuxi have also proposed to implement the policy of "recognizing houses but not loans" within a week.

In addition, several cities have continued to relax their policies on purchase restrictions and sales in recent days. On September 1st, Tianjin optimized the regional purchase restriction measures and adjusted the housing purchase restriction areas in Tianjin to six districts within the city; On September 5th, Shenyang announced the cancellation of the purchase restriction policy within the second ring road and the cancellation of the restriction on the duration of housing sales.

In the future, the real estate market is expected to stabilize while accelerating differentiation, but the industry still needs time to truly stabilize.

In Yu Liang's view, based on conservative estimates such as urbanization rate and foreign experience, the industry can still guarantee a new construction area of 1-1.2 billion square meters in the future, and the market is expected to recover to a healthy and reasonable level.

The management of Longfor Group believes that the overall market performance in the first half of this year was not as good as expected at the beginning of the year, especially with a greater market downturn in July. But at the same time, through a series of policies being introduced one after another, we believe that the market will undergo certain changes. We are optimistic about the Chinese real estate market in the long run, and it will develop healthily and steadily. Consumer confidence also needs some time to recover.

Can the turning point come?

Is it possible for real estate companies to turn losses into profits after the successive release of policy "big gift packages"? The management of real estate companies has responded to the turning point of profit growth, what conditions are needed, and what measures will be taken.

At this year's mid-term performance meeting of Vanke, Zhang Hai, the chief partner of Vanke's development and operation headquarters, stated that the market has exceeded expectations in the past two years, and there is indeed greater pressure on the sales gross profit margin in the short term compared to the past. As these sales resources gradually shift towards completion and delivery, these pressures will be reflected in the settlement performance in the next two years, and there will be a certain degree of decline in the settlement gross profit stage.

Zhang Hai also stated that the company sets sales prices based on market supply and demand. If the market recovery cycle is relatively long, there will indeed be some pressure on the future sales gross profit margin. Starting from last year, Vanke's new project investment has become more stringent, and its product strength has significantly improved. The gross profit margin of the new project before tax deduction has remained above 20%. If market confidence can gradually recover and after a period of adjustment, the gross profit margin of the development and operation business will remain stable and oriented.

Guo Guanghui, Vice President of CNOOC Real Estate, stated that in order to improve the core net profit margin, management work must be done well in investment, operation, cost, and expense aspects. "CNOOC's administrative expenses account for 3.8%, financing costs are 3.54%, which is the lowest in the industry. At the same time, it also has advantages in the cost side. These advantages provide a foundation for CNOOC's core net profit margin to continue to maintain a leading position as the industry transitions to the second half."

Zhang Yadong, Chairman of the Board of Directors of Greentown China, stated at the mid-term performance meeting that the decline in gross profit margin is a phased trend in the entire residential development industry in recent years. Greentown will focus more on core cities during the land acquisition stage, with a higher land to goods ratio, resulting in a decrease in gross profit margin. However, the high safety of the land ensures the speed and price of relocation, and the net profit margin of the project is actually higher.

For distressed real estate companies, there seems to be more to do to turn losses into profits. Chen Yuhan, Director and General Manager of Zhongnan Construction, stated that in the second half of this year, Zhongnan Construction will focus on three aspects: ensuring delivery, promoting private placement and corporate bond issuance, and turning losses into profits. In order to achieve this, Zhongnan Construction will increase its debt clearance efforts with the support of relevant governments. At the same time, based on the current business situation, it will significantly reduce management costs and expenses to minimize the pressure of losses.

Tao Shuru told First Financial that with the intensive introduction of heavyweight real estate policies and the continuous implementation of favorable central and local policies, the real estate market has truly ushered in a "policy bottom". It will still take some time from the policy bottom to the market bottom, and it is expected that the sales market will enter a weak recovery process. The restoration of the profitability level of real estate enterprises still requires the coordination of policy effectiveness and market recovery.

She also stated that the current bottom of industry profits is the result of the market shifting from an upward trend to a rapid downward trend, and is not the norm in the industry. The losses caused by blind investment may still worsen the profit and loss statements of some listed real estate companies, which cannot be compensated by market recovery; However, another group of real estate companies benefit from the "high-energy, high credit, and high-quality" model, with fast sales growth and smooth completion and transfer, especially the high-quality land acquired in the past two years entering the transfer period. This group of real estate companies may still be the first to repair their profit and loss statements.

Fitch Ratings analyst Wang Xingping told First Financial that in addition to land and construction costs, the financial costs of the real estate development industry cannot be ignored. In the downward cycle of the industry, a decrease in sales and a prolonged sales cycle will lead to an increase in financial costs for real estate companies, compress profit margins, and weaken their willingness to spend on land. Therefore, it is difficult for land costs to show a significant decrease, which will further delay the arrival of the turning point in real estate company profits. "The current real estate industry has not fully emerged from the downward cycle. Only when sales stabilize and rebound can the industry truly form a positive cycle, thereby promoting real estate enterprises to turn losses around and restore profit growth."

Wang Xingping stated that at present, except for a few central and local state-owned real estate enterprises, it is difficult for most real estate enterprises to turn losses or achieve profit growth solely on their own. The main obstacle to the recovery of the real estate industry lies in the lack of confidence among various market entities. Recently, a series of policies strongly supporting the real estate industry have been intensively released, combined with many economic stimulus policies, which are expected to boost the confidence of various market entities in the macroeconomy and the real estate industry, and help the real estate industry gradually stabilize.

Zhang Hongwei, founder of Mirror Mirror Consulting, also believes that to reverse the loss situation of real estate enterprises, only sales can solve the problem. If the market improves, especially in more than 30 core cities including first and second tier cities and provincial capital cities, where the market generally improves and housing prices stop falling, it is the beginning of real estate enterprises turning losses into profits. He believes that in March next year, the market in first tier and strong second tier cities may improve, while the market in ordinary second tier cities may improve, estimated to be in the second half of next year. Considering the settlement cycle of real estate companies, it is expected that some companies that experienced lightning strikes will turn losses into profits by 2025 or the first half of 2026. The premise for a Thunderstorm enterprise to turn losses into profits is that it also has a certain amount of net assets, and the asset quality is not too poor. For some real estate companies mainly located in third - and fourth tier cities, they may disappear in this round of real estate reshuffle cycle.

Zhang Hongwei believes that real estate companies should take advantage of the recent favorable policies in the industry to quickly sell their properties, especially for projects in first - and second tier cities. This can accelerate the progress of the project, make operating cash flow positive as soon as possible, and thus turn the profit margin positive. Zhang Hongwei also mentioned that since 2022, the market has entered a period of deep adjustment. Many real estate companies, after making efforts, have found that the sales end is still ineffective, and have since fallen into a "lying flat" state. With the arrival of this round of policies, real estate companies should boost team morale and strive to promote sales.