Feb 5, 2023
China Developers Flag Worst Earnings in Years on Historic Slump
(Bloomberg) -- China’s unprecedented housing slump and construction halt led to the worst earnings for real estate developers in at least seven years, according to Bloomberg estimates.
Among 60 mainland-listed property firms that made profit alerts by a Jan. 31 deadline, 60% expected losses for last year, when a credit crunch sent shockwaves through the industry and triggered defaults, Bloomberg calculations based on public data show. Only 5% of firms turned profitable, while another 5% saw net income growing from a year earlier. The rest said profit fell.
The figures shed light on the scale of the property meltdown’s impact on the industry, which is now counting on government measures to ease financing as home sales and prices continue to tumble. They also suggest grim reading at next month’s results for larger players that are only listed in Hong Kong.
“Developers’ earnings took a severe hit from the deep sector downturn and debt defaults,” said Liu Shui, research director at China Index Holdings. “They won’t be confident enough to start making new investments soon.”
As part of a sweeping sector rescue late last year, China ended a ban on onshore equity fundraising for property developers and widened a program to facilitate local bond sales with government guarantees. State banks have also pledged to boost loans to the sector.
In a sign of how the record downturn has hurt bottom lines, defaulted developer Shimao Group Holdings Ltd.’s main unit onshore is expected to record its first full-year loss in 21 years. While the Hong Kong-listed parent company hasn’t disclosed full-year earnings for 2021, it’s likely to report a meaningful loss in 2022, Bloomberg Intelligence analyst Daniel Fan wrote in a note last week.
The heaviest loss was at RiseSun Real Estate Development Co., which said its red ink probably swelled five times to as much as 25 billion yuan ($3.7 billion).
The majority of developers that turned profitable last year relied on “random events” instead of business improvements, which isn’t sustainable, Liu added.
The biggest gainer was China Fortune Land Development Co., whose offshore debt restructuring plan went effective last week after year-long negotiations with overseas bondholders. The Beijing-based firm said it swung to a profit of as much as 1.6 billion yuan last year from a loss of up to 39 billion yuan in 2021. Still, it had a non-recurring loss of as much as 17 billion yuan when excluding one-time income stemming from the restructuring, the developer added.
Even some of the biggest state-owned players warned of a sharp profit slide. Poly Developments & Holdings Group Co., the country’s biggest state developer by sales, said net income likely slid 33% from a year earlier, mainly due to shrinking margin. China Merchants Shekou Industrial Zone Holdings Co., a top 10 player, flagged a plunge of as much as 63%.
“The worse-than-expected earnings at state firms will be a drag on the sector stocks,” said CCB International Securities Ltd. analysts including Lung Siufung. “The current valuation on these SOE companies could be unreasonable.”
Citigroup Inc. analysts including Griffin Chan advised investors to look through the lackluster results, forecasting a mild stock retreat this month on earnings downgrades and profit warnings. A Bloomberg Intelligence gauge of Chinese developer stocks has jumped 66% since the end of October.
Major property players listed in Hong Kong are scheduled to post full-year earnings by a March 31 deadline.
Last year’s results are a “sunk cost,” and could help to assess a “bottom” for developers, analysts led by Chan wrote in a report last week, adding that a sales-driven stock rally may start to emerge in coming months.
--With assistance from Coco Hu.
©2023 Bloomberg L.P.