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Chinese developers tread with caution after incomes skid to a 3-year low in H1

Major Chinese developers may choose to prioritize debt reduction over land purchases and expansion this year amid economic uncertainties due to the coronavirus pandemic that plunged their first-half earnings to a three-year low.

Although property sales started to recover in the second quarter, the aggregate net income of the 10 property companies with the largest exposure in mainland China dropped 11.23% to 134.4 billion yuan in the January-to-June period, from 151.4 billion yuan a year ago.

SNL Image

SNL Image

Chinese policymakers are expected to remain committed to the "housing is for living, not for speculation" policy. Even as the property market reeled from the effects of the pandemic, the government kept in place its property control measures, experts noted. Several cities eased restrictions over the past months due to slowing sales, but the government is widely believed to be always ready to intervene if the sector were to show signs of overheating.

At an Aug. 20 meeting, the People's Bank of China, the government and property developers highlighted the policy of limiting debt-to-cash, debt-to-assets and debt-to-equity ratios for real estate builders. This rule aims to help companies deleverage and restrict capital from flowing into the property market from the supply end.

In response, developers may go slow on land purchases and offshore expansion and focus instead on reducing gearing and deleveraging, according to Philip Zhong, a senior equity analyst at Morningstar.

The central bank also kept the one-year loan prime rate at 3.85% and the five-year rate at 4.65% unchanged in September, providing guidance for the developers as they face default risks of varying degrees due to reduced funding options and higher refinancing costs.

Delayed projects

Zhong said sales during the first half of this year were lower than a year ago mainly because of the delay in completing property projects due to the pandemic, negating the benefits of a sales rebound in the second quarter.

China Vanke Co. Ltd., China Evergrande Group, China Resources Land Ltd., Country Garden Holdings Co. Ltd. and China Merchants Shekou Industrial Zone Holdings Co. Ltd. logged year-over-year declines in their first-half net income, while China Overseas Land & Investment Ltd., Longfor Group Holdings Ltd., Poly Developments and Holdings Group Co. Ltd., Sunac China Holdings Ltd. and Shimao Group Holdings Ltd. saw improvements in their results during the comparable period.

The companies acknowledged that their financial results for the first half were affected by lower property sales and valuations because of the virus outbreak. They expect macroeconomic uncertainties and sector-specific challenges to spill over into the second half of the year, despite a recovery in China's economy. China Vanke said the company could do little to ward off potential market uncertainties and needs to stay prudent, after it reported a 5.6% year-over-year gain in net profit in the six months to June 30.

Property consultant Midland Holdings Ltd. said first-half business volume rose 1.6% year over year, reversing a decline in the same period of last year. Still, the gross floor area sold by its agents in China dropped 3.3% year over year. Victor Cheung, executive director and CEO of Midland Holdings' China division, said the second half of the year will still be a tough time for developers, though he noted that there will be a significant improvement compared with the first half.

As of Sept. 29, US$1 was equivalent to 6.82 Chinese yuan.