Depth|Review of the fundamentals of real estate companies: revenue bottomed out and rebounded, and the leverage of leading enterprises fell to a 9-year low

The property market "big move" has been issued repeatedly.

On May 17, the Ministry of Housing and Urban-Rural Development, the Ministry of Natural Resources, the Central Bank, and the State Administration of Financial Supervision and Administration issued a package of new policies such as lowering mortgage interest rates, reducing down payments, ensuring housing delivery, supporting government collection and storage, promoting the financing white list of real estate enterprises, and revitalizing idle land.

The unprecedented efforts of the policies are the concrete implementation of the policy direction of digesting the stock and optimizing the increment put forward at the meeting of the Political Bureau of the CPC Central Committee at the end of April. Prior to this, major cities across the country have successively stepped up efforts to introduce measures such as loosening purchase restrictions and encouraging "trade-in", and the market has shown signs of recovery.

Under the stimulus of the policy, the real estate sector set off a tide of price limits. The Shenwan Real Estate Development Index has risen by up to 30% in the past month, and among the leading listed real estate companies, the stock prices of Poly Development, China Overseas Land & Investment, and China Merchants Shekou have risen by more than 40% from the bottom in the past month, and Greentown China, Longfor Group, and Binjiang Group have risen by more than 70%.

With the acceleration of industry risks in the past three years, the former real estate leaders have been differentiated, some real estate companies broke out after the debt repayment crisis and eventually went bankrupt, and some real estate companies actively adjusted their business strategies and asset structure in the downward cycle, and their financial indicators remained stable.

The annual report data shows that after the industry has gone through the darkest moment of the industry, the current performance repair is still facing a lot of pressure. From January to April this year, the national real estate development completion, investment, sales and other data are still running at a low level. However, stimulated by the current successive policy "gift packages", both ends of supply and demand are gradually showing signs of improvement.

Revenue bottomed out

In 2023, the real estate industry is still in a downward cycle, but the operating income of real estate companies has shown signs of stabilizing and rebounding.

According to the statistics of the Securities Times, in 2023, large and medium-sized real estate enterprises listed on A-shares and H-shares (hereinafter referred to as "sample real estate enterprises", the selection criteria are enterprises with a contracted sales amount of more than 10 billion yuan in 2023 and their main business is real estate development, excluding Country Garden and China Evergrande, a total of 54 companies that have not yet published their annual reports) will achieve a total operating income of 4.1 trillion yuan, a year-on-year increase of 3.4% (Figure 1). After experiencing a sharp decline in revenue in 2022, half of the companies' revenue bottomed out and stabilized, achieving positive growth.

From the profit side, the sample real estate enterprises will achieve a total non-net profit of -116.3 billion yuan in 2023, and the total loss will expand compared with 2022, with 56% of the sample enterprises losing money, and the median year-on-year increase in net profit will be -10.53%. Against the backdrop of the overall decline in industry profitability, C&D International Group and Zhongan Group will still maintain revenue and net profit growth for two consecutive years in 2022 and 2023 (Table 1).

In the downward cycle of real estate, in order to resist risks, leading real estate companies have opened the road to find the second growth curve, and have set their sights on operating businesses with higher gross profit margins such as long-term rental apartments, shopping malls, office buildings, and health care, and have gradually become the "ballast stone" of real estate enterprises' performance.

For example, Longfor Group's operating business will contribute more than 60% of its profits in 2023, further improving its ability to resist risks. CR Land regards its real estate business and asset management business as new growth engines, with a total operating revenue of RMB39.06 billion in 2023, representing a year-on-year increase of 26.4%, accounting for 15.6% of total turnover.

Asset impairment helps clear risks

Dismantling the income statement, it is not difficult to find that the decline in gross profit margin and asset impairment are the most important factors dragging down the profits of real estate companies.

The median gross profit margin of the sample enterprises in 2023 is 12.69%, a decrease of 3.51 percentage points from 2022. According to the annual report, the main reasons for the decline in the gross profit margin of real estate enterprises are the implementation of the "price for volume" destocking policy in the context of the industry downturn, the increase in the proportion of low-profit projects carried over, and the concentration of land acquisition in first- and second-tier cities.

Among the 14 listed leading real estate companies with contracted sales of more than 100 billion yuan in 2023 (hereinafter referred to as "leading real estate enterprises"), China Resources Land has the highest gross profit margin of 25.15%, followed by China Overseas Land and Investment with a gross profit margin of 20.32%.

In terms of asset impairment, in 2023, A-share companies in the sample real estate enterprises will recognize a total of 62.837 billion yuan of asset impairment, which is 5.3 times the annual net profit of the above-mentioned companies, and the scale of impairment will decrease by 6% compared with 2022, a slight narrower.

Among the asset impairment provisions, nearly nine became inventory impairments. Since 2021, with the market downturn, real estate companies have increased their impairment provisions because they expect the net realizable value of their projects to be lower than the book value. From 2021 to 2023, the total asset impairment accrual for sample real estate enterprises listed on the A-share market has reached 165.4 billion yuan. The large impairment provision for three consecutive years has effectively squeezed out the moisture of the high asset price, and if the market stabilizes, the pressure on future performance release is relatively small.

Most market participants believe that the current market is in the bottoming stage, with the release of favorable policies, driving the improvement of market supply and demand, the industry is expected to rebound as a whole.

Guojin Securities Research Report believes that from the cost side, the profit margin of the project after the second half of 2021 is relatively high, and it is expected to gradually enter the statement settlement from 2024, and the gross profit margin level of real estate enterprises with active land acquisition is expected to be repaired during this period.

Wind data shows that the premium rate of transacted land in China's 100 large and medium-sized cities reached a high of 37.55% and 25.52% in 2016 and 2017, respectively, and then decreased year by year, to 10.17% in 2021, and to 3.16% and 4.09% in 2022 and 2023. In the future, with the new projects of real estate companies taking land after the land premium correction will be carried forward one after another, the overall net profit of real estate enterprises will have more room for recovery.

Debt "slimming"

In 2023, the total assets of the sample real estate enterprises will be 18.72 trillion yuan, a year-on-year decrease of 7.24%, and the asset scale will decline for two consecutive years.

Among the leading real estate companies, Vanke, Longfor Group, Gemdale Group, and Greenland Holdings have seen their assets fall by more than 10%, with a large reduction in balance sheets. The assets of China Resources Land increased by 10.16%, and the assets of Yuexiu Real Estate increased by 15.83%, achieving asset expansion against the trend.

The reduction of current assets, especially inventories, is the main reason for the shrinkage of real estate companies. In 2023, the total cash held by the sample real estate enterprises will be 1.26 trillion yuan, and the proportion of total assets will decrease from 7.1% to 6.74%; The total inventory was 9.2 trillion yuan, a year-on-year decrease of 10.16%, and the proportion of total assets decreased from 50.73% to 49.13%. Among the major asset accounts, only investment real estate rose against the trend.

From the perspective of liabilities, the total interest-bearing liabilities of sample real estate enterprises in 2023 will be 5.07 trillion yuan, a year-on-year decrease of 3.64% (Table 2). In the context of tighter financing, real estate companies have reduced the scale of debt for the first time, and more than seventy percent of real estate companies have achieved "burden reduction". Among the leading real estate companies, the interest-bearing liabilities of Gemdale Group and Binjiang Group fell by more than 20%.

In 2023, the total contract liabilities (including pre-receivables) of the sample real estate enterprises will be 3.66 trillion yuan, a year-on-year decrease of 20.81%. Contract liabilities are the unsettled contract amounts under the pre-sale system, which will be converted into the company's operating income in the future. The significant reduction in contract liabilities is due to the bottoming out of real estate sales in the downward cycle on the one hand, and the increase in the scale of completion carry-over of real estate enterprises under the guaranteed delivery policy on the other hand.

With the initiative of real estate enterprises to reduce debt, financial support for real estate policies and the improvement of the industry's financing environment, the financing cost of leading enterprises has further decreased. According to the data disclosed in the annual report, the average financing cost of 14 listed real estate companies with sales exceeding 100 billion yuan in 2023 will be 4.13%, a decrease of 0.19 percentage points from 2022.

Among them, the financing costs of 12 leading enterprises all decreased year-on-year, and the financing costs of C&D International Group, China Merchants Shekou and Binjiang Group decreased by more than 0.4 percentage points. The weighted financing cost of China Merchants Shekou dropped to 3.47%, and the financing cost of 7 real estate companies, including Poly Real Estate and Vanke, was less than 4%.

In 2023, a number of A-share real estate companies submitted stock fixed increase financing plans, and 8 were approved.

The leverage ratio of leading real estate companies fell to a new low in nearly 9 years

With the shrinking of the balance sheet, the leverage ratio of leading real estate enterprises has further decreased, and the asset-liability structure has been more optimized. In 2023, the median asset-liability ratio of leading real estate enterprises with sales of more than 100 billion yuan after deducting pre-receivables will be 62.63%, a decrease of 3.4 percentage points from 2022 and a new low in the past nine years, with a significant effect on deleveraging (Figure 2).

At the same time, the leverage levels of small and medium-sized real estate enterprises and leading real estate enterprises have diverged. In 2023, the median asset-liability ratio of the sample real estate enterprises after deducting pre-receivables will be 72.37%, a slight increase from 2022 and nearly 10 percentage points higher than that of leading real estate enterprises, and the asset-liability level of small and medium-sized real estate enterprises is still hovering at a high level.

This is also reflected in the Net Gearing Ratio (Interest-bearing Debt - Monetary Funds)/Owners' Equity) indicator. Due to the significant decline in cash holdings, the median net gearing ratio of the sample real estate enterprises increased to 92.34% in 2023. In 2023, the median net debt ratio of leading real estate companies is only 58.42%.

From the perspective of debt structure, the short-term debt due within one year of the sample real estate enterprises in 2023 will be 1.9 trillion yuan, which is basically the same as in 2022. However, due to the shrinking scale of cash holdings, the short-term debt repayment pressure of real estate companies still exists.

In 2023, the median cash short-term debt ratio (monetary funds/debt due within one year) of the sample real estate enterprises is 0.54, declining for two consecutive years, and facing a large funding gap in the short term. The median cash-to-short-debt ratio of leading real estate enterprises was 1.79, and only one leading enterprise had a cash-to-short-debt ratio of less than 1. In contrast, leading real estate companies have higher financial security (Figure 3).

Destocking is effective

At the end of April, the Politburo meeting of the Central Committee put forward the policy measures of "digesting the stock of real estate and optimizing the incremental housing", and "destocking" has become the focus of this round of real estate policy. Last week, the central bank announced that it would set up a 300 billion yuan re-loan for affordable housing to support local state-owned enterprises to purchase completed and unsold commercial housing at a reasonable price for use as affordable housing for sale or rent, and promote the destocking of the commercial housing market.

According to the status of construction for sale, the inventory of real estate enterprises can be divided into inventory under development and completed inventory. In 2023, 14 leading real estate companies have completed an inventory scale of 1.05 trillion yuan, an increase of 11.76% over 2022. The completed inventory of leading real estate enterprises accounted for 19.86% of the total inventory, 3.6 percentage points higher than that in 2022.

"Guaranteed delivery" has been the focus of real estate policies in the past two years. At the same time, most real estate companies will "ensure the delivery of buildings" and "destocking" as the focus of their operations, actively promote the completion of delivery, and accelerate the return of funds. From the perspective of changes in inventory structure, the proportion of inventory in the development of leading real estate enterprises has decreased, and the proportion of completed inventory has increased, which means that the completion and delivery speed of real estate enterprises has accelerated, and land acquisition is still cautious, which also means that the pressure on the stock of real estate enterprises has increased.

From the perspective of the effectiveness of destocking, the inventory turnover cycle of sample real estate enterprises in 2023 will be 1,084 days, 327 days faster than that in 2022. It is equivalent to the inventory removal cycle has been accelerated for nearly one year, and the turnover rate has hit a new high in the past five years.

The operational efficiency of leading real estate enterprises is higher, with an average decommissioning period of 937 days, a decrease of 85 days from the previous year.

On the whole, after several consecutive years of deleveraging and destocking of real estate enterprises, the income of listed real estate enterprises has bottomed out, and the de-stocking cycle has accelerated. With the opening of a new round of destocking cycle, the performance of leading real estate companies is expected to take the lead in recovery after the market recovers.

Reporter observation|How do real estate companies go through the cycle?

In the past three years, with the downward cycle of real estate, the industry has also been reshuffled. In the past, many of the kings who relied on the expansion of the "three highs" development model of high debt, high leverage and high turnover to dominate various lists have fallen off the altar.

In terms of sales, there will be 16 real estate companies that will be among the 100 billion army in 2023, a decrease of 4 from 2022. Country Garden handed over the top spot, and Sunac China, Xincheng Holdings, CIFI Holdings, and Sino-Ocean Group fell out of the first echelon.

Among the current 100 billion army, there are not only traditional powerhouses such as Poly Development, Vanke, and China Resources Land, but also rising stars such as Binjiang Group and Yuexiu Group who have gone through the industry reshuffle. Under the downturn in the real estate market for many years, how can these real estate companies with different starting points, different scales and different regions go through the cycle together?

From an operational and financial perspective, these developers have the following four things in common.

First, it is moderately leveraged and financially sound. In the past three years, most of the large real estate companies that have defaulted on their debts and broken their capital chains have opted for aggressive expansion strategies during the boom in the property market. For example, Sunac Group and China Evergrande have a net debt ratio of more than 150% for a long time.

Most of these real estate companies that have passed through the cycle have a net debt ratio of less than 80%, and even if they rise in one year, they will quickly pull back in the next year. China Overseas Property, China Resources Land and China Merchants Shekou have had net debt ratios of less than 50% in the past five years.

Second, pay attention to cash flow. Among the 16 100 billion real estate companies, 9 have had positive operating cash flow for 5 consecutive years, and Vanke has had positive operating cash flow for 15 consecutive years.

In addition to stable net cash inflows, these cyclical real estate companies also have more cash on hand. At the end of 2023, Poly Development, China Overseas Land & Investment, Greentown China, C&D International and Huafa Group accounted for more than 10% of total assets, almost double the industry average.

Third, actively deploy first- and second-tier cities. For example, Binjiang Group and Yuexiu Real Estate, which have jumped the most in recent years, have land reserves of 94% and 95% respectively in first- and second-tier cities.

In contrast, Country Garden, which has just stepped down from the sales champion this year, has shifted its focus to first- and second-tier cities in the past two years, and before that, more than 60% of the company's land reserves came from third- and fourth-tier cities, and the property market was more affected by shrinking demand and asset impairment in the downward cycle.

Fourth, we should focus on operational business. The real estate development business is cyclical and cannot protect against systemic risks in the real estate sector. In the downward cycle of real estate, most of the companies with strong performance have diversified growth poles. For example, leading companies such as Poly Development, Vanke, Longfor Group, and China Resources Land are all in addition to the real estate business, and many lines such as apartments, commercial, and property have blossomed.

Editor-in-charge: Ye Shuyun

Proofreading: Wang Wei

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