Chinese Real Estate Developers Inventories Rise, Profits Mixed24 August, 2011, 1:40. Posted by Zarathustra
Tags: Developers, Real Estate
Earlier this year, I pointed out that Chinese real estate developers reported poor first half profits, with debts and inventories rising.
Now, as we are in the first-half reporting season, we should now look at what’s happening. According to Xinhua, half of the listed Chinese real estate developers (roughly 65) have reported their first half result. And the result wasn’t pretty.
Within these 65 developers which have reported, revenue surged from from RMB75.139 billion in the first half of 2010 to RMB83.965 billion, an increase of 11.75%. Profits attributable to shareholders rose from RMB11.75 billion in the first half of 2010 to RMB14.91 billion, and increase of 19.92%. Inventories level also rose from RMB436.1 billion to RMB 607.3 billion, an increase of 39.26%. Although the overall profit rose, 26 out of 65 of them actually reported falling profits. One also have to understanding that developers pre-sold their inventories months or quarters before constructions are completed, and profits are recognised typically on delivery of the properties after completion. That means the profits currently being reported now are reflecting sales already made long time ago. Among 26 of those with falling profits, mostly are small-to-medium sized developers focusing on second and third tier cities.
With monetary tightening and aggressive market cooling measures implemented by policy makers, one would expect that sales would come down over the past 6-12 months, which will be reflected in coming quarters’ profits. But for now, one should expect that cash flow would deteriorate with rising inventories and less pre-sales proceeds coming in, and they would be much less aggressive in acquiring land. As a result, cash flow from operating activities improved from negative RMB47.073 billion in the first half of 2010 to negative RMB24.554 billion. What’s missing in this report is the total debts of these companies. With such a mix of results, one might suspect that debts might be rising further.
As said previously, real estate developers in China are under pressure as sales slow and credit is tightened considerably over the past 6-12 months. Real estate prices seem to be hovering around the top for now, but the situation does not bode very well both for the property market and developers. That’s why we have seen significant underperformance of real estate stocks on top of the already-underperforming Chinese equities. To be fair though, the results here show that the situation for developers might not have been as dire as I previously thought, and it is probably a good sign to see that as a result of less aggressive landbanking, cash flows are improving (i.e. less negative), such that they are still not pressured enough to cut prices dramatically.