Chinese developer Shimao says annual core profit fell 22 per cent, weighed by push to sell inventory in small cities
Shanghai-based Shimao Property said its annual core profit fell 21.5 per cent to 7.91 billion yuan (HK$9.47 billion), as the company struggled to trim its inventory of lower margin properties in smaller Chinese cities.
Revenue increased by 2.9 per cent to 57.7 billion yuan, while its gross profit margin declined to 28.5 per cent, from 32.5 per cent a year ago.
“We have cleared one-third of our unsold units, mainly in third and fourth-tier cities, and that has affected our margin,” said Jason Hui Sai-tan, vice president at Shimao Property.
The developer has already expanded to more than 40 mainland Chinese cities, however, the oversupply and weak sales in lower tier cities have slowed its growth in recent years.
Hui said they will follow the principle of “sales based production” when it comes to smaller cities, and not build new flats if the inventory is not cleared.
“It may take five or more years to clear stock in some cities,” he said.
For the unused land banks in those cities, Hui said they may return some of them to local governments, or seek partners to share risks.
Shimao says it will shift its development focus to cities such as Beijing, Shanghai, Nanjing and Fuzhou.
Hui said he was positive about the property market in the Yangtze River Delta area despite the recent tightening measures in some cities. He expects Shimao will generate higher margin in cities like Shanghai, Suzhou and Nanjing, this year.
Shimao has a contract sales target of 67 billion yuan in 2016, unchanged from last year.
Eva Lee, head of Hong Kong and China Real Estate Research at UBS expects prices in first-tier cities could grow five to 10 per cent this year while tier-two cities saw a flat to five per cent increase.
She said nearly 73 per cent of unsold flats that had been completed in the past seven years are located outside first- and second-tier cities.
“Beijing still see destocking of unsold flats as its top priority,” she said.
The recent price-cooling measures unveiled in first-tier cities such as Shanghai and Shenzhen could impact volume and sentiment in the near term, she said.
The central government will continue to roll out stimulus measures to help to reduce inventory stockpiles, she said.
Besides inventory pressure, Shimao has also incurred foreign exchange losses of 1.2 billion yuan due to yuan devaluation last year.
The company said it planned to repay 13 billion yuan worth of foreign debts this year to help reduce forex risks. After repayment, its exposure to offshore debts will decline to 30 per cent of total debt, from 48 per cent currently.