State players the winners in mainland China property markets, analysts say

Some smaller private developers losing market share

PUBLISHED : Tuesday, 27 October, 2015, 2:31am
UPDATED : Thursday, 01 September, 2016, 12:00pm

State juggernauts have been the winners during the tough times for mainland China’s property markets since last year, with state-owned developers gaining more market share and achieving stronger growth than their private-sector peers, experts say.

They predict the trend will continue in the fourth quarter, with quality state-owned players set to benefit more from government policy support, and recommend selling listed private developers with high leverage or slowing growth.

Among the 36 major listed mainland property developers in the H-share and A-share markets, 10 key state-owned firms have attained faster market share growth than their private counterparts, with their total market share up to 10.1 per cent in the first nine months of this year from 8.8 per cent in 2014, Deutsche Bank analysts Tony Tsang and Jason Ching said in a report on Monday.

The state players included China Overseas Land & Investment, Poly Real Estate Group, China Resources Land, Greentown China Holdings and China Merchants Property Development.

Even among the listed developers, the state-owned developers are gaining market share
Tony Tsang and Jason Ching, Deutsche Bank

A number of leading private developers, including Dalian Wanda Commercial Properties, Country Garden, Shimao Property, Sunac China, recorded declines in market share during the same period, the report added.

“In the past, industry consolidation in the China property market was mainly characterised by the listed developers taking market share from the unlisted developers,” they said. “However, starting 2014, a new phenomenon has emerged – even among the listed developers, the state-owned developers are gaining market share, while most private developers (especially the small- to mid-caps) are no longer gaining market share, or are even losing share.”

They cited possible reasons ranging from state-owned developers’ stronger financial positions and lower financing costs, to rising land prices in first-tier cities and accelerating state-owned enterprise (SOE) reforms in the property markets, which allow state players to have “more reasonable land costs via asset injections from state-owned parents”.

In addition, the recent turmoil in the A-share and H-share markets meant private developers had “lost the opportunity to recapitalise”, at least in the near term, they added.

Besides faster market share growth, state-owned developers have also achieved better profitability and core earnings growth, while outperforming on sales growth in the first nine months of this year, possibly due to better decisions on land acquisition and lower construction costs, as well as lower net gearing and borrowing costs.

The 36 key listed developers accounted for 19.2 per cent of the industry’s core net profit in 2013, and 19 per cent in 2014. Among them, 10 state-owned players saw their share of the industry’s net profit increase from 7.06 per cent in 2013 to 8.11 per cent in 2014, according to statistics compiled by Deutsche Bank.

Meanwhile, several state-owned real estate companies recorded significant sales growth, with China Jinmao posting a 76 per cent year on year growth in the first nine months of this year, and China Resource Land achieving a 43 per cent gain. In contrast, privately owned Shimao Property, Sunac China and KWG all saw their sales decline in the same period.

The investment bank expects the central government will unveil more support policies to boost property sales in the fourth quarter, with quality developers like state-owned China Overseas Land & Investment, China Resource Land and China Jinmao set to better benefit.

However, the analysts maintain a “sell” rating on those real estate companies with high leverage and borrowing costs, continued margin pressure, or slowing growth. They include privately owned Shimao Property, Evergrande Real Estate, Country Garden, Sunac China and Gemdale Property.

In a separate research report on Monday, Daiwa Capital analysts also recommended shares of China Overseas Land & Investment and China Resources Land.

“We believe that the China property industry is moving towards a new era that should present considerable profit potential to stronger players that can manage their business well,” analysts Jonas Kan and Cynthia Chan said in a note.