Property investment

Evergrande overtakes Vanke as China’s top homebuilder of 2016 by sales

PUBLISHED : Friday, 06 January, 2017, 9:15pm
UPDATED : Monday, 09 January, 2017, 9:50am

China Evergrande Group has eclipsed China Vanke to become China’s largest real estate company. But the milestone has sparked little fanfare among investors and analysts.

Expectations of a newcomer in pole position have swirled since September, when Evergrande’s year-to-date contracted sales were higher than Vanke’s. The results were confirmed when the two announced their full-year sale numbers on Thursday and Friday. Evergrande’s shares ended 0.2 per cent higher on Friday.

With total contracted sales of 373.73 billion yuan in 2016, Evergrande surpassed Vanke, long the jewel in the crown of the county’s vast property industry. The sales represented a 85.4 per cent on-year growth, almost a quarter higher than its annual target of 300 billion yuan, according to a filing to the Hong Kong stock exchange on Friday.

The contracted sale figure it carries symbolic significance as it epitomises the breathless expansion of Evergrande. Just two years ago, its sales totalled 131.5 billion yuan to rank as the fourth largest in China.

The result is also a personal victory for Hui Ka-yan, chairman of Evergrande, who set out to capture the top position with his trademark “whatever it takes” approach.

In 2016 Hui renamed his company, executed several takeovers, took control of two A share listed companies, and led a 228 billion yuan back-door listing plan.

The year also saw Hui become involved in Vanke’s shareholder tussle. By late December Evergrande’s vice chairman Xia Haijun promised it has “no intention to, and will not” become the controlling shareholder of China Vanke, virtually ending a five-month equity purchase saga with a 5 billion yuan paper loss.

Evergrande overtakes Vanke to become China’s largest real estate firm with annual sales of 373.73 bn yuan

This came after China’s insurance regulator launched a crackdown amid concerns insurers were using the stock market to gain control over listed companies.

Evergrande shares have lost 11.2 per cent from its peak in early December, owing to the failed foray, and concerns over its high gearing ratio, as net debt equals six times of equity.

Evergrande spent 36.2 billion yuan amassing a 14.07 per cent stake in its rival to become Vanke’s third-largest shareholder.

Separately Vanke reported its sales for 2016 grew 40 per cent to 364.77 billion yuan. It was followed by Country Garden, who announced a 308.8 billion yuan in annual contracted sales.

In an analysis of Evergrande’s winning strategy, China Index Academy attributed the company’s success to a pivot towards larger Chinese cities, and the affordability of its homes. In the first 11 months, sales in first and second-tier cities contributed about 80 per cent of its national sales, especially in Nanjing, Tianjin and Chongqing, where surging prices helped pushed up sales there by more than 100 per cent.

It has also built up a massive land bank, with 186 million square metres in 175 cities, according to data for end-June. Of the newly acquired land in 2016, over 70 per cent was located in first and second-tier cities.

Despite a 85 per cent expansion in sales, average home prices were up 5.9 per cent to 8,355 yuan per square metre, compared to 13,190 yuan per sq m for Vanke.

This is not the first time Vanke has lost the top position. In 2014 Greenland Holdings emerged as the biggest homebuilder.

Vanke’s business model however remains a benchmark within the industry.

“Vanke’s operation model, in which professional managers take the helm and are driven by results, has been repeatedly studied and emulated by its peers. However, Evergrande’s model, which relied on less educated local managers taking allegiance to Hui Ka-yan, is hard to be copy,” said David Hong, head of research at consultancy China Real Estate Information.

“The real thing Hui should worry is, what’s the end of this ferocious expansion? What’s the new growth engine?” Hong said.