Chinese developers set to post strong profits after home prices surge
Analysts see average core profit rising 10 to 20 per cent for 2016 but foreign exchange losses may increase
Hong Kong-listed Chinese property developers are set to post much improved year-end results after house prices skyrocketed in the past two years.
But bigger foreign exchange losses will hit some builders’ bottom line, analysts say, as the majority of developers prepare to announce their 2016 earnings in late March.
The sector’s average core profit, which excludes foreign exchange losses, is likely to expand between 10 per cent and 20 per cent from a year ago, according to four analysts surveyed by the South China Morning Post.
The optimistic forecasts follow a large increase in booked revenue during the period.
China’s property market began to recover in 2015 and hit a peak in August last year, when 64 out of 70 major cities tracked by the National Bureau of Statistics (NBS) reported year-on-year home price growth.
Revenue booked for 2016 year-end mostly comes from projects sold during 2015 and the first half of last year – when the market was booming – so there would be a “rebound in both homebuilders’ earnings and gross margin”, said Raymond Cheng, a property analyst at CIMB Securities.
Big state-owned names such as China Overseas Land & Investment, China Resources Land and market leader China Vanke may continue to outperform, with core earnings rising 15 per cent, Nomura analysts wrote in a note.
Meanwhile, mid-sized Shenzhen developer Logan Property is likely to post a 51 per cent gain off the back of soaring property prices in the city, Nomura estimates.
Philip Tse, a property analyst at Bocom International, said over all the sector’s gross margin may slightly increase, by 1 per cent, to 28 per cent for 2016.
But some property firms with high land costs and a heavy debt burden may disappoint the market, analysts said.
For example, Guangdong-based R&F Properties, which released its results last Friday, saw its net gearing ratio shoot up to 160 per cent from 124 per cent in 2015 while its gross margin eased to 30 per cent from 34 per cent previously, despite strong contracted sales.
Cheng expects the debt ratios of China Evergrande and Sunac China, two major developers, to remain the highest among their counterparts amid aggressive land acquisitions.
Evergrande’s outstanding debt ratio is over 400 per cent while Sunac’s exceeds 200 per cent.
“Sunac’s results could also be hurt by slow delivery of high margin projects,” he added.
Although developers have been able to reduce their financing costs by shifting back to the domestic bond market, many are still exposed to forex losses through the offshore US dollar bond market.
Cheng said developers’ foreign exchange losses might deepen if they don’t use hedging tools, because the yuan depreciated 6 per cent against the greenback last year.
A number of Chinese property firms reported more than 1 billion yuan in foreign exchange losses in 2015.
By the end of 2016, developers’ offshore debt as a proportion of total debt was down to 30 per cent from 40 per cent the previous year, according to CIMB estimates.
In anticipation of strong results, Chinese developers’ stocks surged on Monday. China Evergrande was up 10 per cent, Yuzhou Properties rose 8 per cent, Longfor Properties increased 5 per cent and China Resources Land climbed 3.4 per cent.