China property

Tahoe axes Beijing, Shanghai staff as cash-flow stress hits Chinese developers

Thousands of the builder’s staff are being laid off, according to employees and media reports, as the government’s debt-reduction campaign bites

PUBLISHED : Tuesday, 31 July, 2018, 8:01am
UPDATED : Tuesday, 31 July, 2018, 12:42pm

Tahoe Group is axing its staff in Beijing and Shanghai, according to employees and media reports, becoming the first major listed developer in China to do so as the property sector feels the pinch from liquidity stress.

The Shenzhen-listed builder has slashed most of its design staff in the two cities, as well as its branding staff in Fuzhou and Wuhan, according to employees and online media reports.

The scale of the lay-offs is still unclear. The earliest report by online news site, on July 20, claimed that 30 per cent of staff are being sacked. But one employee in Tahoe’s design department in Beijing told the Post the figure could be as high as 80 per cent.

It is not surprising that some highly leveraged developers are cutting staff under the current circumstance. We’ll not be surprised to see more lay-offs
Alan Jin, Mizuho Securities Asia

Whichever account is closer to the truth, the lay-offs will be huge because there are 15,300 people on Tahoe’s payroll, according to its 2017 financial results.

China’s property industry has been hit hard by the central government’s campaign to cut debt, which has squeezed banks’ off-balance-sheet lending.

According to the source in Tahoe’s design branch, who spoke on condition of anonymity, employees have been asked to take exams filled with “peculiar questions”, and those who fail have to leave. Those who pass are asked to take a second and then a third exam until they fail. The marking of the papers is not transparent, and the source said the list of those being shown the exit had already been decided.

Responding to the reports, Tahoe said in a statement that it is “upgrading” its workforce, recruiting new talent from top universities on a massive scale. When approached for more details, Tahoe referred the Post to the statement.

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Mid- and high-level managers are leaving in their droves, some willingly and some not. At least five senior executives, including vice-president Shen Linan, have left the company this year, according to information available publicly. A general manager who left the company in June and also wished not to be named, said there are deep flaws within the company’s corporate culture and strategy.

The person, who left willingly, depicted a culture in which professional managers are often sidelined by veterans who joined the company when it was a regional player in Fujian province. Chairman Huang Qisen, receiving skewed information from those veterans, had set many “unrealistic” targets, according to the source. For example, Huang last December laid out a 200 billion yuan ($29.4 billion) contracted-sales target for 2018, but internally he set the target at 500 billion yuan.

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In the first half, contracted sales totalled 67 billion yuan, according to an estimate by consultancy CRIC, ranking Tahoe 17th among all China’s developers. Tahoe has not disclosed its contracted sales numbers for the past four years.

In a sign of mounting financial strain, Tahoe has joined a number of Chinese developers who elected to raise funds internally, offering its employees an annual return of 18 per cent for investments of 1 to 3 million yuan, and over 20 per cent for investments of 3 million yuan and above. The source said those laid off had been unable to retrieve their principal.

Will China’s move to free up liquidity help developers get new loans?

“It is not surprising that some medium-sized, highly leveraged developers are cutting staff under the current circumstance. We’ll not be surprised to see more lay-offs and other bad news in the future,” said Alan Jin, a property analyst with Mizuho Securities Asia.

The funding squeeze is hitting smaller developers particularly hard as cautious lenders stay away from those ranked outside the top 50 by sales. This reluctance to lend sometimes extends to builders outside the top 30.

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Zhonghong Holdings, a small developer, has defaulted on several obligations and is selling assets to repay debt. Two other small builders have also failed to repay their loans.

But none compare to the size of Tahoe.

Tahoe has been hit especially hard by its high exposure to the Beijing and Shanghai markets. A cash cow in the boom days, the two markets now are marred by tepid sales, strict buying-eligibility restriction and price caps imposed by the authorities. Sales in Beijing slumped 31 per cent last year.

According to its first-quarter results, Tahoe carried a record 201 billion yuan of debt at the end of March, which is 88.46 per cent of its total assets. Its net gearing ratio – total debt divided by shareholders’ equity – was 473 per cent by the end of 2017, the highest of any Chinese developer. The same measure for Evergrande, a high-debt developer, is 183.7 per cent.