Evergrande Real Estate speeds up push into new businesses

While the mass-market homebuilder pursues diversification despite a 39.3pc rise in profits, Sunac sticks with luxury development in top cities

PUBLISHED : Tuesday, 26 August, 2014, 3:08pm
UPDATED : Wednesday, 27 August, 2014, 1:45am

Evergrande Real Estate Group, a mass-market homebuilder on the mainland, is speeding up diversification of its business even as it outperformed the slowing housing industry.

"Almost all top 500 companies [in the world] diversified when their scale came to a certain level, so will Evergrande," Hui Ka-yan, the firm's chairman and founder, told reporters. "We'll move very fast and you'll hear a lot of news very soon."

A rebalance towards first and second-tier cities since last year is yielding results, pushing Evergrande's core profits up by 39.3 per cent from a year earlier to 6.49 billion yuan (HK$8.2 billion) in the first half.

The company is confident that it could top the full-year target of 110 billion yuan in contracted sales, with 73 per cent of that already locked up in the first seven months of the year.

Evergrande said early this month it would diversify into other businesses such as agriculture, animal husbandry, grains, cooking oil and even infant milk powder as part of its efforts to become one of the world's top 500 firms next year. It has also invested in the mineral water business, which now employs 16,000 of the group's 76,000 workers.

Hui sold half of his cash-burning soccer club to e-commerce giant Alibaba Group Holding for 1.2 billion yuan in June and told reporters that he was busy picking other strategic investors.

The announcement came after Evergrande almost finished its national expansion, with first and second-tier cities combined now accounting for almost half of its outstanding land reserves and sales.

Such a strategy helped boost Evergrande's gross profit margin to 28.6 per cent in the first half from 27.3 per cent a year earlier.

But it also paid a steep cost for 13 new parcels in its land bank in the first six months, while its net gearing ratio surged to 89.6 per cent from 69.5 per cent a year earlier and well above its bottom line of 70 per cent.

Analysts at BNP Paribas estimated Evergrande's net gearing would stay high until 2016 at more than 75 per cent, given the large amount of outstanding land premiums and the potential sales slowdown in third-tier cities on the mainland.

"Evergrande has been shifting its focus to buying land in more tier-1 cities over the past year, but it still had 159 projects in tier-3 cities at the end of 2013," BNP said. "We believe it will take a long time to digest this supply, thus Evergrande's margins will remain low."

But Sunac China Holdings does not share Evergrande's strategy and would like to stay focused on luxury home development in top cities, especially the ones where it already has a strong presence, namely Beijing, Shanghai, Tianjin, Hangzhou and Chongqing.

"We will not diversify," Sunac chairman Sun Hongbin told reporters, adding that the property industry still had plenty of room for players, especially big ones, to grow. "I can't understand why [others] invest abroad or invest in pig farms."

The firm reported a 21 per cent year-on-year rise in core net profit to 1 billion yuan in the first half, with net gearing ratio down 3 percentage points from the end of last year at 66.7 per cent. Revenue gained 5.9 per cent to 9.1 billion yuan and net profit grew 8 per cent to 813 million yuan.

"Overall, Sunac delivered a steady first-half result with growing margins and lower gearing," said Edison Bian, the research head for China property at UOB Kay Hian.

Bian said investors would need to watch how Sunac would close and fund its acquisition of a 24.3 per cent stake in industry rival Greentown China Holdings, its gearing level after the deal and gross margins in the second half.