Source | Shenlan Finance Author | Yang Bo

How did China's real estate market perform in the first half of the year? What are the latest developments among real estate companies?

According to the latest research by CRIC, China's real estate market as a whole remained in a weak consolidation phase in the first half of the year. Real estate companies achieved de-stocking through aggressive marketing and various promotional methods. There was also a clear differentiation in market performance among real estate companies, with central state-owned enterprises and some high-quality overseas private enterprises demonstrating strong anti-cyclical resilience.

Overall, under the weak recovery, the operations of top real estate companies have become increasingly robust.

1

Continuation of Weak Recovery

According to the CRIC research report, supply and transactions in the new home market were both at low levels in the first quarter. After entering the second quarter, the market remained in a low range of fluctuations. Cumulative year-on-year sales for the first five months decreased by 44%, with the decline narrowing by 8 percentage points compared to the first quarter, continuing the trend of weak recovery.

From the perspective of real estate companies, nearly 90% of the top 100 real estate companies experienced a year-on-year decline in cumulative performance from January to May this year. In terms of tiers, the differentiation in corporate landscape intensified, with central state-owned enterprises and some high-quality overseas private enterprises demonstrating strong anti-cyclical resilience.

It is worth noting that the stimulus effect of the "517 New Policy" on the market was relatively significant. According to Securities Daily, after the "517 New Policy," second-hand home transactions in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen all hit new highs, with Shenzhen setting a new 38-month high in monthly second-hand home transactions. In terms of companies, although sales of the top 100 real estate companies in June decreased by 19.55% year-on-year, they increased by 26.05% month-on-month, and the performance of several leading companies also achieved growth of more than 10% year-on-year, indicating gradually improving fundamentals.

For top real estate companies, continuously enhancing operational robustness, reducing asset-liability levels, and optimizing cash flow are all active, robust, and pragmatic operations.

2

Continuous Reduction in Debt Scale

According to GF Securities statistics, the total asset size of the real estate A+H share sector was 18.7 trillion yuan in 2023, a year-on-year decrease of 7.1%; the total liability size was 14.6 trillion yuan, a year-on-year decrease of 7.5%. As of the first quarter of 2024, the total asset size of the A-share real estate sector was 9.3 trillion yuan, with the year-on-year decline expanding to -10%, and the total debt size was 7.2 trillion yuan, with the year-on-year decline expanding to -12%.

Overall, the real estate industry as a whole is showing further balance sheet contraction. For top real estate companies, continuously reducing debt scale is also a pragmatic approach to improving risk resistance during the real estate market adjustment period.

For example, Poly Development's asset-liability ratio was 76.55% in 2023, the asset-liability ratio after deducting advance receipts was 67.14%, and the net debt ratio was 61.20%. As of the first quarter of this year, the monetary fund balance was 129.554 billion yuan; the asset-liability ratio was 75.88%, a decrease of 0.66 percentage points from the end of the previous year.

For example, China Overseas Land & Investment repaid a net debt of 15.6 billion yuan in 2023 and held bank balances and cash of 105.6 billion yuan at the end of the year. As of the end of 2023, China Overseas Land & Investment's net debt ratio was 38.69%; the weighted average financing cost was 3.55%, maintaining a green rating.

For example, Binjiang Group's equity interest-bearing debt was 36 billion yuan in 2023, a decrease of 11 billion yuan from the end of the previous year, and the consolidated interest-bearing debt scale was 41.518 billion yuan, a decrease of 12.027 billion yuan from the end of the previous year, with bank loans accounting for 79.8% and direct financing accounting for 20.2%. The asset-liability ratio after deducting advance receipts was 56.41%, and the net debt ratio was 15.08%.

For example, Longfor Group has actively and orderly reduced its debt scale since 2022. As of the end of 2023, Longfor Group's interest-bearing debt scale was 192.65 billion yuan, a decrease of 15.4 billion yuan from the previous year. Cash on hand was 60.42 billion yuan. The net debt ratio was 55.9%, and the asset-liability ratio after deducting advance receipts was 60.4%, a decrease of approximately 5 percentage points year-on-year. In 2023, Longfor achieved positive overall cash flow for the first time, realizing a net cash flow of approximately 3.5 billion yuan.

3

Holding Properties Become an Important Engine

GF Securities research shows that the scale of holding assets of real estate companies increased year-on-year in 2023. According to statistics, the scale of holding assets, i.e., investment real estate, in the A+H sector reached 1.9 trillion yuan in 2023, an increase of 5% year-on-year. Real estate companies with large investment real estate portfolios include China Resources (262.8 billion yuan), China Overseas Land & Investment (207.7 billion yuan), Longfor Group (199.8 billion yuan), China Merchants (127 billion yuan), Country Garden (119.5 billion yuan), and Vanke (110.1 billion yuan).

In fact, as China's overall new home sales volume has shrunk, real estate companies that previously made substantial investments in operational real estate have demonstrated increasing robustness in recent years, attracting increasing attention from investors.

UBS Real Estate's Chief Analyst Lin Zhenhong recently stated that when rating real estate companies' future prospects, he places great importance on which companies have transformed their business models and increased exposure to commercial real estate, as this can generate more rental income and protect companies from the cyclical adjustments in housing demand.

For example, the ratio of Longfor Group's operating income to real estate sales income has been increasing. In the first half of 2023, Longfor's operating income was 12.97 billion yuan, and real estate sales income was 98.52 billion yuan, with operating income accounting for only 13% of real estate sales income. From January to May 2024, this ratio has risen to 22%, indicating a trend of continuous expansion in operational business. From January to May 2024, Longfor Group's operating income was approximately 11.45 billion yuan (including tax), an increase of 9.7% year-on-year, continuing its robust growth. Among them, operating income was approximately 6 billion yuan (including tax), and service income was approximately 5.45 billion yuan (including tax).

As of the end of May this year, Longfor Commercial's overall occupancy rate reached 95.9%. As of June 30, Longfor Commercial had 91 malls in operation. In 2024, Longfor plans to open 14 new malls, including 8 heavy-asset projects and 6 light-asset projects. This means that by the end of 2024, Longfor will operate over 100 malls, officially entering the "Hundred Malls Era".

As China's real estate market moves away from a high-leverage, high-growth model, those who can grasp more holding properties may become the cornerstone of sustainable business development. Longfor Group stated that the company's development business will not be scale-oriented but will focus on balance between quantity and price and investment realization, providing good houses and products and ensuring high-quality delivery. Operation and service businesses can contribute stable profits and cash flow, providing security for the company's liquidity and becoming an important engine for the group's profit stabilization and return to growth.

CITIC Securities research reports also hold similar views. CITIC Securities issued a research report, optimistic about the operation, circulation, and quality improvement links in the real estate industry chain. CITIC Securities believes that the supply-side capacity clearance in the development sector is relatively sufficient, and some blue-chip companies retain core assets and operational capabilities, currently offering strong valuation attractiveness.

Another A-share company with good business operations, Country Garden Holdings, is also doing well. In 2023, Country Garden Holdings achieved operating revenue of 119.2 billion yuan and net profit attributable to shareholders of listed companies of 737 million yuan. During the reporting period, the company achieved total commercial operation income of 11.324 billion yuan, an increase of 13.17% year-on-year; tax-exclusive property rental and management income was 10.631 billion yuan, with gross profit from property rental and management business reaching 7.431 billion yuan, accounting for 32.73% of the company's total gross profit; the gross profit margin for property rental and management reached 69.90%.

4

Conclusion

Market analysis believes that with the comprehensive implementation of the "517 New Policy" and its gradual effects, various sales data indicate a rebound in market sentiment in core cities. It is expected that as both supply and demand sides optimize simultaneously, the real estate market will accelerate its stabilization and recovery, and real estate companies' sales will improve.

Dongguan Securities also pointed out that after experiencing a year-on-year decline of more than 20% in total sales in 2022, the industry's overall sales have already come down a step. In 2024, with a low base, the year-on-year decline in sales will be controllable, and the year-on-year decline in housing prices will be limited.

Under the continuous accumulation of favorable policies, it is expected that the current real estate market adjustment cycle is nearing its end and is currently at the bottoming-out stage. A subsequent rebound is worth anticipating.

Reference materials: "Summary and Outlook | Enterprises: Sales and Financing Adjusted Low in the First Half, Pressures Remain High in the Second Half," CRIC Research Center, "Bottom Expectations? Positive Signals in the Real Estate Industry Continue to Accumulate, July Start Strong, Significantly Outperforming the Market," Securities Daily, "2023 A+H Sector Mid-Year Report Summary of the Real Estate Industry: Overall Revenue Growth and Losses, Balance Sheet Contraction Continues," GF Securities