3900.HK

Despite falling sales in the first four months of the year, the property developer’s revenue was still much higher than many of its struggling rivals

Key Takeaways:

  • Greentown China reported 52.5 billion yuan in sales from January to April, surpassing Longfor as the biggest purely private company in terms of sales 
  • The developer has avoided the more serious woes of many of its peers in the current property downturn after learning the dangers of high leverage in the past

By Lau Chi Hang 

It’s often said that one man’s misfortune is another man’s fortune. But in the case of Greentown China Holdings Ltd. (3900.HK), the company’s earlier misfortune is turning out to be its own greatest asset in China’s current property market downturn.

Even as many private developers drown in massive debts, often tottering on the brink of insolvency, Greentown has emerged as a rare exception. The company is no stranger to financial woes, having flirted with bankruptcy twice. But it appears to have learned a lesson on the dangers of too much debt, and long ago ditched the high-leverage strategy that is now getting so many of its rivals into trouble. 

Greentown last week reported April sales of 14.5 billion yuan ($2 billion), down “just” 26% year-on-year. Its cumulative sales for the first four months of this year showed a similar trend, falling 24.5% year-on-year to 52.5 billion yuan. While those declines look big, they are far smaller than those seen at other private developers, many reporting declines of more than 50%.

Star performer

Developers with monthly sales of over 10 billion yuan have become a rare breed in the current climate. The struggling Country Garden (2007.HK) reported only 3.85 billion yuan in sales for April, while Poly Property Group (0119.HK) brought in just 5.6 billion yuan. Even Longfor (0960.HK), one of the strongest in the pack, raked in just 32.4 billion yuan in the first four months. That makes Greentown the champion among private developers in terms of sales. 

While revenue has tumbled for most private developers, Greentown’s has actually risen, growing from 100.2 billion yuan in 2021, to 127.2 billion yuan in 2022 and 131.4 billion yuan last year. Its profit is also rising, up 13% last year to 3.12 billion yuan.

The company’s financial position also looks much healthier than its peers. It had 73.45 billion yuan in pledged bank deposits, group bank deposits and cash at the end of last year, with total borrowings of 146.1 billion yuan. Its net debt-to-asset ratio was just 63.8%, and its net borrowings coming due within one year stood at a manageable 32.55 billion yuan.

That raises the question of how Greentown has managed to maintain such good health when other private developers are suffocating under mountains of debt.

Near-death experiences

Greentown’s key to survival may be its two previous flirtations with disaster, teaching it valuable lessons that have helped it to navigate the current industry crisis. The company went public in Hong Kong in 2006 and followed with a binge in fundraising and business expansion. Then the financial crisis hit in 2008 and the Chinese economy slowed, sapping the company’s funding sources. Rumors swirled that Greentown almost sold itself to China Overseas Land (0688.HK), before the government stepped in with a 4 trillion yuan lifeline. 

Unfazed by that near-death experience, it continued its high-leverage strategy again. As a result, the company ran into trouble once more when the Chinese property market started to slow again in 2011, leaving it with 36 billion yuan in debt and a debt-to-asset ratio of 163%. Speculation at that time said the company could go under at any moment, despite regular confidence-boosting speeches by its Chairman Song Weiping. 

After running out of options, Song had to invite Hong Kong blue chip developer Wharf (Holdings) (0004.HK) to come onboard as a strategic investor. Wharf provided HK$5.1 billion ($653 million) in cash, helping Greentown to barely make it through the crisis. In 2014, China Communications Construction Group bought 24% of the company’s shares from Song and increased that by another 4.6% the next year, replacing Song as the biggest shareholder. 

After failing to learn its lesson the first time, Greentown finally seemed to get the message. It sold off a number of its developments to save on costs and pay off outstanding debts. Under Wharf’s influence, the company also ended its reckless expansion, since Wharf had the power to veto any major new investments if Greentown’s debt ratio rose above 100%.

A more humble, cautious company

Having learned its lesson, Greentown cut its debt substantially and swore not to play the high-leverage game again – a strategy that has served it well in the current sea of misery.

In addition to its more conservative financial management, the company has also revised its development strategy to focus on high-quality markets. Chairman Zhang Yadong said that the company only takes on projects in first- and second-tier cities such as Beijing, Shanghai and Hangzhou, as well as others in the wealthy Yangtze River Delta region. Giving up on smaller third- and fourth-tier cities meant it couldn’t benefit from booms in those places. As it paid more to acquire land in more expensive high-tier cities, its gross sales margin fell from 16.3% in 2022 to 11.3% last year. 

But land supply is tighter in those larger cities than in smaller ones, helping prices to hold up better in those markets. At the same time, household income is relatively higher in these higher-tier cities, limiting the downturn’s negative impact on sales. Thus, Greentown’s focus on these higher-quality markets has turned out to be a savvy strategy in the current market.

In addition, its sound financial condition and the fact that it doesn’t need government assistance to finish its projects have helped to maintain confidence that it will complete its developments. Home buyers tend to choose its homes because the risk of non-delivery due to lack of funds to complete construction is low. That assurance helps it sell homes more effectively than its more cash-strapped peers. 

Despite performing much better than its peers, Greentown isn’t immune from the downturn, which has been characterized by oversupply that will take time to absorb. When the broader industry is in trouble, no developer can stay unscathed forever. Greentown’s COO has previously said that the company’s top priority right now is simply to survive. If it can do that, it could be well positioned to thrive again more when the market finally starts to recover. 

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