Red Star Macalline shines spotlight of hope on struggling retail property sector

The shopping mall operator said its losses continued to grow in the first half of this year, but indicated the rate of increase could be moderating

Key Takeaways:

• Red Star Macalline said its loss widened about 36% in the first half of this year, marking an improvement from the 45% increase in 2024
• The company’s stock has risen 30% in the last three months as investors applaud its efforts to get its financial house in order

By Doug Young

Could China’s embattled retail sector be turning a corner?

It’s possible, based on signals coming from shopping mall operator Red Star Macalline Group Corp. Ltd. (1528.HK) in a profit forecast for the first half of the year issued on Monday. The forecast doesn’t look too exciting at first glance, saying the company expects to report a loss of between 1.65 billion yuan ($230 million) and 1.98 billion yuan for the first six months of 2025.

A closer look shows a loss at the midpoint of that range would be 36% bigger than the loss of 1.34 billion yuan the company reported in the year-ago period. While that may not sound too impressive, it would be an improvement from the 45% jump in the company’s net loss last year, when the figure widened to 3.49 billion yuan from 2.41 billion in 2023.

That piece of potentially positive news was also offset by Macalline’s concurrent announcement that it would adjust the value of its investment properties downward by 1.8 billion yuan during its semi-annual valuation adjustment. A similar downward adjustment for the second half of the year would far outpace the 2.9 billion yuan downward adjustment for all 2024, showing values continue to fall sharply in China’s sputtering property market.

The latest half-year loss sets up Macalline to report a third consecutive annual loss for 2025, after it first fell into the red in 2023. It blamed the latest loss on the usual factors, including rental and management fee reductions to help struggling shopping mall owners and tenants. Macalline operates its own shopping malls, which accounts for about two-thirds of its revenue, and also manages malls for other property owners.

While Macalline didn’t provide too much detail on the factors behind its rising losses, its latest annual report released in April showed the company seemed to be getting its own situation under control in 2024. Reflecting that, it returned to positive cash flow for the year, reporting a 605 million yuan inflow, reversing a 101 million yuan outflow in 2023.

From a macro perspective, China’s retail sector appeared to be stabilizing in the first half of the year after more than a year of weakness. Some of that could owe to a growing number of stimulus measures by Beijing to boost consumer spending. The highest profile of those offers government subsidies when consumers trade in their old home appliances, smartphones, PCs and other big-ticket items to buy new ones.

As such programs gain momentum, retail spending has logged relatively strong gains so far this year, including a 6.4% rise in May – the fastest growth since December 2023. That growth followed similarly strong gains in the first four months of the year, with retail sales generally up between 4% and 6% each month.

Slumping real estate

While the macro retail numbers look solid enough, the outlook for China’s retail real estate market hardly looked encouraging going into 2025. British real estate services provider Savills forecast that vacancy rates for retail real estate in most major Chinese cities would rise between 0 and 5 percentage points this year. Similarly, it forecast that rents would be flat at best, and could fall as much as 5%, as landlords offered discounts to retain tenants and more flexible leasing options to bring in new ones.

Macalline’s 2024 results reflect both of those trends, though, as we’ve previously noted, the company appeared to make significant progress in cleaning up its finances. Its revenue totaled just 7.82 billion yuan last year, down by nearly a third from 11.5 billion yuan in 2023.

Its core business of directly managing its own shopping malls did a bit better, with revenue down 21% year-on-year to 5.36 billion yuan, accounting for 69% of its total. Part of that was due to a drop in the number of the company’s directly operated malls, which fell 11.5% to 77 at the end of last year from 87 a year earlier. The occupancy rate for that part of its business actually improved slightly last year to 83% from 82.8% in 2023.

But the relative strength for its directly operated mall business was offset by bigger declines for its other two main areas. Its construction and decoration services segment was especially weak, with revenue plunging by more than three-quarters to just 332 million yuan from 1.48 billion yuan a year earlier, reflecting a lack of demand as new property construction remains anemic.

All that said, Macalline’s attempts to clean up its own house showed up in a wide range of metrics across its latest annual report. In addition to returning to positive cash flow, the company reported its net gearing ratio dropped to 54.8% last year from 64.7% at the end of 2023. It also reported gross margin improvement to 63.8% last year from 61.1% in 2023, as its cash reserves rose to 3.15 billion yuan from 2.53 billion yuan over that time. Its account receivables also fell by more than half to 585 million yuan at the end of last year from 1.2 billion yuan a year earlier.

Investors have generally applauded Macalline’s efforts as it tries to steady its ship, even as it’s far from clear whether the company’s business downturn has reached bottom. The stock has rallied 30% over the last three months, giving the company a price-to-sales (P/S) ratio of 0.91 – not exactly stellar, but well ahead of most of China’s other property developers and managers.

The latest profit forecast looks slightly encouraging as it seems to show the company is bringing its own problems under control, even as the broader Chinese commercial property market remains weak. But we’ll need to wait for the company’s full half-year report, most likely set to come out next month, before making a better-informed assessment of where it’s going, and whether its recent stock rally is sustainable.

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