Vanke bleeds red ink but detects signs of upturn

The property company is battling to get its house in order after posting big losses, hoping to capitalize on a tentative market revival

Key Takeaways:

• Vanke swung from profit to a deep loss of 17.94 billion yuan in the first three quarters of the year, despite efforts to steamline its business and maximize income
• The company reported stronger demand during the National Day holiday period in October, logging sales subscriptions worth 10.22 billion yuan

By Lee Shih Ta

Stimulated by pledges of government support, China’s troubled property market is showing signs of life, but the latest earnings reports from top developers underline the true scale of the recovery challenge.

Take for example China Vanke Co. Ltd. (2202.HK; 000002.SZ), the country’s second-biggest real estate developer by sales. The company is doggedly battling through a crisis in the property sector, trimming operations and selling off assets, but its revenues dropped by nearly a quarter in the first nine months of the year, pushing the bottom line from profit into a deep loss.

And the earnings result for the three months to the end of September was the biggest quarterly loss in the company’s history.

But Vanke was more upbeat about recent market activity, saying supportive government policies since September were helping to drive an uptick in property deals.

Over the three quarters Vanke’s revenues fell 24.5% to 219.9 billion yuan ($31 billion), delivering a net loss of 17.94 billion yuan against a profit of 13.62 billion yuan in the same nine-month period a year earlier.

For the third quarter, revenues came in at 77.12 billion yuan, with 61.55 billion yuan generated by property development, on a settlement area of 5.05 million square meters. The company posted a third-quarter loss of 8.09 billion yuan, after contract sales fell 29.7% to 53.87 billion yuan and the sales area slumped 24.9% to 3.91 million square meters.

Data submitted to the Shenzhen Stock Exchange indicated that the situation was particularly dire in September, when sales contracts totaled 17.42 billion yuan, a whopping year-on-year drop of 45.6%.

The company blamed the flood of red ink on troubles in the property development business, as well as investment and impairment losses and discrepancies between transaction prices and book value for some equity and asset disposals.

From January to September, all the key metrics were flashing red. The property development business realized a settlement area of 13.84 million square meters, down 24.4% from the year-earlier period, generating revenue of 173.23 billion yuan, a drop of 29.1%. Over the same timeframe, the gross margin for property development after tax fell 11.9 percentage points to 2.7%.

Sizeable drops were recorded on other business measures for the nine months. The contract sales area fell 26.8% to 13.31 million square meters, with the amount of contract sales tumbling 35.4% to 181.2 billion yuan.

Weighty liabilities

Meanwhile, the market downturn has also stressed the company finances. Total Vanke capital stood at around 79.75 billion yuan by the end of September after a net outflow of 12.65 billion yuan compared with three months earlier. Interest-bearing liabilities amounted to 327.61 billion yuan, of which 64.4% were obligations of more than one year.

The company said it paid out nearly 70 billion yuan in the first three quarters on interest-bearing liabilities and had serviced all its publicly issued debt for the year. But the servicing task is set to be challenging next year, when the company has 16 tranches of domestic debt coming due or being exercised, on principal of 32.64 billion yuan. In the first quarter of next year alone, 9.89 billion yuan worth of debt will mature.

The company revealed an operating net cash flow of 330 million yuan in the third quarter. But during the first three quarters, the cash flow was a net negative 4.85 billion yuan, compared with a positive 240 million yuan during the same period of last year.

Vanke has sold off a host of assets at a discount to ease its financial pain and took other actions to boost incoming payments, such as maintaining a high collection rate and leasing some properties at a marked-down price.

In the first nine months of the year, it entered into deals exceeding 23.26 billion yuan to divest or securitize assets, including a project at the Shenzhen Bay Super Headquarters Base sold at 70% of the market value for around 2.24 billion yuan.

Some 8,000 property units were converted from sales to rentals in the nine-month period, including over 5,500 units owned by Vanke itself. Rental income from residential homes rose 3.7% in the nine months to 2.63 billion yuan.

Vanke has also unleashed several rounds of organizational restructuring this year, streamlining its regional offices in the latest rationalization drive in October.

Staying afloat

At the same time, the company was actively securing new loans or refinancing totaling 77.4 billion yuan in the nine months. And Vanke borrowed another 16 billion yuan in late October and early November from Shenzhen branches of ICBC and the Bank of Communications, with collateral provided by its subsidiaries.

A slew of government stimulus measures announced since late September has enlivened China’s real estate market. Vanke noted an increase in customer interest during the National Day holiday, when it logged subscriptions worth 10.22 billion yuan. The average daily sign-up rate jumped by 113% compared with the Mid-Autumn festival in September, Vanke said.

Shares in Chinese real estate developers have been gaining traction since early October, helping Vanke to eke out a year-to-date gain of 2.6%, although its  price-to-sales (P/S) ratio has barely budged from a paltry 0.2 times, lower than the 0.7 times for China Resources Land (1109.HK) and the 0.5 times for Longfor Group (0960.HK). Vanke’s multiple is marginally higher than the 0.1 times for Sunac China (1918.HK) and is on a par with Poly Property (0119.HK; 600048.SH).

Persistently rumored to be on the brink of collapse, Vanke has been buying time with a strategy designed to support its vow to avoid debt default. The company will no doubt be hoping that a policy-driven recovery in the property market will offer longer term salvation.

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