After three years of downturn, the real estate industry seems to show no signs of stabilizing. According to data from the Bureau of Statistics, commercial housing sales in 2023 hit a new low since 2012, sales volume hit a new low since 2016, while sales area and sales continued to drop by more than 20% in the first two months of 2024, and the industry saw no light in the cold winter.
However, under the cold winter, the resilience and vitality of housing enterprises was tested. After the reshuffle, some leading housing enterprises went out of the market by storm, the market gradually cleared up, and industry concentration increased markedly. Housing enterprises with high-quality development not only achieved revenue growth, but also achieved profit increases, and financial structures were greatly optimized. In 2023, both Hong Kong and domestic housing stocks announced their annual results (Evergrande delayed release). The overall performance was fair, and some housing companies made impressive profits.
The Zhitong Finance App observed that the total turnover of 16 housing enterprises in the Hong Kong stock market statistics was 2.13 trillion yuan, up 5.13% year on year. The target growth targets were 11 companies, accounting for 68.8%, with a total net profit of 25.414 billion yuan. There were 9 profitable companies, accounting for 56.3%. However, if real estate companies that have not issued financial reports, such as Evergrande, lost more than 30 billion yuan in the first half of the year, then the industry as a whole is still in a state of loss.
Compared to A-shares, the overall scale of domestic housing stocks in Hong Kong stocks is obviously larger, and their performance also exceeds the industry level. Thanks to the defensive management and fine management of most housing enterprises, they have achieved financial stability and improved operating efficiency. For example, China Resources Land (01109) had revenue of 251,137 billion yuan in 2023, up 21.3% year on year, ranking in the top three. Shareholders' net profit was 31.365 billion yuan, up 11.65% year on year, the highest level in the industry, and has remained profitable.
Evergrande was the first industry leader to fall, but the leader reshuffle was by no means limited to Evergrande. As an industry leader, Vanke's performance in 2023 was poor. It achieved revenue of 465.74 billion yuan, a year-on-year decrease of 7.56%, and shareholders' net profit of 12.163 billion yuan, a year-on-year decrease of 46.4%. Recently, the company also revealed a debt default. In March of this year, Moody's announced that it would withdraw Vanke's Baa3 issuer rating, grant the company family a Ba1 rating, and include all Vanke ratings on the downgrade watch list. The market feared that the company might thunder.
In fact, there are two main defensive management strategies for domestic housing stocks: one is to reduce the debt level, adjust the debt structure, and carefully acquire and expand land; the other is to increase the removal rate and speed of inventory turnover, and leave a large amount of abundant cash flow in case banks and suppliers collect debt and meet short-term debt expenses. In fact, housing enterprises have always been reducing leverage. The overall debt level of the industry has dropped below 80%, yet some housing enterprises are still mired in a debt crisis.
In 2023, the overall debt ratio of the sector statistics was 73.9%. Four companies were below the industry level, namely Vanke, China Resources Land, Longhu Group, and China Overseas Development. Among them, China's overseas development debt ratio was only 57.4%, and the highest was Sunac, which was 91%. In terms of interest-bearing bonds (bank loans), the overall interest-bearing debt ratio fell to 18%, while Vanke, China Resources Land and China's top three overseas companies were 14.9%, 13.1%, and 17.9%, respectively.
Only “food on the account” can be guaranteed. Among domestic housing stocks according to statistics in 2023, China Resources Land had the most cash equivalent, at RMB 112.675 billion, followed by China Overseas Development, Vanke, Greentown, and Longhu. The cash equivalents were RMB 105.629 billion, RMB 96.943 billion, RMB 69.758 billion, and RMB 59.224 billion, respectively. It is worth noting that Sunac China and R&F Real Estate had cash of 7.056 billion yuan and 1,727 billion yuan respectively. In addition, Evergrande had cash of 4,047 billion yuan in the first half of the year, both less than 10 billion yuan, and its ability to withstand debt risks is weak.
However, “having food on the account” does not mean being able to sit back and relax. As mentioned above, lowering the level of debt is actually more about paying interest-bearing debt, reducing interest-bearing debt to a level that can be tolerated by cash capacity. In 2023, considering bank loans alone, Sunac China's interest-bearing debt (short- and long-term bank loans) was the highest, at 277.834 billion yuan, of which short-term debt reached 181.2 billion yuan, 25.7 times cash. Refer to Evergrande, the company's operating situation is in jeopardy.
Vanke proposed the slogan “stay alive” in 2018, yet industry risks and indigestible debts are eating away at financial soundness. In 2023, the company's interest debt reached 223.537 billion yuan, second only to Sunac, of which 43.573 billion yuan was short-term debt. In terms of net cash, the company's net cash and Sunac's net cash was -126.59 billion yuan and -27078 billion yuan respectively, both lower than the overall level of the industry. This also confirms that the agency downgraded Vanke's rating.
The domestic housing sector (excluding Evergrande and Country Garden) has an average cash equivalent of 48.16 billion yuan, and net cash - 71.37 billion yuan. Both indicators are superior to industry standards, including China Resources Land, Greentown China, C&D International, and China's overseas development. Among them, C&D International's net cash is the only positive target in the sector, at 22.085 billion yuan. Its finances are very healthy. Short-term liabilities are only 5.922 billion yuan, or 10.93% of cash.
Of course, some leading housing enterprises have large amounts of receivables and inventory, such as Vanke. In 2023, inventory was 707 billion yuan, and accounts receivable were 329.78 billion yuan, accounting for 47.13% and 21.98% of total assets, respectively. Both of these indicators can bring cash in the future, but on the one hand, there are falling inventory prices and impairment losses on receivables, which have a significant adverse impact on the company's performance. On the other hand, considering industry risks, the long inventory turnover cycle is tantamount to quenching Wangmei's thirst.
The industry is still “quite severe” in 2024. According to Kray's data, in the first quarter of 2024, real estate sales in China continued to be under pressure, and sales of the top 100 houses fell close to the bottom. In fact, the government has introduced corresponding stimulus policies on both the supply side and the demand side, such as lifting purchase restrictions in places on the demand side, etc., but there is little incentive for home purchases. The forecast for the second quarter is not optimistic. At the same time, overseas real estate is also facing the same dilemma, which further increases pessimistic expectations. Houses are difficult to sell and the repayment cycle is long. In the short to medium term, improving profits and reducing debt are still the two major strategies for housing enterprises to survive.
Finally, when it comes to the secondary market, will the industry end its cold winter. In 2023, the housing sector fell as high as 34%, falling for four consecutive years, with a cumulative decline of more than 70%. In terms of individual stocks, most housing enterprises fell by more than 80% in four years. Among them, the market value of leading company Vanke shrunk by 52% in 2023 and 75% in four years. However, there are still some housing enterprises that are relatively resistant to the decline. For example, China Resources Land, Greentown China, C&D International, and China's overseas development companies mentioned above, fell due to industry irresistible factors in 2023, but their resilience was obvious in four years. Among them, China Resources Land fell by only 12.5%.
In terms of valuation, the average PB value in the sector is currently 0.44 times, and the valuation of housing enterprises with high debt and on the verge of explosion has seriously shrunk. For example, Sunac has a market capitalization of only HK$7.98 billion, and PB is 0.1 times. China Resources Land and China's overseas development PB are 0.42 times and 0.33 times respectively. As industry concentration increases, leading high-quality housing enterprises with high-quality development will gain greater market share, and valuations will also be repaired.