Since the end of last year when the proposal for “promoting M&A of real estate enterprises to improve industrial concentration” was put forward by the Central Economic Working Conference, the Matthew Effect has become striking in this sector. In the first half of 2016, Top 100 real estate enterprises sold nearly half of China’s houses, while the industrial concentration of Top 10 real estate enterprises reached 19.2%. As the typical representative of the Top 10, Country Garden realized “Two 100-billion” in the first half year: contract sales of about 125.1 billion yuan (the same below) and cash collection of 105.1 billion yuan. With contract sales up by 130% year on year, it topped all 100-billion-yuan real estate enterprises, and marched into Forbes 500 listed companies
Top 10 real estate enterprises account for 19% of sales
According to the monitoring by E&H Corporation, Top 10 real estate enterprises including Vanke, Evergrande and Country Garden, etc. reported contract sales close to 1 trillion yuan in the first half of the year, taking up 19.2% of total sales in China, compared with 17.3% for the whole year of 2015, which means that the industrial concentration of the Top 10 rose by 11% in the first half of 2016. In view of Top 100 real estate enterprises with sales occupying 49% of China’s total sales, they are well-matched in strength and form a 50:50 market share proportion with the rest of more than 130,000 real estate enterprises.
Currently, there are numerous real estate development enterprises in China with many in lack of strength, hindering continuous development of the whole industry. Therefore, the Central Government has set the keynote of enhancing industrial concentration. According to relevant analysts, it is expected that over half of real estate enterprises will be washed out in the following 3-5 years.
In the process of natural selection, benchmark enterprises, with more powerful development capacity, profitability and risk resistance capacity, will secure larger development space. For example, Poly Real Estate realized sales up to 110.6 billion yuan in the first half of the year with an 47% year on year growth, surmounting 100 billion yuan in advance and becoming the 5th real estate enterprise with sales income exceeding 100 billion yuan in first half of 2016 following Vanke, Evergrande, Country Garden and Greenland Group. While Country Garden reaped the sales of 100 billion yuan on June 8, and raised its annual sales target to 220 billion yuan at the beginning of July.
10 real estate enterprises will enter the 100-billion-yuan club
Against the general backdrop of L-shaped trend of China’s economy, the real estate circles generally thinks that the sector will meet 10 100-billion-yuan real estate enterprises this year, of which Vanke, Evergrande and Country Garden will present surprisingly pleasant performance.
According to the mid-term performance report issued on August 18, Country Garden realized the contract sales of 125.1 billion yuan, up by 130%, over doubling year on year, ranking No.1 among the Top 10 in terms of growth rate.
As of June 30, Country Garden owned about 117 million square meters available for sale around China (including those with and without pre-sale permits), of which 52% target Tier 1 and Tier 2 cities and 48% focus on Tier 3 and Tier 4 cities.
According to the Report, Country Garden has long before identified new profit growth point on the premise of steady development, and has prioritized the overseas development in recent years. For example, the 20-year-long strategic project Forest City, a JV project with Johore government, Malaysia, has become popular internationally. Currently the project has attained a planned area of about 20 square kilometers, with forecast profit margin far higher than that of domestic projects in the same period. Meanwhile, Country Garden will set its production based on sales, and carry out rolling development of the project according to market situations.
In recent years, partnership mechanism has been prevailing in Chinese business circles. As an important one practicing the mechanism, Country Garden is one of the first enterprises benefiting from it. In Oct. 2014, management-equity partnership was implemented in all new projects of Country Garden. By June 30, 2016, 319 projects had introduced the mechanism, with cumulative contract sales reaching 100.4 billion yuan, expected net profit margin of estimated average contract sales from partnership project standing at about 12.5%, and expected average cycle for regaining positive net cash flow lasting 8.3 months.
Property management booms
According to the Report, in the first half of the year, Country Garden’s building sales income and cash collection of other businesses exceeded 100 billion yuan for the first time and reached about 105.1 billion yuan, up by 112% year on year. The financing cost dropped drastically, with ending weighted average borrowing cost of 5.76%, down by 44 basis points compared with that of 2015. On June 30, lower than the redline of 70%, the net debt-to-credit ratio was 62.6%, keeping steady.
In terms of operating revenue, Country Garden realized total revenue of about 57.4 billion yuan in the first half of the year, up by 21% year on year; gross profit before land VAT provision was about 12 billion yuan, up by 9.6% year on year; profit due for shareholders about 5.4 billion yuan, up by 9.3% year on year.
In the term, earning per share was 0.2418 yuan, up by 3.6% year on year. The Board of Directors announced payout of mid-term dividend of 0.0692 yuan per share, up by 6.8% year on year, making half-year total dividend account for 31% of core total net profit.
Property management and community-related businesses also boosted growth of profit. In the term, Country Garden’s Property Dept. contracted management area of about 229 million square meters, covering 197 cities in 27 provinces of China, of which the management area with entry of relevant property management teams reached about 100 million square meters, serving about 1 million owners and residents in total around China.
In the same term, income from property management and community-related businesses stood at about 969 million yuan, up by 7.1% year on year, and profit about 187 million yuan, up by 127.5% year on year. In the future, Country Garden will actively take advantage of capital market to develop relevant businesses, enrich income sources and enhance business value.