Tuesday 25 September 2018

Not-so-good news in China developers' fabulous earnings

Pressure: China’s developers are under pressure to refinance their debt, even as the housing boom in Beijing and other cities buoys earnings and pushes up margins
Pressure: China’s developers are under pressure to refinance their debt, even as the housing boom in Beijing and other cities buoys earnings and pushes up margins

Bloomberg News

The financial results of Chinese developers this earnings season have been roundly impressive, but there is one metric that should give investors pause: Firms' ability to service their debt is the weakest in three years.

Cash-to-short-term debt levels at more than 80 publicly-traded real estate companies tracked by Bloomberg were 133pc on average in the first half, the worst since the first six months of 2015 and down from 297pc a year earlier.

Almost a quarter of developers sport a ratio below 50pc.

"The biggest alarm is the refinancing pressure," said Christopher Yip, a real estate analyst at S&P Global Ratings.

"Although developers try to hoard cash, their buffers are draining."

It's a stark reminder of the challenges ahead for Chinese developers even as the nation's booming property market buoys earnings and pushes up margins. The sector faces a record $23bn maturity wall in the first quarter of 2019, Bloomberg calculations show, or as much as $43bn if bond investors demand early repayment of some notes. Compounding that is China's determination to keep a lid on home prices, which is making it harder for firms to generate swift cash from sales.

It's all too tempting to focus on the good stuff, though. First-half profit at the 10 biggest Chinese developers jumped an average 75pc from the same period last year, while gross margins climbed to a six-year high of 32.8pc.

But while business has been booming, developers have also been piling on the debt. Firms have been selling more bonds in the domestic market - and at the cheapest rates as investors shrug off default concerns. Those with dollar-denominated obligations, meanwhile, face higher borrowing costs as the US Federal Reserves continues on its tightening path.

According to Bloomberg Intelligence property analyst Kristy Hung, it's the smaller firms that will suffer the most. Their land banks are under threat from larger rivals with big war chests, and consolidation is already starting to occur.

The top 30 players now command a market share that's approaching 50pc, up from 29pc in 2016.

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