Major Chinese property developers have slimmed down their debt levels by spending less on land acquisition and speeding up sales to meet government limits on borrowing, according to annual result filings.
Country Garden Holdings, China’s second-largest developer by sales, had cut debt by 43.1 billion yuan (US$6.6 billion) to 326.5 billion yuan last year, according to its annual results filing with the Hong Kong stock exchange on Thursday.
“Our financial position is healthy and we hope to lower our debt to below 300 billion yuan this year,” said Mo Bin, the company’s president and executive director. Country Garden said its net profit dropped 11.4 per cent last year to 35 billion yuan, while its revenue dropped 4.7 per cent to 46.3 billion yuan.
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Chinese property developers, who have used debt and loans to finance their massive projects, are being pushed to clean up their books under a government campaign to keep corporate debt levels in check to prevent any financial shocks. Chinese financial regulators have drawn up three so-called red lines, which cap their debt-to-asset ratio at 70 per cent, their net debt-to-equity ratio at 100 per cent and their short-term borrowings from exceeding their cash reserves.
Guangzhou R & F said on Thursday that it had reduced its total debt by 37.4 billion yuan to 159.73 billion yuan last year. It reported a 9.3 per cent drop in its net profit for 2020 to 9.2 billion yuan, while its revenue fell 5.4 per cent to 85.9 billion yuan.
“We aim to reduce our net gearing ratio to below 100 per cent in 2021, and to clear all three red lines in 2022,” said Li Sze Lim, its chairman. The company had placed a significant emphasis on strengthening its balance sheet and improving long-term financial flexibility, he added.
Kaisa Group Holdings said its net gearing ratio had fallen to 97.9 per cent last year, from 144 per cent in 2019, after an increase of 18.6 per cent in its net profit for 2020 to 5.4 billion yuan. It also announced the acquisition of a serviced apartment, residential, retail and hotel property project in Beijing from chairman Kwok Ying Shing for 13 billion yuan through a possible rights issue.
“We expect Chinese developers will continue to control debt growth in 2021, given the tight regulatory conditions,” said Franco Leung, associate managing director of corporate finance group at Moody’s Investors Service. He said he expected developers rated by Moody’s would boost sales and exercise prudence in land acquisition to control their debt this year.
Reducing land acquisitions and maintaining a sales quantum each year to cut debt was one of the ways to meet the three red lines, said Adrian Cheng, senior director of Asia-Pacific corporates at Fitch Ratings.
“Only a handful of developers are being monitored by the regulator … but most developers that are not being monitored are also working to adhere to the three red line policies. Those that have not cleared the three red lines will continue to work to meet [them], whether by cutting absolute debt levels, or through increasing their asset base without increasing debt,” he said.
“This will lead to some declines in profit margins, as developers focus more on churn. However, developers will have to strike a balance between maintaining a sales churn and the need for land replenishment. Other than that, some developers may also resort to selling down stakes in existing projects, or slowing down other investments in general,” Cheng added.