Security Boundary Line And Profit Defense War Of Real Estate Enterprises Under The "Three Red Lines"

Under the heavy pressure of property market regulation, real estate enterprises that once pursued the growth of scale and profits are paying more and more attention to the proposition of "living".

Since August, hundreds of A-share and H-share listed real estate enterprises have released their mid year performance. At this time, it is just one year since the "three red lines" policy was introduced, but under the heavy pressure of various regulatory policies, the focus of real estate enterprises has changed significantly.

It is not difficult to understand that "safety" and "profit" have become the themes of many performance meetings. The former is an inevitable requirement under supervision, while the latter is a practical need for the development of real estate enterprises. How to balance the relationship between the two not only tests the adjustment space of the real estate enterprise, but also relates to the development potential of the company.

Many large real estate enterprises that have completed the release of the China Daily have to face the dilemma of profit and security. For example, Vanke's net profit attributable to the parent company was 11.05 billion yuan, down 11.7% year on year. For the first time in recent 19 years, its medium-term net profit declined. In the face of such problems as increasing income without increasing profits, Zhu Jiusheng, president and CEO of Vanke Group, said, "It's like the feeling when I was studying. I didn't do well in the mid-term exam and didn't know how to answer the teacher."

Vanke is still like this, which shows that the whole industry is hard to be optimistic. In the past six months, most listed real estate enterprises have achieved "downshifting" in accordance with the "three red lines" standard, but also paid some costs, such as increasing income without increasing profits. Even so, in the debt repayment cycle, the risk of the entire industry has not really declined, and the industry rarely talks about scale.

There is no doubt that the real estate industry has ushered in a period of change. It is easy to see from the China Daily that most enterprises are trying to embrace uncertainty. The only thing that can be determined is that the single evaluation standard based on scale has changed.

Where have all the profits gone?

In the first half of this year, Vanke held cash of 195.22 billion yuan, and the cash short debt ratio after deducting pre-sale regulatory funds and restricted funds was 1.67 times; Net debt ratio 20.2%; The asset liability ratio excluding advance receipts is 69.7%. The "three red lines" are not stepped on, and continue to be in the "green gear".

In terms of sales, Vanke achieved a contract sales amount of 354.43 billion yuan, up 10.6% year on year. The operating revenue was 167.11 billion yuan, up 14.2% year on year.

This is where the decline in profits occurred. Zhu Jiusheng has three reasons for this: first, the growth of sales scale is limited; Second, the gross profit rate of development business declined rapidly; Third, it will take time to reflect the impact of business transformation.

Under the situation that the regulation of the property market follows suit, the lack of scale growth has become a common feature of the industry, and the decline of gross profit margin has also become the norm. In the first half of 2021, Vanke's gross profit rate of real estate and related businesses will be 18.0%, down 6.02 percentage points from the same period in 2020. "In the past few years, especially since 2017, the land sales ratio (the ratio of land cost to sales price) has been rising, so the gross profit margin of the development business will show a downward trend... Vanke will still have some pressure on gross profit margin in the next two years." Han Huihua, executive vice president and financial director of Vanke Group, said at the performance meeting.

The diversified business of real estate enterprises mostly belongs to "heavy investment, little return", which is easy to form pressure on the capital chain and will affect the profit rate and return on assets. However, when traditional businesses are affected, diversified transformation is indispensable.

As Zhu Jiusheng said, these factors together form a "drag" on the profits of real estate enterprises, and also make profit margin dilution a common phenomenon. For example, the gross profit rate of R&F is 21.7%, 3.5 percentage points lower than that of 2020; Rongchuang's gross profit rate was 20.8%, 0.2 percentage points lower than that in 2020 and 2.2 percentage points lower than that in the first half of last year; The gross profit rate of Longhu is 27.7%, which is a high level in the industry, but also 1.6 percentage points lower than that in 2020.

In addition, a number of real estate enterprises, such as R&F, Jindi, Aoyuan, Jianye, Shoukai, Sino Ocean, and Zhongnan, fell into the situation of "increasing income and reducing profits".

In the past few years, the loss of profits has become the norm in the real estate industry. The relevant person in charge of a listed real estate enterprise in Beijing told the 21st Century Business Herald that in recent years, the company has only done one thing - to make an article on costs - under the general trend of selling price limits and increasing land costs. The slogan often put forward by the company is "profit from financing, profit from management, profit from engineering and profit from suppliers". However, compared with the lost industry dividend, there is not much room.

He also said that the trend of profit dilution was inevitable. Since 2018, the real estate market has maintained a rapid growth under strict control. Even with the impact of the COVID-19 epidemic, the whole industry continues to maintain a high sales scale, which also supports most enterprises to enjoy this wave of sales dividends. If not, the decline in profits of real estate enterprises will be more obvious.

The End of the Myth of Scale

Compared with the decline of profits, safety is a more urgent issue. In 2018, Vanke held a regular autumn meeting in Shenzhen with the slogan of "live", which was regarded as a warning by the industry. Three years later, "living" has become the reality of the industry.

In the first half of 2021, Evergrande's gross profit and net profit will be 28.84 billion yuan and 10.50 billion yuan respectively, down 57% and 29% from the same period last year. Evergrande said that the decrease of gross profit was mainly due to the decrease of delivery area and the decrease of average sales price. Evergrande also disclosed that some projects were suspended due to non payment.

Evergrande's capital chain problem has long been known to the outside world. This top 3 real estate enterprise, whose sales volume reached 356.6 billion yuan in the first half of the year, has recently encountered financial difficulties. In addition to selling cars, property, retail and other businesses, Evergrande also disclosed that it is looking for strategic investors.

Huaxia Happiness, another real estate enterprise in financial difficulties, is also in the process of self rescue. In the first half of this year, Huaxia Happiness achieved sales of 13.97 billion yuan, only 34% of the same period last year (41.564 billion yuan). Since the debt default occurred on the eve of the Spring Festival this year, the business of Huaxia Happiness has also been affected to varying degrees, which in turn affects its performance.

In addition to selling projects and introducing strategic investors, Huaxia Happiness is also pursuing the asset light strategy to reduce the scale of capital deposition.

Four years ago, the scale of Huaxia Happiness was among the top ten in the industry. Some analysts believe that the current situation of the above two companies shows that the scale has been difficult to become the "moat" of the real estate industry. On the contrary, excessive pursuit of scale at this stage will lead to greater risks. Taihe and Blu ray, which had debt problems due to rapid scale expansion, also performed poorly in the first half of the year.

The introduction of a series of policies aimed at "deleveraging" is considered as the "enemy" of scale expansion. Since last year, representative policies such as "three red lines" for real estate financing and "five levels of management" for housing loans have been introduced, and the real estate market has officially entered the "post leverage era". These policies not only affect the scale expansion of enterprises, but also put a number of enterprises at risk by "bleeding" the capital side.

Liu Shui, deputy director of enterprise research of China Index Research Institute, believes that the policy objectively urges real estate enterprises to increase their sales efforts, make up for the lack of cash flow through sales collection, and at the same time achieve "downshifting" and return to the safe zone. However, enterprises' expenditure on land acquisition and investment has inevitably been affected.

According to the 21st Century Economic Report, compared with the end of last year, most real estate enterprises achieved "downshifting" in the middle of the year, and the proportion of "green" and "yellow" real estate enterprises is also increasing.

However, the overall risk of the industry has not really declined. The aforementioned real estate enterprises said that this year and next are still the debt repayment cycle of real estate, and the capital pressure will continue to exist. At the same time, the policy pressure will make more and more real estate enterprises face capital chain pressure. Debt default and industry mergers and acquisitions may continue to occur frequently.

What is certain is that the industry evaluation standard based on scale is no longer applicable. Chen Jinshi, Chairman of Zhongnan Construction, said at the performance meeting, "I don't think it is necessary to do things recklessly. We need to adapt to the policy and the market rationally to achieve the best under the company's high-quality operation."

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