China Developer Reports 31% Profit Drop as Small Companies Struggle

China Overseas Grand Ocean Group, one of China’s smaller listed developers, reported a 31 percent drop in net profit during the first half of 2014, and the company’s performance seems to confirm the diverging fortunes of the haves and the have nots among real estate companies in the world’s second largest economy.

China Overseas Grand Ocean Group paid the price for being the first mainland developer to report first-half results on Friday, and the market quickly punished the company’s stock, which dropped 8.74 percent on Friday after investors saw the results of the company’s financials.

As noted in a story in Reuters, the company’s leadership blamed the disappointing results on suddenly reticent buyers in China’s smaller markets. “Currently, real user demand in third-tier cities is limited,” company chairman Hao Jianmin was quoted as saying in the report.

Hao, who also chairs developer China Overseas Land, which holds the largest stake in China Overseas Grand Ocean also pointed to excess supply of housing and a shortage of bank credit as major obstacles for his company.

Bigger Developers Getting Bigger Profits

In contrast to China Overseas Grand Ocean’s lower profits, its more powerful parent, China Overseas Land & Investment declared on Friday that its operating profits were up by 42.7 percent during the first half of 2014.

Turnover for the property giant increased by 54.0 percent to HK$49.57 billion, with its property development business on the mainland accounting for 96.7 percent of this turnover. The developer achieved its improved performance through higher average selling prices of RMB 16,525 per square metre, although contracted sales actually dropped by 8.8 percent.

China Overseas, which is the biggest mainland developer listed in Hong Kong by market cap, and one of the top four developers in China, made profits of HK$10.79 billion (US$1.39 billion) during the period from January to June, exceeding analyst estimates.

In a statement, Hao, the chairman of China Overseas Group said of China’s real estate market in the coming six months that, “Property developers which are weak in managerial and financial capability and with a high gearing will likely be eliminated. Such trends present more opportunities than challenges to the Group.”

More Consolidation on the Way

Hao’s prediction of opportunities for China’s larger property developers during the downturn correlate with views stated earlier by other industry leaders about the impact of the slowdown on the crowded sector.

Following the acquisition of Hangzhou-based Greentown China by Sunac Holdings during May, Yu Liang, the president of China Vanke predicted that the country’s real estate industry would consolidate from its then 85,000 firms to only 10,000 within the next 15 years.

Ronnie Chan, the chairman of Hong Kong developer Hang Lung made a similar, if less quantified prediction in April this year, of this year when he predicted that the 2014 downturn would begin to “separate the men from the boys in China’s real estate market.”

Hang Lung on Thursday released its own first half results showing underlying profits rising 29 per cent in the first half of the year, thanks in part to 14 percent growth in its rental income in mainland China.

Hang Lung said in a statement that its mainland China portfolio now accounted for 54% and 51% of the Group’s rental turnover and operating profit, respectively.