Mainland developer China Evergrande Group said in an announcement to the Hong Kong stock exchange this week that it is likely to report a record 90 percent jump in core profit for 2018, thanks to an increase in the amount of housing that it sold and improving efficiency.
The profit warning from Evergrande came after the Shenzhen-based firm ranked third amongst mainland developers for 2018 in terms of contracted sales, after signing agreements to sell RMB 551.1 billion ($82.16 billion) in real estate last year.
The increase in profit, however, primarily showed the company’s collection of revenue realised from sales contracts signed in 2017 or earlier, with Evergrande’s contracted sales for 2018 only having risen by up 7.4 percent compared to 2017, according to statistics from China Real Estate Information Corp (CRIC), a research unit of mainland brokerage E-House.
Financials in Line With Analyst Projections
While audited results will not be published until later this month, Evergrande’s profit announcement is in line with estimates from equity analysts in the region. Researchers at Bank of America Merrill Lynch having projected that the developer’s core profit will have increased in the 75 to 80 percent range in the second half of the year to RMB 46-48 billion, at least three percent higher than what the American investment bank says is the market consensus of RMB 44.4 billion. The company announced a 101.5 percent year on year rise in profit to RMB 55 billion in the first half of last year.
According to January projections from Singaporean bank DBS, Evergrande’s gross margins remained stable at the end of 2018 at 35 to 36 percent, as the company’s management said that it had shifted its focus to profitability. That margin mirrors the 36 percent achieved in the first half of the year, and in 2017.
The profit alert comes a day after the company disclosed its contracted sales for January and February of this year fell 42.5 percent year on year to RMB 64.7 billion — its worst performance in three years. It has also been less than a month since the company announced it was aiming for a nine percent increase in sales in 2019 to RMB 600 billion — its lowest growth target in at least three years.
China’s Best-Known Debtor Vows to Change
Evergrande’s improved profits come as the company vows once again to deleverage. Company representatives have said that Evergrande will reduce its gearing ratio from close to 140 percent at the end of 2018, to 100 percent by the end of 2019, and to 70 percent by the end of December of 2020.
According to UBS, the developer plans to re-finance RMB 200 billion of trust loans in 2019-20. The company has RMB 10 billion of onshore bonds due in 2019, and no offshore bonds maturing this year. According to DBS, the company’s recently issued $3 billion in bonds will be used to support this debt restructuring effort.
That determination could be aided by the company’s relatively low-cost land bank. According to UBS, the firm purchased RMB 74.6 billion worth of land in 2018, down 69 percent year on year, but it plans to increase its acquisitions slightly in 2019 in order to support growth.