Despite falling home prices and credit challenges three China real estate developers this week reported jumps in profit reaching 63 percent in the first half of 2014.
Country Garden Holdings, China Resources Land and Franshion Properties all reported their first half financial results to the Hong Kong stock exchange yesterday, with Franshion announcing that its profits had climbed to $471 million during the period from January to June.
The good news on profits, however, was balanced against below target sales results, which led two of the three companies to promise to bring more projects to market in the second half. If the firms follow through with their plans, the prospect of greater supply amid slumping prices could drive a new wave of discounting.
Earlier this week China’s National Bureau of Statistics reported that average home prices slid 0.9 percent nationwide in July compared to June, with 64 out of 70 cities surveyed reporting declines in housing prices.
Franshion Profits Up 63 Percent But Sales Disappointing
Franshion Properties (China) Limited (HKG:0817) reported net profits for the period of RMB 2.89 billion, up 63 percent from the same period last year, but up only 14 percent once gains from property revaluation are disregarded.
The company recorded its strongest results in its core property development business, where revenues grew 29 percent year on year to RMB 9.35 billion. The company will still have to work hard to achieve its 2014 sales target, however, as its reported contracted sales are only RMB 6.86 billion – just 34 percent of its full year goal.
In order to reach its target, Franshion indicated that it would release 20 projects onto the market in the second half of 2014. During June the company raised RMB 2.54 billion ($414 million) through the IPO of its Jinmao Investments and Jinmao (China) subsidiary.
Country Garden Builds Profits But Needs to Move Pipeline
Country Garden Holdings also reported strong financial results for the first half of the year, with its net profit margin climbing to 14.2 percent, compared to 11.7 percent during the second half of last year. The company’s core net profit, which excludes gains from revaluation of property, was up 14.1 percent to RMB 4.7 billion.
Revenues for the Foshan-based builder were up 42.2 percent compared to the first six months of 2013, and by GFA its transactions increased 38.7 percent to 5.35 million square metres.
Contracted sales for the first half were up 73.6 percent compared to the same period in 2013, and reached RMB 58,417 million on 8.79 million square metres of space.
The dark cloud for the developer belonging to 33-year-old billionaire Yang Huiyan is that despite the rise in contract sales, the company is still well under halfway to its target of RMB 128 billion for the year.
The company also plans to ramp up its introduction of new projects to the market in the next six months, pushing out 37 projects between July and December, compared to just 22 during the first half.
China Resources Land Squeezes Higher Profits From Slimmer Sales
China Resources Land reported less promising results than Country Garden, but still saw net profits rise 13.3 percent, which outperformed the 12.7 percent growth it achieved in the same period of last year.
However, the company’s chairman, Wu Xiangdong cautioned that the state-run firm’s full year contracted sales could fall short of its RMB 70 billion target after booking only RMB 29,821 in new sales during the first seven months of the year.
Despite this admission, Wu expressed confidence that the sales goal was still attainable. The company’s contracted sales for the period from January to June were down by nearly a quarter compared to the same period last year. In its statement, the company attributed its disappointing sales to “to weak property market and limited new saleable resources.”
New Supply Could Squeeze Profits
While China Resources, Country Garden and Franshion all reported healthy profit margins, that situation could be set to change if the companies – along with many competitors – follow through on their plans to increase the number of new projects that they bring onto the market, despite softening demand from consumers.
During the first half of the year, many property developers have held back new projects from the market in the hopes that prices might recover and they might preserve profit margins. Now, with the need to achieve annual sales targets, many companies – such as Franshion and Country Garden are recognising the need to discount to survive.
In results released a day earlier than this trio of developers, China Vanke, the country’s largest developer by sales showed that it had only recovered from a disastrous first quarter by cutting prices to move more homes.
If more companies follow that lead, then we may expect to see market prices softening further this year.