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

Under the pressure of real estate market regulation and control, real estate enterprises, which once pursued the growth of scale and profit, are paying more and more attention to the proposition of "surviving".

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

It is not hard 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 the practical need for the development of real estate enterprises. How to balance the relationship between the two, not only test the adjustment space of real estate enterprises, but also related to the development potential of the company.

Many large-scale real estate enterprises that have completed the release of China Daily have to face the dilemma of profit and security. For example, Vanke's net profit attributable to its parent company was 11.05 billion yuan, a year-on-year decrease of 11.7%, and the medium-term net profit decreased for the first time in recent 19 years. In the face of problems such as increasing income but not increasing profits, Zhu Jiusheng, President and CEO of Vanke Group, said, "it's just like reading. I didn't do well in the mid-term exam. I don't know how to answer the teacher."

Vanke is even more so, which shows that the whole industry is hardly optimistic. In the past six months, most listed real estate enterprises have realized "downsizing" according to the "three red lines" standard, but they have also paid some costs, such as increasing income but not increasing profits. Even so, in the debt service cycle, the risk of the whole industry has not really decreased, and the industry seldom talks about scale.

No doubt, real estate has ushered in a period of change. It is not difficult to see that most enterprises are trying to embrace uncertainty. The only thing that can be determined is that the single criterion of scale has changed.

Where are the profits?

In the first half of this year, Vanke held 195.22 billion yuan of monetary cash, and the short-term debt ratio of cash after deducting pre-sale regulatory funds and restricted funds was 1.67 times; The net debt ratio was 20.2%; The asset liability ratio excluding accounts received in advance was 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, a year-on-year increase of 10.6%. Operating revenue reached 167.11 billion yuan, up 14.2% year on year.

This is where the decline in profits has occurred. In this regard, Zhu Jiusheng can be attributed to three reasons: first, the growth of sales scale is limited; Second, the gross profit rate of development business decreased rapidly; Third, it will take time for the transformation effect to be reflected.

With the regulation of the real estate market following suit, the weakness of scale growth has become a common feature in the industry, and the decline of gross profit rate has also become the norm. In the first half of 2021, the gross profit rate of Vanke Real Estate and related businesses was 18.0%, 6.02 percentage points lower than that of 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 rate of development business will show a downward trend... Vanke will still have some pressure on the gross profit rate in the next two years. " Vanke Group Executive Vice President, financial director Han Huihua said at the performance meeting.

Most of the diversified business of real estate enterprises belongs to "heavy investment, less return", which not only easily forms pressure on the capital chain, but also affects the profit margin and return on assets. However, under the influence of traditional business, diversified transformation is essential.

As Zhu Jiusheng said, these factors together form a "drag" on the profits of real estate enterprises and make the dilution of profit margins a common phenomenon. For example, Fuli's gross profit margin was 21.7%, 3.5 percentage points lower than that in 2020; Rongchuang's gross profit rate was 20.8%, slightly lower than that in 2020 by 0.2 percentage points, 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 belongs to the high level of the industry, but it is also 1.6% lower than that in 2020.

In addition, Fuli, Jindi, Aoyuan, Jianye, shoukai, COSCO, Zhongnan and other real estate enterprises have fallen into the situation of "increasing income and reducing interest".

In the past few years, the loss of profits has become the norm of the real estate industry. A person in charge of a listed real estate enterprise in Beijing told the 21st century economic report that under the general trend of limiting sales prices and increasing land costs, the company has only done one thing in recent years - making an article on cost. The slogan often put forward by the company is "ask for profit from financing, profit from management, profit from engineering and profit from supplier". But compared with the lost industry dividend, there is not much room for this.

He also said the trend of thin profits was inevitable. Since 2018, the real estate market has maintained rapid growth under strict regulation. Even with the impact of the new crown 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 real estate profits will be more obvious.

The end of the scale myth

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

In the first half of 2021, the gross profit and net profit of Evergrande were 28.84 billion yuan and 10.5 billion yuan respectively, which were both down by 57% and 29% compared with the same period last year. Evergrande said that the decline in gross profit was mainly due to the decrease in delivery area and the decrease in average sales price. Evergrande also disclosed that some of the projects were in shutdown due to non payment.

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

Another real estate company, Huaxia happiness, is also in the process of self-help. In the first half of this year, the sales amount of Huaxia happiness reached 13.97 billion yuan, which was only 34% of the same period last year (41.564 billion yuan). Since the debt default on the eve of this year's Spring Festival, Huaxia happiness's business has been affected to varying degrees, and further affected its performance.

In addition to selling projects and introducing strategic investors, Huaxia happiness is also carrying out the asset light strategy, so as to reduce the scale of capital precipitation.

Four years ago, the scale of Huaxia happiness was once among the top ten in the industry. Some analysts believe that the status quo 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 their rapid expansion, also performed poorly in the first half of the year.

A series of policies aimed at "deleveraging" are considered as the "enemy" of scale expansion. Since last year, the "three red lines" of real estate financing and the "five file management" of housing loans have been introduced in succession, and the real estate market has officially entered the "post leverage era". These policies not only affect the scale expansion of enterprises, but also make a number of enterprises fall into risk by "drawing blood" from the capital side.

Liu Shui, deputy director of enterprise research of the China Central Research Institute, believes that the policy objectively urges real estate enterprises to increase sales, make up for the lack of cash flow through sales collection, and at the same time realize "downscaling" and return to the safety zone. However, the 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 of the real estate enterprises have achieved "downsizing" in the middle of the year, and the proportion of "green" and "yellow" real estate enterprises is also increasing.

But the overall risk of the industry has not really declined. The above-mentioned real estate enterprises said that this year and next are still the repayment cycle of real estate, and capital pressure will continue to exist. At the same time, policy pressure will make more and more real estate enterprises face the pressure of capital chain, debt default and industry merger and acquisition behavior may continue to appear at a high frequency.

What can be determined is that the industry evaluation standard based on scale is no longer applicable. Chen Jinshi, chairman of Zhongnan Construction Co., Ltd., said at the performance meeting, "I don't think it is necessary to be reckless. We have to rationally adapt to the policy and market, and achieve the best under the company's high-quality operation."