China's property minnows take big hit as downturn bites

Wed Jul 30, 2014 5:00pm EDT

* Several smaller developers have flagged weaker earnings

* Sales volumes recovering but discounts hitting margins

* H2 likely to see market stabilise - analyst

* Top 10 players only make up 20 pct of market

By Clare Jim

HONG KONG, July 31 (Reuters) - A number of small developers - the kind that by sheer weight of numbers dominate China's vast property sector - are set to report big drops in earnings or even losses as the industry grapples with tight credit, sluggish sales and excess supply.

The first-half results are likely to stand in contrast to the performances of larger players, which have weathered the downturn relatively better thanks to their greater exposure to top-tier cities, pricing power and easier access to credit.

The pressure on smaller developers is significant because they make up the major chunk of a sector that accounts for more than 15 percent of China's gross domestic product. The top ten players account for less than 20 percent of the market by sales.

"Big players have good execution, so their profit will be better. Small players offer more price cuts," said Raymond Ngai, head of Greater China Property Research at Bank of America Merrill Lynch.

China Overseas Grand Oceans (COGO) will be among the first of the country's smaller developers to report earnings when it releases first-half results on Thursday.

COGO, which is about 40 percent-owned by major developer China Overseas Land & Investment Ltd (COLI), this month flagged a 30 percent dip in net profit, citing unspecified "structural economic adjustments" and a big fall in market value of investment properties.

"The expected weakened results (of COGO) for 1H 2014 reflect the challenging operating environment in third-tier cities ... against the backdrop of a tight environment for bank credit," Moody's senior analyst Kaven Tsang said in a note.

Greenland Hong Kong and Jingrui Holdings Ltd - two other smaller players expected to report in August - have said they will incur a first-half net profit fall and a loss, respectively, due to a drop in the number of properties completed and delivered.

RESTRICTIONS EASED

While many small Chinese property companies are feeling the heat, some of the larger developers are expected to post healthy revenue growth for the first half, lifted by record 2013 sales and less spending on land purchases due to a market slowdown.

Many industry watchers expect the market to bottom out in the second half thanks to further government stimulus and easier credit, although margins will continue to be squeezed across the board as developers offer discounts to boost sales.

"The second half will be better; sales should have bottomed in May," Bank of America Merrill Lynch's Ngai said.

Local governments have already started to ease restrictions on property purchases that were put in place at Beijing's behest when housing prices were soaring, while some banks in top-tier cities such as Shanghai and Shenzhen are reportedly offering mortgage rate discounts to first-time homebuyers.

Last month, China's home sales surged 32.5 percent from May. However, sales by value fell 5.4 percent, reflecting price cuts and other incentives developers have been offering to entice buyers and offload unsold homes.

"Prices will continue to come down in a gentle and expected manner, unlike the panic we saw in H1" said BOCOM International analyst Toni Ho. "Now market expectations have changed, price cuts are no longer seen as negative as long as they can bring in sales."

China's newly appointed housing minister, Chen Zhenggao, told developers at a forum earlier this month that clearing inventories is a priority for the second-half, further fuelling expectations of more mini-stimulus by local governments.

The CSI300 real estate subindex of leading Shanghai and Shenzhen-listed A shares has risen around 14 percent in July, the biggest monthly gain since December 2012. (Editing by Anne Marie Roantree and Stephen Coates)

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