(Adds COGO results, comment)
* COGO H1 net profit down 31 pct, cuts FY sales target 22 pct
* Several smaller developers have flagged weaker earnings
* Sales volumes recovering, but discounts hitting margins
* 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.
China Overseas Grand Oceans (COGO) was the first mainland developer off the block on Thursday, when it reported a 31 percent drop in first-half net profit and flagged a gloomy industry outlook due to high inventories and tight credit.
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.
COGO, which focuses on third-tier cities, cut its full-year sales target by 22 percent to HK$18 billion ($2.3 billion) on Thursday and said it does not expect to post a profit growth for 2014. Its gross margin fell 3.7 percentage points from a year ago to 29 percent.
"Currently, real user demand in third-tier cities is limited," said company chairman Hao Jian Min, who is also the chairman and chief executive officer of state-backed China Overseas Land & Investment Ltd (COLI). COLI owns about 40 percent of COGO.
"Because of excess supply, together with buyers' wait-and-see approach, even if prices were adjusted somewhat, it wouldn't drive good sales," he said at an earnings briefing, adding that limited bank credit remained a problem for the industry.
He said COGO had slowed some developments in the first half to avoid inventory pile-up.
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.
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." ($1 = 7.7500 Hong Kong Dollars) (Editing by Anne Marie Roantree, Stephen Coates and Simon Cameron-Moore)