March 27, 2019 / 4:41 AM / 3 months ago

Breakingviews - China property giants face call of tech sirens

A labourer (R) gestures to his colleague outside their dormitory at a residential construction site of Evergrande, near a wall painted with the company logo, in Guangzhou, Guangdong province June 22, 2012. REUTERS/Stringer/File Photo

HONG KONG (Reuters Breakingviews) - China’s property developers are struggling to resist the siren song of tech investing. China Evergrande, a $45 billion giant, reported bumper earnings for last year, along with several major peers, even as overall sales growth slowed. Home prices are rising, debt is stabilising and government policy is friendlier. Shareholders could relax, were developers not plowing the bounty into electric cars and farm technology.

Evergrande on Tuesday reported that profit attributable to shareholders rose more than 50 percent last year. China Vanke and Country Garden reported double-digit earnings growth as well, even though national data showed sales growth in floor space terms slowed to 1.3 percent last year. Sales cooled further in January and February, yet home prices still rose more than 10 percent in February on an annual basis, according to Reuters. Average debt among rated developers is forecast to fall to 7.4 times earnings before interest, tax, depreciation and amortisation this year, according to S&P Global Ratings, down from 8.9 times in 2016.

What’s more, the policy environment seems increasingly favourable. Beijing might well allow cities to further ease homebuying curbs later this year in order to boost the economy.

The diversification into trendy technology buzzwords is more concerning. Evergrande in particular has a penchant for such plays: last year it signed an agreement with the Chinese Academy of Sciences to invest around $15 billion in high-tech sectors. It is making eye-popping bets on electric vehicles, aiming to become one of the largest new energy vehicle manufacturers in the world in three to five years – though it now says it will not diversify into new industries in the next five years.

Chinese developers like to hedge against real estate downturns by spreading bets during good times. There may even be synergies in some cases: Country Garden, for instance, wants to use robots for construction. But the same can’t be said for Evergrande’s dabbling in bleeding-edge sectors like electric vehicles or Country Garden’s forays into agriculture. These are ways to amplify risk, not reduce it.

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