Breakingviews - China Evergrande stands to win a price war

FILE PHOTO: FILE PHOTO: An exterior view of China Evergrande Centre in Hong Kong, China March 26, 2018. Picture taken March 26, 2018. REUTERS/Bobby Yip/File Photo

HONG KONG (Reuters Breakingviews) - China Evergrande has hyped some big discounts before, but this time it may be for real. Unwritten credit rules being circulated by Beijing have prompted the $29 billion property developer – which often hikes prices first before touting reductions – to raise cash by offering 30% off for projects nationwide. The aggressive gambit by Chairman Hui Ka Yan may, however, cripple the competition.

The country’s housing market has been resilient against the pandemic, stoking fresh concerns about a bubble. The government’s “three red lines” policy has yet to be officially announced but is expected to take effect next year. It will prevent developers who fail to restrain key ratios - namely debt to assets, net debt to equity and short-term debt to cash - from borrowing more. Even those that pass will only be able to increase borrowing by 15% each year from their June 2019 levels.

Hui saw the writing on the wall. He called an emergency meeting earlier this month and became the first to declare broad price reductions. The company also set an ambitious monthly sales target of 100 billion yuan ($14.7 billion) for each of the next two months.

Peers will be under pressure to follow suit. Country Garden, China’s biggest developer by sales, is among those figuring out its next steps. Evergrande will be able to withstand the pain better than most, however. Its gross profit margin, at just below 30%, beats smaller rivals such as Huafa Industrial Zhuhai and Tahoe Group by nearly 10 and 20 percentage points, respectively.

And even though Evergrande’s total debt-to-equity ratio stood at a staggering 641% in June, Huafa’s was 618% while Tahoe’s was 620%, according to Refinitiv data. What’s more, Evergrande’s land bank, the largest in China according to credit rating agency S&P, also means it is better positioned to sell at speed.

A price war will hurt. Evergrande’s average sales price per square metre in the first half of the year already had slipped 12% from a year earlier, according to Breakingviews calculations. Net profit also fell by more than half. That can only spell trouble for many of its competitors, and increase the chances for collapse or consolidation for many of them.


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