HONG KONG, 11 Dec 2019. Pengyuan International has released a credit research report regarding China's property market.
Credit differentiation to expand
China’s property sales slowed slightly in 2019, in line with our previous predictions but beating the market expectation. We expect the slowdown to continue in 2020. In our recent sovereign review on China, we forecast M2 to grow at its current pace of 8% in 2020. For 2020, we expect the Chinese government to ease its monetary policy while keeping its controls on the property sector. In 2019, the sector underwent structural changes which will widen the differentiation in credit profiles among property developers.
Funding structure changed, challenging small players: The growth rate of property funding in China remained the same in 2019 as in 2018, but the funding structure changed in 2019, with new bank loans replaced by lower seniority financing sources such as bonds, trust funds or even equity. The lower seniority financing sources are likely to result in shorter tenor and more market-driven financing for developers, which will create difficulties for the smaller players in accessing funding. This is likely to strain the liquidity of the smaller developers and thus widen the credit differentiation among developers. We project the funding growth rate for Chinese developers to remain at 7% in 2020, driven by solid growth of property sales.
Land replenishment more through M&A: Despite a slowdown recently, land purchases in China increased by 19% in the first ten months of 2019, slower than the 57% increase in 2018. More land acquisitions were conducted through mergers and acquisitions (M&A) in 2019 compared to the past few years. As a result, land replenishment has increased while primary land acquisition slowed down in 2019. Land acquired through M&A tends to have longer cash cycles, despite having higher value and easier financing. We expect land replenishment to slow down while primary land acquisitions will pick up in 2020, hence the primary land acquisitions will yield a higher contribution in 2020 than in 2019. Over the mid-to-long term, we expect land replenishment to slow down together with sales. Instead of expanding their landbank, some developers will deleverage, diversify their business outside property or increase dividend payouts.
Differences in land banking strategy will widen credit differences: We believe the overall working capital requirements has increased for the Chinese property sector and expect it to stay high with the property inventory continuing to increase in 2020. As a result, the leverage will increase while liquidity conditions will remain tight. Against such a backdrop, Chinese developers’ credit profiles will diverge. We have observed that most large players didn’t expand their land and contracted sales aggressively in 2019, reversing from the previous year’s trend. These developers with strong sales and prudent expansion strategies managed to deleverage. On the other hand, some mid-to-small players have been aggressively pursuing scale and market share through rapid land bank expansion. For these developers, we expect to see deterioration in their credit profiles in the coming years.
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