Evergrande Profit Falls as Property Curbs Are Maintained

Evergrande Real Estate Group Ltd. (3333), China’s biggest developer by sales volume, said first-half profit fell after the company sold fewer apartments in less affluent cities as the government maintained property curbs.

Profit excluding the revaluation of investment properties dropped 21 percent to 3.8 billion yuan ($598 million) compared with an increase of 148 percent a year earlier, the company said in a Hong Kong stock exchange statement today.

Evergrande’s earnings declined as home prices were hit the most in inland cities where the Guangzhou, southern China-based company focused its expansion last year. Prices in the eastern city of Wenzhou dropped 15.6 percent last month from a year ago, leading declines.

“They had a brilliant performance last year because of their move to second- and third-tier cities, but the story twisted this year,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research, before today’s release. “The property markets of smaller cities are lagging behind the major ones.”

Evergrande’s contracted sales fell 21 percent to 35 billion yuan in the first half from a year earlier, accounting for 43.8 percent of the full-year target of 80 billion yuan, the developer said in an e-mailed statement last month. For the same period last year they accounted for 60.5 percent of a sales target of 70 billion yuan.

Contracted sales from first-tier cities was 410 million yuan, representing 1.2 percent of total, while they were 16.36 billion yuan from second-tier cities, accounting for 46.7 percent of total, and 18.27 billion yuan from third-tier cities, or 52 percent of total.

Net Gearing

The company is confident of achieving this 80 billion yuan sales target for this year and will start more projects in the second half, Chief Executive Offier Xia Haijun told reporters in Hong Kong today.

The government has said it will maintain measures it began introducing in April 2010 to prevent an asset bubble in property prices, including higher down-payment and mortgage requirements, and home purchase restrictions in about 40 cities.

Evergrande’s net gearing, or the debt-to-equity ratio, climbed to 96.1 percent, compared with 68.9 percent six months ago. Cash balance in the first half was 24.74 billion yuan, down 12.3 percent from the end of last year, the developer said today.

The developer said it expects its gearing to fall to 80 percent by the end of the year after sales started recovering in April, Chief Financial Officer Tse Wai Wah said at the press conference. The gearing rose because sales slowed late last year and early this year, and the company undertook financing, he said.

Short-Seller

Short-seller Citron Research targeted the developer in June, claiming the company “has used accounting tricks and bribes to hide the fact that it is truly insolvent.” Evergrande denied the report and said its cash flow is sufficient, while it filed a police report in Hong Kong against the allegations.

The company acquired land for 36 projects in the first half, it said in today’s statement. It bid 32,967 yuan per square meter (10.76 square feet) at an auction for land in Guangzhou’s new financial district, Zhujiang Xincheng, in June, said an Evergrande official, who asked not to be identified because of company policy, at the time. The price, based on the site’s buildable area, was a record high for China’s southern business hub, the official Xinhua news agency reported.

Evergrande’s stock fell 0.6 percent to HK$3.19 at the close of trading in Hong Kong, before the earnings were announced, bringing this year’s loss to 0.9 percent.

The developer won’t pay an interim dividend.

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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