Sunac to Exceed Sales Target Countering China Property Curbs

Sunac China Holdings Ltd., the Chinese developer part-owned by buyout firm Bain Capital LLC, expects to exceed its sales target this year as demand remains strong even amid the nation’s property curbs, Chairman Sun Hongbin said.

The Tianjin-based homebuilder in January forecast 45 billion yuan ($7.3 billion) in sales for 2013. Net income can grow this year as Sunac’s adequate cash holdings allow it to avoid price cuts and maintain gross margins, Sun said in an interview in Beijing, without giving forecasts.

China’s accelerated efforts to implement more property curbs have had limited impact, with March home prices rising in the most cities tracked by the government since September 2011, while housing sales jumped 69 percent in the first quarter. Sunac’s sales surged 147 percent to 10.5 billion yuan in the three months ended March 31, as buyers rushed into the market before local governments tightened restrictions that pushed up transaction costs.

“Our first-quarter numbers already exceeded market expectations because most of our projects are scheduled to enter the market only in the second half of the year,” Sun said. “Gross margins should also improve this year as prices are rising but costs of our projects are not increasing.”

China’s new-home prices jumped 5.3 percent in April from a year earlier, the biggest gain since housing costs ended eight months of declines in December, SouFun Holdings Ltd., the country’s biggest real estate website owner, said on May 2.

Sales Surge

Sunac, which had 12.3 billion yuan in cash and equivalents as of Dec. 31, the most since at least 2008, focuses on luxury projects in cities including Tianjin, Beijing and Chongqing. The main reason for persistent home-price gains is the scarcity of land, particularly in prime urban locations, Sun said.

Thirty-five city governments issued details of property measures by an April 1 deadline, a month after former Premier Wen Jiabao ordered the central bank to raise down-payment requirements for second mortgages in cities with excessive cost gains. Local governments were also directed to tighten home-purchase limits and set price-control targets on those with the biggest price pressures.

Beijing banned single-person households from buying more than one residence and raised the minimum down-payment for second homes to 70 percent.

Sunac’s contract sales surged more than 80 percent to 35.6 billion yuan last year, ranking it the 12th-biggest Chinese developer, up from 18th in 2011, the company said in March. Net income climbed 11 percent in 2012, while gross margin slipped by 7.8 percentage points to 25.8 percent.

The shares, which are traded in Hong Kong, rose 3.1 percent to HK$6.36 at the close of trading, taking their gain this year to 6 percent, compared with an 8 percent advance in the Bloomberg Asia Pacific Real Estate Index of which Sunac is a constituent.

‘Aggressive Expansion’

“We expect Sunac to maintain its aggressive expansion and growth appetite over the next two years,” Standard & Poor’s analyst Bei Fu said in a March 26 report.

S&P revised the outlook on the developer’s BB- long-term corporate credit rating to stable from negative. The rating company forecast Sunac’s contract sales this year to be as much as 31 billion yuan.

Beijing is also resorting to administrative measures to tame prices. It has been delaying pre-sale approvals for projects whose selling prices the local government sees as too high, said Jing Hong, Sunac’s general manager for the Chinese capital. That is impacting the second phase of a development the company plans to sell for 38,000 yuan per square meter (10.76 square feet), compared with 30,200 yuan per square meter it was asking in September for the first phase, he said.

Rising Prices

While high-end homes are the most vulnerable to the property curbs, administrative restrictions would loosen over time when local authorities are confident about meeting price-control targets, Sun said in the April 22 interview. Such properties will be favored by buyers trying to make full use of their restricted right to buy a home, he added.

Instead of cutting prices to quicken sales, “we’ll just wait,” Sun said, also citing rising development costs such as land. “We’re not under a lot of pressure to sell.”

The average selling price for Sunac West Chateau, a residential project located near the Old Summer Palace in northwest Beijing, has risen to more than 50,000 yuan per square meter this year, from about 44,000 yuan when it was first sold in June 2011, said Lou Yanqing, deputy general manager for the project, in the same interview. Sales at the project may exceed 5 billion yuan this year, she added.

Sunac’s average selling price last year of more than 17,000 yuan per square meter compares with 10,900 yuan at China Vanke Co., the nation’s biggest developer, suggesting high regulatory risks, Fitch Ratings analysts, led by Andy Chang, wrote in a March 28 report. China Vanke said April 22 that first-quarter profit jumped 16 percent as revenue gained 35 percent.

“Sunac’s focus on mid- to high-end segments increases its exposure to regulatory risks compared with mass-market peers, given the government’s aim to make housing more affordable,” the Fitch analysts wrote in the statement, confirming a BB-rating on the developer’s $500 million bonds due in 2018.

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