EUR 850.00 For Business Accounts Only

Morningstar | 02202 Updated Forecasts and Estimates from 02 Apr 2019

After a decade of breakneck growth, a slowing Chinese economy and subdued demand will now weigh on the real estate sector. Favourable capital market conditions or supportive government policies are likely to have only a temporary and limited impact. For the sector as a whole, contract sales growth will slow or even decline. Excess capacity and inventory buildup will constrain significant price growth. Slower contract sales limit the cheapest source of funding for real estate developers, and smaller developers will face increasing liquidity constraints, prompting them to exit the sector. Further, the ongoing reform initiatives for state-owned enterprises will push many SOEs to dispose of noncore real estate operations or establish partnerships with leading developers.While top developers' market share has nearly doubled during the past five years, the Chinese real estate sector remains fragmented. Given top developers’ operating efficiency, access to financing, and large balance sheets, they stand to benefit from the ongoing sector consolidation by taking market share from smaller developers. We believe China Vanke will successfully maintain growth by focusing on operational efficiency and opportunistic acquisitions.China Vanke achieved a 20% CAGR in revenue and a 18% CAGR in core profit from 2013 to 2018. Its streamlined development process resulted in a land bank turnover rate of 2.5 years in 2018, relative to a peer average of seven to 10 years. With a comparatively small asset base and robust presale proceeds, the firm has maintained average gearing of 21% over the past five years. The strong balance sheet provides the necessary dry powder for opportunistic acquisitions. Further, China Vanke uses joint ventures extensively to boost its return on invested capital, with income from joint ventures rising from 5% to 12% in recent years. On the funding-cost side, China Vanke has lagged other large developers in accessing the offshore market, resulting in higher financing costs. Given the recent weakness of the Chinese yuan and the opening of the domestic bond market, China Vanke is on the path to narrowing its funding cost gap relative to peers.