(Bloomberg) — China Vanke Co. warned of hefty losses in the first half, as the country’s property downturn took a toll on the closely watched developer that’s trying to secure cash to pay off debts.
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State-backed Vanke expects to post a first-half loss of 7 billion yuan to 9 billion yuan ($962 million to $1.2 billion), it said in a filing late Tuesday. The projected loss signals a sharp downturn from the first quarter, when it lost 362 million yuan.
The homebuilder resorted to price discounts to reduce inventory and boost cash flow, squeezing profit margins. Investment in some projects “has been over-optimistic,” it said. “The company deeply apologizes for the performance loss,” it said.
At the same time, Vanke said it has made “repayment arrangements” on onshore bonds due in the second half of this year, and has no offshore notes maturing in the period.
Vanke’s update is the latest sign that China’s years-long property crisis continues unabated, as the government’s supportive policies have yet to materially reinvigorate homebuyer demand. The company, once considered one of the more sound players in the industry, has been raising funds and looking to sell assets to calm investor concern over liquidity stress.
The state-backed developer hasn’t reported a first-half loss since at least 2003, according to data compiled by Bloomberg. In the first half of 2023, Vanke had a profit of 9.87 billion yuan.
Vanke’s Hong Kong-listed shares opened 4.5% lower, before paring the decline to trade down 0.9% at 10:53 a.m., bringing this year’s decline to 38%. Vanke’s dollar bonds due 2027 and 2029 also fell.
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The earnings warning “came significantly behind our expectation,” Jefferies Hong Kong Ltd. analysts led by Calvin Leung wrote in a note. “We believe the cash flow mismatch could widen, in turn lifting reliance on asset disposal and new financing.”
Read BI’s reaction: Vanke Losses Set to Deepen on Ongoing Home-Sales Decline
Vanke said this year has seen “material impact” from investments in some development projects that resulted in high land acquisition costs as the projects settled in 2024. Some of the first-half loss also came from discounts from clearing housing inventory and offloading assets, it added.
The developer said that a package of plans was formed during the first half of this year for business reformation and risk mitigation. Vanke also sought to slim down and achieved “positive progress.” Also, 74,000 homes were delivered and Vanke “ensured repayment of open market debts on schedule.”
On the bright side, executives told some analysts Tuesday that Vanke has reduced some of its short-term debt, according to minutes of the meeting published online by the builder. Debt refinancing and new financing has totaled 60 billion yuan this year as over 50 billion yuan of debt has been paid.
In a separate statement to the Shenzhen Stock Exchange on Tuesday, Vanke said it has a combined 4.3 billion yuan of onshore bonds due in the second half of this year and has made “repayment arrangements.” It added 10.5 billion yuan of offshore bonds were repaid in the first half and that no offshore bonds are due the rest of this year.
The developer continues to face headwinds as its home sales growth stalled in June. Its month-on-month contracted sales rose 7.9%, much slower than the average 36% increase at the 100 biggest real estate companies in China.
Vanke’s June sales reached a breakeven level of 25 billion yuan, Jefferies analysts estimated, but part of it was driven by front- loaded purchases following the easing of home-buying rules in May, analysts led by Leung wrote. With diminishing room for further city-level relaxation of property measures, Jefferies remains skeptical on the sustainability of sales into the second half.
The preliminary interim loss is likely to extend into a full-year one, according to JPMorgan Chase & Co. property analyst Karl Chan.
“As Vanke’s priority is to prevent a bond default, we think the margin squeeze will continue as Vanke would likely have to prioritize cash flows over profitability,” Chan said.
–With assistance from Jeanny Yu.
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