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[Securities Times] Evergrande Real Estate Believes Cash is King, All Buildings on Promotion with a 15% Discount

 Date:2010.05.06   Publisher:Evergrande Group

Securities Times 2010-5-6 Sun Wen

All products under Evergrande are on promotion with a 15% discount! When most of real estate developers still take a wait-and-see attitude on the new policy for real estate, Evergrande Real Estate took the lead in the industry to take active response measures.

As reporter learned yesterday from Evergrande Real Estate, at the end of April, Evergrande Real Estate’s book cash balance reached 21 billion HKD. For the promotion that Evergrande took great efforts this time, Evergrande Real Estate intended to take the regulation and control opportunity to lock cash, expand market share, and drive the industry reshuffle.

Sensitive Responding to New Control Policies

Yesterday, Evergrande Real Estate released April performance data in Hong Kong. The data shows that Evergrande Real Estate Group realized contract sales amount of 3.74 billion RMB, contract sales area of 578 thousand square meters, and the average contract sales price was 6,467 RMB per square meter in April. April sales amount and sales area were respectively 55.9% and 17.8% higher than those of the same period last year. In the first four months, Evergrande Real Estate realized the accumulated contract sales amount of 12.13 billion HKD and total accumulated sales areas of 1.893 million square meters. Sales amount and sales areas of the first four months increased by 120% and 60.4% compared with those of the same period last year.

This is a good performance, but this is not the most explosive news that the reporter got from Evergrande Real Estate yesterday. Insiders of Evergrande Real Estate confirmed to reporters yesterday that Evergrande Real Estate would promote all its items on sales under the group all over China with a 15% discount! Evergrande Real Estate Group currently has projects in more than 20 cities all over China.

Under current real estate regulation and control background, the strategy of Evergrande Real Estate draws attention. As we all know, in the State Council executive meeting held on April 14, 2010, the State Council expressed the determination to curb the rapid rise of house price and introduced a series of measures with the core on housing credit differentiation. Currently, governments are all working on the implementation details, while majority of the developers still wait and see.

For this strategy of Evergrande Real Estate, Yang Shaofeng, general manager of Beijing Four Square Joint Real Estate Brokerage Company told reporters yesterday that "recently the majority of developers still wait and see, and the strategy adjustment of Evergrande Real Estate is very perceptive. A 15% discount is a great marketing effort." Yang Shaofeng thought that Evergrande Real Estate has experienced a severe winter for real estate during the economy crisis in 2008 and has the experience to respond to real estate downturn, so its response to the real estate regulation and control new policy is very sensitive.

Yielding Profit only because "Cash is King"

Yang Shaofeng analyzed that the real estate regulation and control policy launched by government restrained speculation and demand, while it managed the financing channels of developers, which highlighted the significance of cash flow as developers’ lifeline.

"In fact, developers will be back to the era of ‘cash is king’ during the 2008 financial crisis." said Yang Shaofeng. People of Evergrande Real Estate also confirmed to reporters yesterday that the corporate promotion strategy indeed was to take the initiative and adopt the idea of ‘cash is king’. Comprehensive yielding profit is to lock the cash in advance.

It is understood that Evergrande Real Estate has been taking measures to implement sound operation strategies after listing and maintenance of adequate cash flow is one of the key indicators. Financial data of Evergrande Real Estate of April shows that cash balance of Evergrande was around 16.3 billion HKD by the end of 2009 and cash balance was about 21 billion HKD at the end of April.

This amount is not low, but under the macro-control background, of course, it is the priority for large real estate companies to lock more cash flow in advance. Yang Shaofeng stressed in an interview by reporters that under current round of stringent real estate regulation and control policies, only those enterprises which take the lead to response can get the initiative in real estate downturn. In his view, it is wise for Evergrande Real Estate to take the lead in marketing strategy to lock the cash flow. His analyzed that as a large real estate company which experienced the financial crisis, Evergrande Real Estate has learned the experience from previous crisis: only by maintaining sufficient cash flow, the stability of development can be ensured.

In fact, the reporter learned that Evergrande Real Estate was also the first to start promotion measures by transferring part of the profits in the real estate downturn caused by 2008 financial crisis and implemented the 15%-discount measure for the buildings under the group. According to statistics at that time, in September 2008, Evergrande Real Estate had 18 new buildings all over China, nearly 2 million apartments were promoted at ultra-low-price with 8.5 fold, and the pricing strategy activated the market. On the day when houses of 18 communities were launched to the market, 3.1 billion yuan were received, and in the first seven days, a total of about 4.8 billion yuan were received. Evergrande Real Estate took this to solve the fund shortage after listing suspension and realized overtaking at the corner with the aid of rational pricing strategy in 2009.

Driving Shuffle with the Intention to Surpass

This time coming back, Evergrande Real Estate take the initiative to play 8.5 fold once again, the situation is by no means comparable in 2008. With 21 billion HKD cash at hand, Evergrande Real Estate has far-reaching intention. The insiders of Evergrande Real Estate revealed that the corporation took the promotion measures this time with one intended to lock the cash in advance, but it also contains more far-reaching management objectives – taking the opportunity to expand market share and drive industry consolidation.

Every downturn is the good opportunity for industry consolidation. For Evergrande Real Estate, the first adjustment can clearly win the good opportunity to expand market share while others still waiting to see. First quarter real estate sales data obtained by reporter from China Real Estate Information Group and China Real Estate Assessment Center shows that for the indicator of sales amount, China Vanke ranked No. 1 with sales amount of 14.5 billion and Evergrande ranked No. 2 with sales amount of 8.53 billion; for the indicator of sales area, Evergrande ranked first with total sales areas of 1.295 million square meters, and Vanke ranked second with sales areas of 1.18 million square meters. Obviously, Evergrande Real Estate has driven towards the top in the industry.

Whether the regulation and control of the real estate will bring the opportunity for Evergrande Real Estate to exceed? Yang Shaofeng analyzed in the interview by reporter that the proactive strategy of taking the first step and striving for initiative by Evergrande Real Estate strategy is undoubtedly correct. He thought that in price reduction trend, the enterprise which took measures sooner can gain more initiative. "Only those enterprises which sell houses, get the returned money, and lock cashes as soon as possible can buy the land at low market price in next downturn and lay foundation for a new round of development." Yang Shaofeng analyzed.

According to industry analysis, if the current real estate policy is strictly implemented, it does not rule out that some small and medium developers which take the land at high price will be acquired. The large real estate companies which first get capital return will have the chance for a gluttonous feast. When Evergrande Real Estate Insiders were consulted by reporters, they did not disguise their expectation for this industry consolidation opportunity. "Taking the opportunity to drive industry consolidation is also one of the intentions that Evergrande Real Estate wanted to implement in the current round of real estate regulation and control."

According to the analysis, the current real estate regulation and control is expected to have more control on too high housing price rise in first-tier cities, and relatively less impact on those in second and third tier cities. This is a favorable condition for Evergrande Real Estate to exceed. It is understood that the projects of Evergrande Real Estate in 25 cities are mostly located in the second-tier provincial cities. Price increase is relatively small, market transaction is active. Taking April data for example, Evergrande Real Estate Shijiazhuang project was opened for sale in the mid of April with sales amount of 630 million yuan.

Evergrande Real Estate insiders analyzed that Evergrande Real Estate accumulated rich management experience in large boutique real estate projects of standardization operation is one of the important reason that the company can achieve corner overtaking. The company is equipped to drive industry consolidation with current standardization operation of Evergrande real estate projects, more than 50 million square meters of land reserves and brand advantage.

Most Developers are Still Waiting to See

The promotion measures of Evergrande Real Estate draws market concern, but it is still not clear how other developers will react. Several real estate insiders interviewed by reporter said, the developers in Beijing and Shanghai etc. currently have no decent promotion measures. "Most of them are still waiting." Yang Shaofeng said.

In fact, according to reporter, currently developers in domestic first–tier cities have begun to introduce sales strategy to promote to cut price or launch special price apartment. Taking Beijing for example, the large residential community Hui Long Guan has nearly 5,000 yuan price reduction for building actually, but the form of internal subscription has been taken and price reduction is still partly concealed.

Overall, the building promotion is mostly scattered project phenomenon, except Evergrande Real Estate, no other large developers in China show their will for transferring part of the profits in the sales. The other large real estate developers such as China Vanke still talked to the media that they have no price cuts short-term plan.

But in fact, insiders of the industry thought that under the strict real estate regulation and control, the fact that developers cut price and transfer part of the profits in sales has become the consensus of the industry. Li Wenjie, general manager of Beijing Zhongyuan analyzed for the reporter yesterday that the developer cutting price will become a trend, but it depends on time. He thought that concrete policy implementation details of local governments at all regions have not been completed, so it will take some time for developers to stand.

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