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[National Business Daily] With over 20 Billion HKD in Cash, Evergrande Takes Advantage of the Downturn to Accelerate Integration

 Date:2010.05.06   Publisher:Evergrande Group

National Business Daily 2010-5-6 Zhu Ling

At present, in the volatile real estate market, transactions remain in the downturns.

On May 5, at the results presentation held in Hong Kong, Evergrande Real Estate which was listed in Hong Kong last year (03333, HK) reported the April sales performance which once again surprised all walks of life: In April this year, the Group achieved contractual sales of 3.74 billion HKD, up 55.9%; from January to April this year, Evergrande achieved total contractual sales of 12.13 billion HKD, increased by 120.3% over the same period of 2009. As of April 30, 2010, Evergrande’s cash balance has reached 20.99 billion HKD.

According to industry analysis, the significant increase in its performance results from that Evergrande focused on the second and third-tier cities with slower increase in housing prices, and the impact of the new policy regulation on the property market in such cities is less, plus the strong rigid demand. Meanwhile, Evergrande avoided the competition with other real estate developers in first-tier cities or the risk of pushing up the housing prices.

Achieving sales over 10 billion yuan from January to April

From mid-April, the property market transaction around China witnessed obvious decline, and even the "May Day" Holiday saw the unprecedented gloom. However, Evergrande Real Estate gave a good answer in the depressed property market conditions.

It is reported that in April 2010, the Group achieved the contractual sales of 3.74 billion yuan and the contractual sales area of 578,000 square meters, of which the sales grew 5.59 billion yuan and 50% compared with 2009, and the sales area rose 178 million square meters on a year-on–year basis. It is noteworthy that under bad market conditions, the average sales price of Evergrande’s projects across China reached 6,408 yuan/square meter, up 32.4% compared with 4,666 yuan/square meter of last year.

According to the information released at the results presentation, the regions contributed most to sales of Evergrande in April are concentrated in the second and third tier cities such as Shijiazhuang, Chongqing, and Changsha, of which the sales amount in Shijiazhuang accounted for 18.7% of the total contractual sales, Chongqing accounted for 14.1%, and Changsha 10%.

The Evergrande City project in Shijiazhuang should be most representative. According to relevant sources from Evergrande Real Estate, the Evergrande City project in Shijiazhuang was officially opened on April 18, the day when the new policy was published. On that day, the contractual sales reached about 630 million yuan, the contractual sales area about 70,000 square meters, about 520 units were sold, with an average price of up to 9,014 yuan/square meter, setting a new record in the local property market.

Market experts believe that due to the significant differences between the property market in the second-tier cities and the first-tire cities, the developers like Evergrande with the main layout in the second-tier cities around China will be able to further enhance strength and increase capacity to respond to market changes. As the state’s regulations are focused on the cities with soaring house prices, as far as the price increase in 70 large and medium cities nationwide recently released by the National Bureau of Statistics, the significant increase of prices are also mainly concentrated in the first-tire cities.

Therefore, the April sales performance of the developers in the major first-tire cities declined to different degrees. While Evergrande avoids the impact, the impact of the new policy on Evergrande is small. In addition, the company has consistently adhered to the purpose of prudent operation, so, whether in selling or developing land, it avoids the competition with other real estate developers in first-tier cities or the expected risk caused by pushing up the housing prices.

As of April, Evergrande Real Estate achieved total contractual sales of 12.13 billion yuan, doubling of the same period of 2009 to 120.3%; and it achieved total contractual sales area of 1.893 million square meters, up 60.4%. Following March 2010, the Group's contractual sales once again refreshed the record of the same period.

After tasting the sweetness of fruits by distributing investment in second-tier cities, this year, Evergrande will once again prove its second-tier distribution strategy with practical actions. April 23, Evergrande Real Estate bought the block of Changchun High-tech Zone for 500 million yuan in total. This block covers an area of 200,000 square meters, with average floor price of only 2,531 yuan/square meter.

Industry experts said that the presence of some famous developers in second and third-tire cities will not only improve the quality of the local real estate and, but also stimulate local economic growth, so that market competition will develop in a diversified manner.

Sufficient cash flow, offer 15% discount nationwide to seize the market

"Our properties across China have begun to offer 15% discount." Evergrande Real Estate insider said.

April 15, banks implemented differentiated credit policies, increased down payment for the second house to 50%, and increased interest rates to 1.1 times, which caused the market to be precarious once again. All the developers dared to take the plunge, and some developers said that what they can only do now is to make plans based on the market conditions.

Though Evergrande has maintained abundant cash flow after listing, as of April, Evergrande’s cash balance reached nearly 21 billion HKD. Evergrande took the lead in launching special offers throughout the country with discount rate up to 15%. "We would like to take this opportunity to benefit the people. Even though it is a great offer, actually our products can still make profit, to achieve maximum market scale." said Evergrande insider.

By the end of January this year, the bonds Evergrande Real Estate issued for the first time was over-subscribed, so that the 5-year senior notes valued at 7.5 billion US dollars were successfully issued. Later in April, Evergrande Real Estate issued 600 million U.S. dollars of bonds. Until April this year, the company has held 20.99 billion HKD in cash. It is reported that, Evergrande’s cash flow reached 16.36 billion HKD in December 2009 and reached 19.02 billion HKD in January of this year, so the cash flow grows steadily month by month.

Many securities professionals believe that Evergrande Real Estate seized market opportunities beforehand to speed up financing, in order to prepare sufficient cash for "hibernation" of the future industry. It is reported that two times of financing bonds issuance of Evergrande set a new high in bond issuance among Hong Kong-listed domestic property companies, and the private financing with unprecedented efforts of this time is also the precaution for the past land costs and the market expectations.

Analysis indicates that the entire market is under adjustment, so the key for the companies to respond to the anticipated changes in the market before many others is to adjust their strategy, and Evergrande’s concessions can not only maintain a stable cash flow growth as a large enterprise, but also can expand its market share.

Some analysts pointed out that Evergrande’s most projects are located in the second tier cities, so that the cost is low, and the credit risk is relatively small for financial institutions.

Evergrande is one of the real estate companies with the largest land reserve in China. So far, Evergrande’s land reserve across China has exceeded 50 million square meters, with 57 projects distributed in 25 major cities. Almost all the cities where they are located are regional economic centers, with population of five million or more, occupying the leading level in the country in economic scale and development pace.

The scale of most of Evergrande’s projects is between 500,000 and 2 million square meters. Such projects are very suitable for scale development and rolling development, to meet the planning and design conditions of complete supporting facilities and beautiful environment.

In general, Evergrande’s projects are located in quality regions characterized by great potential for appreciation of city value and rising demand for housing, of which 84% are urban projects with beautiful environment, developed planning facilities, and urban transport, as well as greater potential for appreciation.

While the tourism real estate projects are generally located in the places which are 30 to 40 km from mega-urban centers, near the highway exits and have unique natural beauty. Moreover, these projects are also characterized by low cost of land and sustainable land development.

Although the loans to development enterprises and personal loans have been tightened to varying degrees, Evergrande’s steady cash flow ensures its healthy development.

The opportunity of involving in the industry consolidation at low tide appears

A person close to Evergrande Real Estate told the reporter that this move of Evergrande embraces an untold motivation — to achieve industry consolidation by taking advantage of the market nadir.

Companies like Evergrande with large scale and strong financial strength will not only enhance the scale of the market, but also merge some companies with weaker finance in order to achieve self-expansion.

"In the current policy environment, land prices are somewhat declined with house prices, which however is a golden opportunity for the developers with sufficient amount of money to integrate land resources", which is shared by real estate experts. The reasonable return of land prices is an opportunity for the developers like Evergrande to exploit border and develop land, as it will be easier than before for them to buy land in new cities, and thus increasing their contribution rate.

It is reported that Evergrande’s second-tier market layout has yielded good results. Not only in the April sales performance but also the first quarter sales, the contribution of Evergrande’s strategic layout in the second and third tier cities to the Group has been gradually increasing.

In addition, Evergrande’s advantages in management and operation play a more important role in the market changes. In second-tier cities, the new expansion requires involvement of the developers with mature management and operation model, once the market turns bad, medium and small developers will lose competitive advantage, while large developers will take advantage of favorable situations.

Whether in land cost or in project management and tendering and so on, Evergrande has always adhered to standardized operational advantages. According to the analysis of an observer with long-term research on Evergrande Real Estate, Evergrande Real Estate implements the uniform criteria to select new projects, to ensure successful project development and minimize the risk of decision-making.

He pointed out that this will include standardization of project location, project scale, project location, and project status, etc. In addition, all main bodies, decoration, landscaping, and other large projects of the companies shall be uniformly tendered by the headquarters of the Group; and the scale advantage of the Group ensures that the bidding companies provide quality services at reasonable prices, so as to effectively control construction costs.

Facing the new policy, developers are creating all sorts of strategies and tactics, while large-scale and powerful developers have begun to occupy more and more advantages. "Each market adjustment is an opportunity for expansion-oriented large enterprises." Some experts said. Therefore, the changes of Evergrande’s marketing strategies indicate the era of big developers will come quickly. 

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