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"three Red Lines" and the Red, Orange, Yellow and Green in the performance report
Sep 1,2020 08:13CST
translation
Source:Financial Union
The content below was translated by Tencent automatically for reference.

SMM News: this year's housing enterprises in the newspaper will have two of the hottest topics: the "three red lines" new policy and the general reduction of gross profit margin.

If the gross profit margin is a foreseeable chronic disease, the "three red lines" is an urgent problem related to the life and death of real estate enterprises. Because it's about room for growth.

Specifically, the new policy manages real estate enterprises according to "red, orange, yellow and green" and sets up "three red lines": the asset-liability ratio excluding advance payment is more than 70%; the net debt ratio is more than 100%; and the cash short-debt ratio is less than 1 times. Companies that step on three red lines at the same time will be marked as red, and so on.

Among them, the interest-bearing liabilities of red-file enterprises can no longer increase; the annual growth rate of interest-bearing liabilities of orange-grade enterprises shall not exceed 5%; the annual growth rate of interest-bearing liabilities of yellow-grade enterprises shall not exceed 10%; and if all indicators meet the requirements of regulators, the annual growth rate of interest-bearing liabilities of real estate enterprises can be relaxed to 15%.

In addition, whether the ratio of land to sales is too high and the operating cash flow are also important indicators.

Although the above news has not been finally determined and implemented, the new deal has become the hottest topic at this year's housing enterprise performance meeting. At present, the dust has settled, and the latest news on August 28 shows that the "three red lines" that restrict developer financing will be fully implemented from January 1, 2021.

In other words, real estate companies have four months to improve their finances. Especially for those companies that have stepped on all three lines, they used to be representatives of high turnover or high leverage.

In fact, they are not unaware of their problems. As early as the middle of last year, when the 2019 annual report was released in March at the latest, these "high-risk" developers more or less proposed to control scale and reduce debt. Throughout the reporting season, they have given up-to-date guidance on their previous commitments.

For example, housing companies with heads stressed in the middle of last year that the focus of their work in the second half of 2019 was to "promote sales and recover money", and that land acquisition work was suspended in principle in the second half of the year. Now, after a year of efforts, the net debt ratio can now be brought down.

However, after the interim results are released, we also find that the asset-liability ratio and cash short-debt ratio after excluding advance payments still exceed the standard, the latter is about 0.48 times.

There are also several head housing companies that have stepped on all three red lines and announced early in the morning that they would press down the debt ratio. Now it says that by next year this value will be controlled below 100%. At the same time, they propose to implement the development strategy of "high growth, controlling scale, and reducing debt" to bring down the previous 100-digit net debt ratio as soon as possible.

However, for some enterprises located in orange and yellow files, they show caution and hope to make full use of the limited rule space to further expand. Because they still have a demand for scale, they then announce that they will not stop taking land.

On the other hand, most of the enterprises in the green file are state-owned enterprises, or have a background of state-owned enterprises. they are stable and have always paid attention to the health of financial statements in the past, but now the biggest problem troubling them may be the decline in gross profit margin. But this is a common difficulty faced by the whole industry.

For example, the half-year comprehensive gross profit margin of some real estate enterprises is 33.5%, which is 4.4 percentage points lower than that at the end of 2019. The other two data are: one is the gross profit margin of real estate development and related asset management business in the first half of the year was 24.1%, down 4.2 percentage points from the same period last year; the second period gross profit margin was 25.9%, down 6.1 percentage points from the same period last year.

Now, almost all housing companies have exposed this problem.

One reason is that most of the projects carried over by housing companies in 2019 come from projects in 2017-2018, and the industry has sold well in these two years, resulting in a high gross margin base for settlement in the same period in 2019.

At the same time, due to the impact of the epidemic in the first half of this year, the operating performance of the whole industry has been affected, so it is not ruled out that some enterprises comply with the trend and simply deal with some inventory with lower gross margins.

In response to this, the management of some real estate enterprises made it clear in response to the reasons for the decline in gross profit margin that due to the influence of the carry-over structure, more than 12% of the carry-over income in the first half of this year came from areas with low gross profit margin.

On the other hand, there is the problem of land. Land prices are becoming less and less cost-effective. Some housing enterprises summed up quite well: "with the development of the industry, land prices continue to rise, the ratio of real estate to real estate has been declining, and the trend of declining gross profit margin of the industry is a fixed trend." In particular, the current property market environment is becoming more and more difficult, many housing companies hope to increase sales through promotional means, which will further lower the expectation of corporate gross profit margin.

So how to get cheaper land or higher profit land is the proposition that the major real estate enterprises need to focus on at present. Cooperative development, the goal of land acquisition to urban agglomeration, and the tendency of urban renewal are the characteristics of developers who have been there for a period of time.

Among them, the urban renewal project has become a very convenient tool. It has a high gross margin and is not included in the soil storage area before conversion.

This makes urban renewal projects especially favored by some highly indebted enterprises, which can hide the real land reserves in urban renewal projects in order to reduce the level of debt in the financial statements.

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