Net profit margin drops for nearly 60 percent of listed mainland real estate companies

Published: 27 January 2014

Despite the increase in their average total revenue, nearly 60 percent of listed mainland real estate companies in Hong Kong, Shenzhen and Shanghai registered a decline in net profit margin during 2012, reflecting the beginning of a profitability down cycle in light of tight policy environment and easing economic growth, according to the latest research report from Deloitte.

The Deloitte report compared the financial data of 174 property companies listed in Shanghai, Shenzhen and Hong Kong in 2012 against that of 168 companies in the previous year. There were also in-depth interviews with the management of certain major market players. The sampled property companies engage mainly in property business in China, deriving 50 percent-plus revenue or return on assets from property development or investment.

The report said property companies achieved average total revenue of HK$7,912 million in the reported period in 2012, against HK$6,348 million for the same period previously. Net profit margin dropped 2.65 percent from 2010, albeit a slight increase of 0.5 percent from 2011. A reduction pattern has emerged for return on equity, which weakened to 9.98 percent in 2012, against 10.72 percent in 2011 and 11.5 percent in 2010.

"In the past year, we witnessed constant increase in volume and prices for domestic property market in top-tier cities; and sufficient demand also continued to provide a shelter for the housing market in tier-two cities against policy risks. Cooling measures will remain in place this year as there is no sign for any change in policy tone. Overall, lower profit margin will be a likely scenario for Chinese real estate companies in the future amid cost pressure from land, financing, marketing and labour," said Richard Ho, Real Estate Managing Partner, Deloitte China.

In comparison with their counterparts in Shenzhen and Shanghai, real estate companies listed in Hong Kong fared up better in terms of their market capitalisation, reflecting the better performance in Hong Kong's stock market bolstered in part by global quantitative monetary easing policies. Meanwhile, real estate companies listed in Hong Kong also showed a better average net profit margin, which is indicative of their higher portfolio composition in investment properties and the associated tax impact.

"When it comes to finance liquidity, the sampled listed companies suffered from tight liquidity in 2012 as their current ratio edged down by 4.48 percent. It probably resembles the border challenging credit condition in China. However, the three markets differed in current ratio, where there was modest improvement in Shanghai, along with 5 percent and 9.3 percent reduction in Shenzhen and Hong Kong respectively. It is worth noting that the liquidity of all Hong Kong listed real estate companies worsened except for the super large ones," said Matthew Sze, Developers Managing Partner, Deloitte China.

The report also provides some forecast about the property market in China for the future. In particular, there is a strong likelihood for continuous integration within the industry to wipe away the weaker companies. The Chinese government will impose policies that drive the real estate industry from high and extensive growth towards more stabilised but sustainable expansion. Also emerging as a long term trend is the rapid development of energy efficient properties, which adopt green and environmental friendly concepts.

"Real estate companies in China have demonstrated divergent operating results. Market consolidation will ensure that only the fittest will survive. Industry integration is also in tandem with the government's hopes to deepen the structural transformation of the real estate industry in China," concluded Mr Ho.