(Bloomberg) — China Vanke Co. reported a half-year loss for the first time in more than two decades and said most of its non-core investments are up for sale as the developer tries to pay off debt during the country’s unprecedented housing slump.
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Shenzhen-based Vanke posted a net loss of 9.85 billion yuan ($1.4 billion) in the six months ended June 30, its first since at least 2003. That’s higher than the upper range flagged by the developer last month, and compares with an annual profit of 12.2 billion yuan last year.
“Property impairment exceeded our expectation when we flagged it based on preliminary calculation,” board secretary Zhu Xu said in a briefing after the results were released on Friday.
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China’s years-long property crisis is taking a toll on the closely watched developer, as the government’s supportive measures have yet to revive homebuyer demand. The state-backed company, once considered one of the more sound players in the industry, has been raising funds and looking to sell assets to calm investor concerns over liquidity stress.
Vanke’s loss signals a sharp downturn in the second quarter, after it lost just 362 million yuan in the first three months. The slowdown in China’s market has deepened since then, as sales and prices continue to fall. Local governments are dialing back intervention over pricing of new residential projects, driving developers to offer deep discounts to lure buyers.
The developer said it will keep divesting assets this year, and plans to generate cash by issuing real estate investment trusts. It has sold 20.4 billion yuan of assets in the first seven months, making progress on plans made earlier this year for “risk mitigation,” Zhu said. The developer has pledged to exit all non-core operations as it seeks to boost liquidity.
Refinancing Gap
Vanke had a short-term refinancing gap of about 12 billion yuan at the end of June due to a spike in long-term debt coming due within a year, according to Bloomberg calculations based on company data. That’s the first time the company’s cash balance has failed to cover its debt due in a year since at least 2014.
However, the funding gap “could be plugged by access to funding,” Bloomberg Intelligence analysts Daniel Fan and Hui Yen Tay wrote in a note late Friday. “It also may be able to dispose of assets, including its stake in GLP Pte, and raise more secured debt.”
Vanke’s refinancing risks remain even after it raised new bank loans, Moody’s Ratings wrote in a note this month. The firm downgraded the developer’s ratings deeper into junk. Vanke is likely to maintain its access to secured bank loans, supported by its local-government links through its largest shareholder Shenzhen Metro Group Co., according to Moody’s.
Vanke will actively resolve its debt issues and ensure that “public debts are repaid on schedule,” according to its filing.
For the remainder of this year, it only has 2 billion yuan worth of public debt that matures, Zhu said. The firm has notified some investors that it has enough cash to repay the yuan bond due Sept. 6, according to a Bloomberg report this week. Vanke doesn’t have dollar bonds due this year.
Like many peers, Vanke has prioritized boosting cash over profitability, resorting to price discounts on its projects to reduce inventory. That hasn’t been enough to revive sales, which continued to slump in July. Moody’s now forecasts the developer’s sales to tumble around 30% this year, faster then a 25% drop expected earlier.
Chairman Yu Liang remains optimistic on China’s long-term housing outlook.
“China’s potential home-buying demand is still huge, even though it has fallen from peak,” Yu said. “It’s underestimated.”
Other key figures from the results:
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Total debts rose to 331 billion yuan, from 320 billion yuan as of Dec. 31
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Cash and cash equivalents shrank to 90 billion yuan, from 97 billion yuan as of Dec. 31
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Revenue plunged 29% from a year earlier to 143 billion yuan
Vanke’s shares hovered near a record low in Hong Kong before developer stocks jumped on Friday following a Bloomberg report that China is considering allowing homeowners to lower their mortgage costs. Some of its longer-dated dollar bonds recently recovered to above 50 cents from below 40 cents in April, though they’re still trading at deeply distressed levels.
(Updates with more balance sheet details, analyst and executive comments throughout.)
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