CHINA VANKE has more companions now

Author | Zhou Zhiyu

Editor | Zhang Xiaoling

Despite the previous performance forecast, when Vanke's interim report losses were truly presented, it still caused countless reflections within and outside the industry.

The depth and length of the cyclical adjustment in the real estate industry are obviously beyond imagination. Faced with an unprecedented major change, no one can stay out of it.

However, in Vanke's financial report, new vitality is also brewing. The operating cash flow turned positive in the second quarter, the competitiveness of the three major core businesses steadily improved, and the breakthrough in multi-track REITs all indicate that Vanke has withstood the phase pressure. While coping with short-term difficulties, it is also accumulating strength for long-term development in the future.

At the performance meeting on August 30, Vanke's Chairman Yu Liang still showed confidence in the industry. He admitted that after three years of adjustment, the cost-effectiveness of new homes is improving, and policies to support diverse housing demands are continuously increasing. These are all accumulating energy for the market demand recovery and providing a foundation for the arrival of a new development stage.

The market is also full of expectations for further warming of policies. Just on August 30, a rumor about adjustments in existing loan interest rates stirred up investors' emotions, leading to a surge in the real estate sector, and Vanke A even hit the daily limit.

Of course, the current difficulties and the ability to improve towards the "new" still require patience and time. Patience now is confidence in the future. In this process, Vanke has gained more companions, which will be the confidence for Vanke to navigate through this cycle.

Repair

The net profit attributable to the parent company was negative for the first time in the interim report, while the net cash flow from operating activities turned positive on a quarter-on-quarter basis. From the interim report, it can be seen that Vanke is indeed facing a difficult problem, but it is not unsolvable.

Facing temporary operational difficulties and short-term liquidity pressures, Vanke has carefully analyzed the situation and provided its own solutions.

The loss on the profit side reflects the impact of the real estate cycle. Before 2022, the industry focused on scale, with high-priced land parcels frequently appearing. As these land parcels entered the settlement cycle in the past two years, it brought considerable pressure on the current profits of real estate enterprises including Vanke.

In addition, Vanke's streamlining and asset optimization in the first half of the year resulted in losses from bulk and equity transactions, as well as losses and impairment provisions from some non-core financial investments, putting pressure on Vanke's short-term performance.

However, Vanke's CFO Han Huihua stated at the performance meeting that the profit situation of Vanke's new projects after 2022 is good, with an average sales gross margin of around 18%. By the end of this year, there will be approximately 227 billion yuan in inventory, with an expected realization of 80%. As these projects enter the settlement period, this will drive the improvement of Vanke's performance.

Furthermore, Vanke is also enhancing operational efficiency to extract greater value from existing resources.

In terms of cash flow affecting the debt repayment ability of real estate companies, Vanke has made significant improvements. From this perspective, Vanke has passed the most difficult period.

The interim report shows that Vanke's net cash flow from operating activities in the second quarter improved significantly from -9.421 billion yuan in the first quarter to a positive cash flow of 4.2 billion yuan.

Han Huihua explained that this is mainly due to Vanke's positive progress in streamlining and optimizing operations in the first half of the year.

Through improving sales, promoting bulk asset transactions such as commercial properties, and exiting other businesses, as well as efforts in clearing and transferring non-core financial investments, Vanke received a total of over 137 billion yuan in payments in the first half of the year At the same time, as the peak delivery period has passed, CHINA VANKE's payment pressure has significantly decreased. Data shows that in the first half of this year, CHINA VANKE's total deliveries decreased by more than 30% year-on-year, and the engineering payment volume also decreased accordingly. In addition, other expenses of CHINA VANKE have also decreased with the decrease in scale.

With operational improvements, CHINA VANKE has also maintained smooth financing channels with the support of banks and other financial institutions and relevant departments.

It can be seen that CHINA VANKE's new financing and refinancing accelerated significantly in the second quarter. In the first half of the year, CHINA VANKE achieved new financing and refinancing of 61.2 billion yuan, with an average financing cost of 3.66%, and the pace of financing model transformation has accelerated.

Especially in May, CHINA VANKE obtained a 20 billion yuan syndicated loan led by China Merchants Bank; subsequently in July, it obtained multiple loans from Bank of Communications, Bank of China, and other institutions. As a result, as of the end of July, CHINA VANKE's total new financing and refinancing exceeded 67 billion yuan.

After continuously reducing outstanding debts recently, CHINA VANKE has not issued any overseas public bonds this year, with only one domestic public bond remaining, a medium-term note of 2 billion yuan.

In addition, CHINA VANKE has nearly 100,000 units of pending deliveries in the second half of the year, with a 40% year-on-year decrease in delivery volume, greatly easing the expenditure pressure on the operational side. CHINA VANKE is able to complete the second-half delivery tasks with full effort, maintain stable sales and receipts, and create more available cash flow by further promoting bulk transactions and equity disposals.

While transitioning financing models, CHINA VANKE is also seeking opportunities for syndicated loans and operational property loans to seek incremental liquidity on the financing side. The further improvement in cash flow supports CHINA VANKE in overcoming short-term difficulties.

Rebirth

Indeed, the real estate industry is still in the process of transitioning from old to new dynamics, and the pains of real estate companies will continue for a while, but once they pass this stage, they will also undergo a transformation and usher in a new era.

CHINA VANKE is prepared for this. While adjusting its financing model and reducing risks, CHINA VANKE will further focus its capabilities on three main businesses: comprehensive residential area development, property services, and leasing apartments. It hopes to sharpen its business, investments, and capabilities through professional refinement, aiming to focus more. It can also turn crises into opportunities.

Currently, for real estate companies, development business is still the main source of income, but the market supply-demand relationship has undergone significant changes. Homebuyers are more segmented and rational, while good products still have a market.

Zhang Hai, Co-President and Chief Operating Partner of CHINA VANKE's Development and Operation Department, stated that the new housing market has shrunk, while the operational difficulty of projects has increased significantly. CHINA VANKE focuses on building good houses to achieve high-quality development.

This means that when investing in land, it is necessary to further concentrate on areas and districts with real improvement demands in the city; in addition, creating community living scenes, adjusting the investment structure in costs and expenses based on new customer needs, and improving the quality-price ratio and performance-price ratio of products.

At the same time, with a significant reduction in new projects, seeking opportunities in the existing market is also a solution for CHINA VANKE.

In the first half of the year, CHINA VANKE's key focus was on the renovation capabilities of old communities. By conducting business with a high cost-performance ratio that is 30% lower than the market price, improving the public area environment of projects systematically, and gaining the initiative in market competition Through exploring market opportunities, Vanke achieved revenue growth in the first half of the year despite challenges in industry growth, with revenue reaching 17.63 billion RMB, a year-on-year increase of 9.5%.

Zhu Jiusheng, President of Vanke and Chief Partner of the Long-term Apartment Business Unit, revealed that in the first half of the year, Bo Yu reached strategic cooperation intentions with state-owned enterprises in multiple cities, with a total future cooperation room inventory exceeding 20,000 units.

This demonstrates the continuous maturity of Vanke's long-term apartment stock asset activation model. Taking the example of Shenzhen and Songxuan projects, Zhu Jiusheng mentioned that 1,088 apartments were converted from sales to leases, achieving full occupancy upon opening. Similar models have been completed in 6 projects this year, activating over 6,000 units.

In the first half of the year, Vanke's rental housing business achieved operating income of 1.73 billion RMB, a year-on-year increase of 5.3%. Both Net Operating Income (NOI) and equity net profit achieved double-digit growth.

While the operational service business maintains a good development momentum, Vanke's multi-track REITs continue to make breakthroughs. In March, the logistics REITs obtained approval from the National Development and Reform Commission and were accepted by the China Securities Regulatory Commission; in April, Jinli REIT was listed on the Shenzhen Stock Exchange; and apartment REITs are in the application stage, having received relevant guidance and feedback.

In addition, Vanke has also noticed attempts of private equity REITs in the industry. Vanke's Jianwan Fund Wuhan project has joined the "Jianxin Housing Rental Fund Holding Real Estate Asset Support Special Plan," which was listed on the Shanghai Stock Exchange on July 30th.

The continuous breakthroughs in REITs not only allow Vanke to create more high-quality assets and accelerate the transition to real estate operators but also connect with more investment institutions including China Life, CICC, and CITIC. These institutions are not only REITs investors but also supporters of Vanke's growth during the cycle transition.

Recently, Vanke announced that a total of 1,862 key management personnel have collectively raised 201 million RMB to increase their holdings of the company's A-shares. With the unity of internal key personnel and the support of external institutions, Vanke can face cyclical changes more confidently.

Perhaps the road ahead is still full of challenges, but only by fearlessly forging ahead can one pave a way out of the winding path. Vanke will continue to strive forward, with the support of like-minded individuals, to find a way of living in the second half for itself and the industry