China Vanke - Deep net loss in 1H24 with balance sheet stretched and liquidity under pressure
- 1H24 net loss larger than profit warning upon higher-than-expected impairments
- All eyes on further progress on refinancing and asset disposals despite solid progress to date as liquidity remains stretched
- Margin pressure and lower development booking weighing on near-term earnings; expect net losses in FY24-25F with breakeven potentially from FY26F
- Maintain HOLD for H shares at HKD3.50/sh TP and Fully Valued for A-shares at Rmb3.20/sh TP
Deteriorated balance sheet with continually tight short-term liquidity. Net gearing rose 7.4ppts to 62.0% with total cash to ST debt ratio falling to 0.9x as of Jun-24 (vs. Dec-23: 1.6x). Total cash fell 7% h/h to Rmb92.4bn upon Rmb5.2bn cash outflow (vs. Rmb1.9bn inflow in 1H23), though management indicated that the situation has improved on a quarterly basis with OCF returning to an inflow in 2Q24. The company has repaid Rmb17.2bn of on/offshore bonds in 7M24 with only Rmb2bn onshore bonds due in Sep in the public bond market for the rest of 2024.
Based on our updated OCF sensitivity analysis, we estimate Vanke will need to secure >Rmb28bn in presales per month on average in the next twelve months to remain solvent based on the assumption that the company is unable to secure any forms of refinancing for opex and short-term public bonds due (or >Rmb47bn under the extreme case it fails to refinance all short-term debts).
Decent refinancing and asset disposal pace. Vanke secured c.Rmb61.2bn in refinancing during 1H24, of which Rmb15bn (or Rmb21.9bn on gross basis) was from operating asset loans. Meanwhile, Vanke managed to sell c.Rmb20.4bn worth of assets in 7M24 (inclusive of asset disposal at SCPG level and REIT issuance), on track to meet its full-year disposal target. Management indicated there are potentially 19 assets in talks for disposal, which may be completed during the next few months of this year.
Looking ahead, the company aims to reduce admin cost by 15% in 2024. Vanke’s liquidity remains stretched with its monthly presales performance (c.Rmb21bn on average in 7M24) falling short of our revised cashflow breakeven point (c.Rmb28bn per month, based on Jun-24 data). Short-term liquidity and thus the company’s refinancing, asset disposal and monthly presales remain key factors for investors to watch.
Gross margin to remain pressured in the near-term. Vanke is adopting a more flexible pricing strategy on its projects for sale in light of the challenging physical market. Management disclosed that the company has provided different levels of price discounts for its c.146 projects in the past three years. While property development projects on land acquired from 2022 onwards (expect c.80% sold by year-end) are doing well with an average GPM of 18%, contribution from this end will likely be gradual. The majority of development revenue recognition in the next two years will continue to be from projects on land purchased before 2022 as well as some inventory of completed units. Profit margin is thus expected to remain pressured in the near term.
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