Analysts warn of earnings decline at property firms

SHANGHAI: Property companies in the China market have been celebrating rising interim earnings, but analysts warn of a decline in profits over the next two years.

Developers have managed to report encouraging six-month earnings predominantly because most of their units were pre-sold last year when the China market was booming,

"Over the next few months we should see deeper price cuts, which will affect their margins," said Lee Wee-liat, a regional property research head at Samsung Securities. "Sales volumes may not significantly improve and all these will affect their earnings in 2011 and 2012."

Lee said earnings were expected to peak this year and a slide would start from there.

China Overseas Land & Investment, controlled by the Ministry of Construction, said last Wednesday, Aug 11 its net profit rose 66.7% in the first half over the same period last year on gains from property development in China.

China Vanke said its first-half net profit rose 11% from a year earlier because of stronger sales while Poly Real Estate, a major subsidiary of state-owned Poly Group, announced that its net profit gained 16.6% in the first half.

Smaller developers such as Longfor Properties and Sino-Ocean Land Holdings are expected to announce positive interim earnings when they report this week.

Bernard Chu, a research manager at Guodu Securities, said developers' results would be good as they reflected their strong pre-sales results last year.

"It is not easy to estimate developers first-half earnings as we do not know which projects the company will book in the first half," Chu said.

He expected Longfor's interim and full-year profit results to be strong. Longfor's earnings for the full year are expected to increase 33% to 2.15 billion yuan (RM1 billion).

JP Morgan said in a report early this month that Sino-Ocean's full-year core profits would rise 88% to 1.99 billion yuan.

But Chu said developers had reported slowing growth in sales in the first half and the impact would be seen in their earnings next year.

Looking ahead, Lee said developers mainly focusing on high-end residential properties in tier-one cities would be hit hardest.

He cited Glorious Property Holdings and China Resources Land as examples.

Cheng Lixiong, the chief executive of Shanghai-based Glorious Property, last month expressed caution about the outlook for sales later this year, after the central government unveiled harsh measures to rein in the red-hot property sector.

In mid-April, the central government announced a series of measures to tighten the property market, such as raising down-payment requirements and mortgage rates for second homes and increasing the down payments for first home buyers purchasing large apartments.

Last week, China media reported that banks in major cities such as Shenzhen had suspended loans to third-home buyers.

At a time when recovery in the residential market remains uncertain, Lee advises investors to focus on commercial players such as Powerlong Real Estate Holdings. — South China Morning Post