China Real Estate : Financial positions remain stable despite capex increase in 3Q

Takeaways from 3Q results of 110 A-share listed property firms

From the third-quarter financials of 110 A-share listed property companies,we note that the aggregate financial position saw net operating cash flowdecrease from 2Q12 but remain positive, due mainly to rising capex (up28% qoq but flat yoy), offset partly by strong 3Q property sales (up 13%qoq and 40% yoy). Gearing (net debt to equity) decreased slightly to 68%from 69% at end-2Q, though remains far above the previous trough (29%)in 3Q09. Meanwhile, cash as a percentage of short-term debt rose to 1.10Xfrom 1.07X in 2Q12 (vs. previous trough of 0.9X in 4Q08) and cash balanceaccounted for 42% of total debt vs. 41% in 2Q12.

Pre-tax margin lower again due to disproportionate SG&A booking

Pre-tax margin came down to 16% in 3Q12 from 19% in 2Q12, due mainlyto disproportionate SG&A booking against relatively small revenuebooking in 3Q (-12% qoq). We noticed that gross margin remained stable at27% in 3Q, same as 2Q. Among three categories of developers (Top 15,Mid 35 and Bottom 60), pre-tax margin for the Bottom 60 developers fellmore significantly due primarily to their limited project booking resources.

Weaker cash flow for Mid 35 on lower qoq sales growth

Capex spending as a percentage of cash inflow was at similar levels for allthree categories of developers in 3Q (56-59%) but increased sharply for theMid 35 from 2Q (46%) due to lower qoq growth of cash collected fromcontract sales (7% vs. 20% for Bottom 60 and 14% for Top 15) and probablynot much flexibility in cutting capex correspondingly. As a result, the Mid35 saw the highest qoq decline in aggregate operating cash flow (thoughstill positive). That said, net gearing for the Mid 35 remained stable qoq.

Investment view

Despite fluctuations in developers’ cash flows during this quarter, we thinkthe improving trend in financial positions remains intact on the back of ourexpectation for a stable sales outlook and contained new investmentspending in the coming months. That said, we expect margins in thecoming quarterly financials to remain on a downward trend as the bookingof weak property sales during 4Q11-1Q12 gradually kick in. Our top picks(all Buy rated, on CL): Greentown, Longfor and BCD. Key risks: Furthergovernment policy tightening and/or macro hard landing.