Policies Continue To Favour SOEs; Regulators Easing Rules To Induce M&A

Over 80% of the leading developers failed to achieve their sales targets in 2021 while SOE developers generally outperformed the industry. The financing environment remains challenging as the recent easing measures only benefitted “high-quality” developers. M&A financing for SOEs could be exempted from Three Red Line limitations while the Guangdong provincial government is reported to be facilitating
M&As in the industry. Policies continue to favour SOEs. Maintain UNDERWEIGHT.


Over 80% of the leading developers failed to meet 2021 sales target; SOEs outperformed. China Real Estate Information Corporation’s (CRIC) Dec 21 preliminary contracted sales for the top 100 developers was up 32.4% mom but still 35.2% lower yoy. Lacklustre sales performance in 2H21 wiped out the magnificent start in 1H21, with 2021 sales for the top 100 -3.5% yoy. Leading developers’ average sales target completion for 2021 was only 88% (2020: 105%).

Among the leading names, Guangzhou R&F, China Aoyuan and Shimao achieved only around 80% of their annual sales targets. Homebuyers shun developers with high perceived default risks and tend to favour large-scale developers, especially SOEs with a lower likelihood of abandoning projects. SOE developers like Yuexiu, Greentown, Gemdale and CR Land were among the few to have achieved their annual sales targets.

Capital market fund-raising shrank to five-year low. Based on CRIC’s compilations, total funds raised from the capital market for the top 100 developers in 2021 was Rmb1,303.8b, down 26% yoy, the first yoy decline in the past five years. Note that the monthly funds raised by the top 100 developers have been consistently below Rmb100b since Aug 21. The recent credit easing measures benefitted only “high-quality” developers, namely SOEs and a few leading private developers. The remaining private developers were left struggling to raise fresh funds to repay maturing debts. Moreover, these “high-quality” developers are also raising fresh funds at reasonable costs, with Dec 21’s average financing cost at 4.52% (- 2.40ppt yoy).

Regulators easing rules to induce M&As; facilitating meetings between SOEs and struggling developers. Recently, it was reported that M&A financing for “high-quality” developers will be exempted from the Three Red Lines (TRL) limitations, which has been one of the key constraints holding back financially sound developers from conducting M&A activities. Besides, the Guangdong government is reported to be facilitating M&As between financially stressed private developers and SOE developers. Financially stressed private developers were invited to present the current status of their projects under development to potential acquirers. Regulators have turned more aggressive in inducing industry consolidation recently, with the aim of accelerating the elimination of highly-geared and poorly-managed developers so as to safeguard the interests of homebuyers and upstream suppliers/contractors.