Shimao is the Chinese property developer controlled by the country’s enigmatic billionaire, Xu Rongmao.
Readers in the UK might be familiar with Rongmao, since he was linked back in September 2008 to the possible purchase of Mike Ashley’s stake in Newcastle United Football Club.
Not much came of that rumour. But it might now be time to re-familiarise ourselves with the Rongmao name, nonetheless.
In what might be considered an exemplary response to Chinese liquidity measures, the Shimao group last week announced a quadrupling of profits in 2009.
Indeed, as Bloomberg reported on April 13, net income at the group jumped to 3.51bn yuan (€514m) versus 841m yuan a year earlier, while sales more than doubled to 17 billion yuan.
At the time, Standard Chartered’s Feng Zhi Wei reflected positively on the results:
Going forward, we expect the company to record sustained profitability growth and achieve its contracted sales target of CNY 30bn in 2010. While recent market uncertainty, particularly on the regulatory front, may dampen buyers’ sentiment and negatively affect the sales performance of Chinese developers, we believe the company’s target of 33% y/y sales growth is realistic.
Shimao sold CNY 5.5bn of properties in Q1-2010, up by 21% y/y, at an ASP of CNY 12,000 psm; this was 18% of its full-year target. The company plans to have 4.3mn sqm of GFA for sale in 2010, including 658,000 sqm of unsold inventory, about 3mn sqm of new launches (from both new projects and later phases of existing ones) and anther 660,000 sqm from its 64%-owned Shanghai Shimao project.
Based on the ASP of CNY 9,000 psm in 2009, this represents a sales rate of about 77% of the total available-for-sale space. In comparison, the company projected a total of 3mn sqm of GFA available for sale in early 2009 and sold/pre-sold 2.5mn in the year, representing a sales rate of 83%.
But even Feng Zhi Wei noted a degree of market uncertainty when it came to the regulatory front.
Fast forward to Monday April 19, and the regulatory risk suddenly became a touch more clear thanks to a new directive from the State Council. Indeed, as Marketwatch reported via the Wall Street Journal (our emphasis):
HONG KONG-China stocks skidded Monday in their biggest drop of the year and took other Asian markets with them, as investors reacted to fears that government action to cool that country’s volatile property sector will slow economic growth.
The Shanghai Composite index fell 4.8% to 2980.30, below the symbolically important 3,000 level. It was the biggest drop in mainland China’s benchmark index since Aug. 31, and it is now down 9% this year. The rest of Asia mirrored China’s fall, in part over fears that government removal of loose money supply and bank lending could snuff out the nascent recovery in corporate profits.
Japan’s main index fell 1.7% to 10908.77, while Hong Kong’s fell 2.1% to 21405.17. Markets also reacted to civil fraud charges filed against Goldman Sachs Group Inc. in the U.S. on Friday and the impact of Iceland’s volcano on airline stocks.
Investors in China spent the day digesting weekend actions by the State Council to restrict speculative property investments. The targeted tightening measures followed similar moves last Thursday, as well as earlier bank-lending curbs.
Xinhua news agency provided the following English summary of the measures to be imposed:
BEIJING, April 17 (Xinhua) — Commercial banks can refuse to issue loans to buyers of their third home in areas suffering from excess property price rise, said the State Council, or the Cabinet, on Saturday.
To curb speculation, banks can also halt loans to those who can’t provide materials to prove they had lived and paid taxes and social insurances for at least one year in cities where they intended to buy houses, according to a statement on the central government’s website.
The statement also urged local governments to take any necessary measures to put restrictions on the number of homes to be bought in a certain period of time. Tax policies should be employed to adjust consumption for housing and earnings on property development, according to the statement.
For reference, this chart details how Shimao’s share price reacted to the tightening news over the week:
The chart below shows how its share price has behaved over the last three months:
But is it actually all a bit of an overreaction?
The Sinocism blog, for example, noted on Monday that the State Council and Premier Wen Jiabao have made numerous pronouncements since 2004 about cooling off the real estate market, all to no effect.
Out of all the rules proposed, it’s also really only the one prohibiting non-residents of a city from obtaining mortgages to buy properties in that city — unless they can prove that they have paid taxes there for at least one year — that might really have an immediate effect.
Meanwhile, as we’ve recently written, and the Business Insider also noted last month, it’s hardly in the government’s interest to prick the bubble completely, especially as many local authorities are invested directly in property markets themselves.
In any case, we suggest Xu Rongmao’s movements might be worth watching more closely for the time being.
Related links:
More on that overheating Chinese property market - FT Alphaville
China’s liquid real estate bubble – FT Alphaville
And now for a Chinese real-estate crash? – FT Alphaville