HONG KONG (Reuters) - China Evergrande Group, which has the second-largest debt pile among the nation’s corporates, pledged to slash its debt by 2020 after unveiling a jump in first-half profits that was aided by the early redemption of some bonds.
The country’s No.3 property developer by sales also announced it is changing its growth strategy to focus on growing profitably, and reduce the size of its land reserves towards that end.
Evergrande said on Monday it aimed to cut its net debt ratio to around 70 percent by June 2020 from 240 percent now, helped partly by the introduction of a third round of strategic investments of 30 billion yuan ($4.53 billion) to 50 billion yuan by its unit, Hengda Real Estate Group, expected after September.
As a first step, it aims to lower the ratio to 140 percent by end of June next year, and to 100 percent in the year after. Its total borrowings stood at 673.5 billion yuan as of end-June.
Chief Executive Xia Haijun told an earnings briefing Evergrande would no longer aim to be the largest developer in China by sales, but instead attempt to be the No. 1 by margins.
It will start to reduce the scale of land reserve by 5 to 10 percent, or 10 to 20 million square meters, each year, he said.
“In the last 20 years, Evergrande has been chasing scale, but why is Evergrande changing strategy this year? ... This is because we have the basis for a transformation,” said Xia.
“Because China’s property market has moved from a golden era to a stable one, so we need to transform.”
Evergrande’s core profit, which excludes revaluation gains, came in at 27.30 billion yuan ($4.12 billion) over the six months ended June, a more than three-fold surge versus 7.8 billion yuan a year ago, thanks to a substantial rise in average selling prices and a full redemption of high-interest perpetual bonds.
Its net profit rose nine-fold to 18.83 billion yuan, while gross margin rose by 7.5 percentage points to 35.8 percent.
However, the developer booked a net loss on the disposal of available-for-sale financial assets of 7.02 billion yuan.
Earlier this year, subsidiaries of Evergrande sold 1.55 billion A-shares in China Vanke at a lower than average buying price to state-owned Shenzhen Metro, ending a years-long struggle for boardroom control at the larger peer Vanke.
Having half of its exposure to smaller cities in China, Evergrande was less affected by a slew of government tightening measures to rein in the country’s overheated property sector.
The developer said its future land purchases would be focused on Tier 2 and satellite cities in China that are less impacted by tightening policies, although it forecast land prices would rise steadily due to a shortage.
Evergrande redeemed all its perpetual bonds, totalling 112.94 billion yuan, by end-June. The bonds cost it $1.6 billion in interest last year.
Its dollar bonds were trading higher by a quarter to a half point across maturities after its pledge to further cut its net debt ratio.
The developer has seen its shares surge close to 400 percent this year, driven by an imminent backdoor listing for most of its real estate assets in mainland China, fresh capital of 70 billion yuan from strategic investors as well as share buybacks.
Evergrande said it believed the Chinese economy would maintain a stable and favourable trend and that it was confident it could achieve its full-year contract sales target.
($1 = 6.6279 Chinese yuan renminbi)
Reporting by Clare Jim; Editing by Himani Sarkar and Muralikumar Anantharaman