Since the Central Political Bureau meeting on April 30 proposed "digesting existing real estate and optimizing incremental housing", some cities have relaxed restrictions on commercial housing purchases and loans, and the government has acquired and stored existing real estate. On May 17, a combination of real estate policies was implemented one after another, and real estate support policies have ushered in major changes. At present, real estate sales area and prices are still declining, which has had a great impact on real estate companies, affecting their profits and cash flow, and deriving problems such as debt defaults, which has led to a decline in real estate companies' willingness and ability to acquire land and their ability to guarantee the delivery of buildings. What are the current risks in the real estate industry? What is the operating status of real estate companies? This article is based on the 2023 annual report data of 171 real estate development listed companies (collectively referred to as "sample real estate companies", 101 A-shares + 70 Hong Kong stocks, excluding real estate companies that have been suspended or have not yet disclosed annual reports), sorting out the current operating difficulties and debt situation of real estate companies, in order to provide data support for further optimization and adjustment of policies. 1. Operation of listed real estate companies: sales and profits continue to bottom out, and corporate differentiation intensifies 1. Sales: Revenue increased slightly in 2023, while contract sales fell sharply, and future performance is not optimistic. The main difference between operating income and contract sales is the different time points of revenue recognition. The former is usually the amount of sales revenue confirmed after the commercial housing meets the conditions for completion and delivery, while the latter is the amount of the pre-sale contract for commercial housing. From the perspective of current revenue, the operating income of the sample real estate companies increased by 2.0% year-on-year in 2023, which is related to factors such as accelerating the transfer of income under the background of guaranteed delivery. Contract liabilities (advance payments) are revenue to be transferred in the future. In 2023, the balance of contract liabilities of the sample real estate companies decreased by more than 20%, and the coverage multiple of the current year's transfer operating income dropped to 0.80, which was lower than 1 times for the first time. From the perspective of contract sales, the contract sales amount of the top 100 real estate companies in the industry fell by 17.3% year-on-year in 2023, and further fell by 49% in the first quarter of 2024. The decline in sales widened, and the future performance of real estate companies may be difficult to guarantee. 2. Profitability: Both gross profit margin and net profit margin have dropped to historical lows, with 46% of listed real estate companies in the red. In terms of gross profit, the gross profit margin of sample real estate companies in 2023 fell by 2.1 percentage points to 16.8%, the lowest level in recent years. This is mainly due to price discounts and channel promotions by real estate companies on the revenue side, and the high construction costs of high-priced land projects in 2021 on the cost side. In terms of net profit, in 2023, the sample real estate companies achieved a total net loss of 40.65 billion yuan, and the net profit margin calculated by dividing by operating income was -0.8%, the first time they turned from profit to loss. The loss rate of listed real estate companies has increased significantly, reaching 46.2% in 2023, and the accumulation of asset impairment losses is the main reason. First, due to the downward trend in land prices, the value of real estate companies' land reserves has shrunk, and the provision for inventory impairment has increased; second, due to the decline in housing prices, the value of investment properties held by real estate companies has declined, and asset impairment losses have been accrued. 3. Inventory: The inventory turnover rate of real estate companies has improved, which is due to the reduction of inventory, rather than the substantial improvement driven by sales. The overall inventory turnover takes 2.85 years. In 2023, the inventory balance of sample real estate companies will decrease by 11.7% year-on-year; the inventory turnover rate is 0.35 times/year. The inventory turnover rate indicator has increased. First, real estate companies strictly control the increase in new projects and promote the completion and delivery of sold projects; second, real estate companies have increased inventory impairment losses, the inventory scale has shrunk, and the transfer of high-cost projects has accelerated. 4. Cash flow: Real estate companies' operating and investment activities have shrunk, and monetary funds have decreased. First, the net cash flow from operating activities has improved, but it is a "contraction improvement", because the cash inflow from sales proceeds has decreased, while the cash outflow from land acquisition and construction payments has decreased more. Second, investment activities are more cautious, and most real estate companies have reduced their holdings of investment properties. In 2023, real estate companies turned to "determining expenditures based on sales and investment based on sales", and the net investment cash flow of the sample real estate companies was -162.2 billion yuan, which was only about 1/4 of that in 2021. Third, the financing cash flow of real estate companies has a large net outflow, and the difficulty of financing has not yet been reversed. In 2023, the net financing cash flow of the sample real estate companies was negative for three consecutive years, with a net outflow of up to 624.8 billion yuan, which was higher than the net cash inflow from operating activities. Fourth, the cash balance on the books of real estate companies has been greatly reduced. At the end of 2023, the cash and cash equivalents balance of the sample real estate companies was 1.74 trillion yuan, a year-on-year decrease of 12.2%; only 56 real estate companies had a positive net cash flow throughout the year, and about two-thirds of the real estate companies had a decrease in cash on their books. 5. Enterprise differentiation: The income share of private real estate companies has dropped to 60%, and the decline in performance of private enterprises is much greater than that of central state-owned enterprises. Since 2021, the operating and profit gap between real estate companies of different ownership has widened. First, the revenue share of private real estate companies has dropped significantly. Among the sample real estate companies, private real estate companies accounted for 60.6% of the operating income in 2023, a decrease of 5.6 percentage points from the previous year. Second, the net profit margin and return on net assets of private enterprises are much lower than those of central state-owned enterprises. The profits of private real estate companies were hit harder. In 2023, the net profit of listed private enterprises was -121.9 billion yuan, and the net loss further expanded. The net profit margin of sales fell to -3.8%, and the return on net assets was -5.5%; while the listed central state-owned enterprises achieved a net profit of 81.2 billion yuan, a net profit margin of 3.9%, and a return on net assets of 2.2% during the same period. 2. Debt of listed real estate companies: leverage is steadily declining, and the debt repayment risk of tail companies is increasing 1. Total debt: The total debt of listed real estate companies has been reduced, and interest-bearing debt accounts for about 40% of the total debt. First, overall, at the end of 2023, the sample real estate companies had a total debt balance of 18.9 trillion yuan, a year-on-year decrease of 8.2%; the overall asset-liability ratio of the sample real estate companies after excluding contractual liabilities was 65.3%, a decrease of 1.1 percentage points from the previous year. Second, structurally, the contract liabilities, accounts payable and bills payable of the sample real estate companies have declined significantly, and interest-bearing liabilities have declined for the first time in nearly five years. In 2023, the interest-bearing liabilities of the sample real estate companies accounted for about 42.0% of the total liabilities, and short-term loans, bonds payable and long-term loans decreased by 0.8%, 1.3% and 3.7% respectively. 2. Debt risk: The overall leverage ratio has steadily declined, but structural debt risks still exist. First, the leverage ratio indicators of high-risk real estate companies have further climbed. In 2023, the median of the debt indicators of the sample real estate companies generally declined, but the 3/4 quartile of the debt-to-asset ratio still rose by 1.8 percentage points to 76.6%. About 40% (68) of the real estate companies had an asset-to-asset ratio exceeding the regulatory red line of 70%, and the risks of high-debt real estate companies were still worsening. Second, the cash on the books of real estate companies decreased, and their ability to guarantee short-term debts decreased. In 2023, the short-term repayment pressure of real estate companies continued to increase, and the cash-to-short-term debt ratio of the sample real estate companies dropped to 0.64, which was not enough to cover the interest-bearing liabilities due within one year.3. Debt Financing: Real estate companies face negative cash flow from financing activities, and the difficulty of bond financing in the public market is relatively high. Firstly, there is a significant net outflow in financing activities, leading to a negative net cash flow for real estate companies for three consecutive years. Secondly, the credit risk of real estate companies continues to be exposed, with negative net financing from public market bonds. In 2023, the net financing amount for domestic credit bonds of real estate companies was -208.3 billion yuan, and the net financing amount for overseas bonds has been negative for three consecutive years.

III. Policy Recommendations

Firstly, optimize the commercial housing policies in first-tier cities to release incremental demand and reverse the expectation of falling housing prices. Secondly, implement the policy to ensure housing delivery as soon as possible, and resolve the risks of commercial housing projects in a categorized manner. Thirdly, increase fiscal support for the purchase and storage of commercial housing, and coordinate the digestion of existing stock and the optimization of incremental supply. Fourthly, optimize land supply and development methods to meet residents' demand for high-quality commercial housing in good locations. Fifthly, encourage real estate companies to save themselves and promote industry mergers and acquisitions. Sixthly, real estate companies should accelerate business transformation and lay out a new track for "good housing".

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