The impact of tighter real estate financing appears to be more serious than expected.

Before the Hong Kong stock market opened on August 22nd, Sunac China released a good semi-annual report with revenue of 76.8 billion and net profit attributable to shareholders of 10.3 billion, with a growth rate of more than 60%, and the performance continued to accelerate transformation.

However, today's Sunac shares opened high and closed low, closing down about 4%. At the performance meeting, some of the messages released by the management team headed by President Sun did not seem to be optimistic:

1. The tightening of financing is unprecedentedly serious, and there will be great pressure on issuing bonds in the future, and there may be no debt to buy in the market.

2. This time, the real estate regulation and control from the financing side is expected to have an impact not only on land acquisition in the second half of the year, but also on sales.

3. The pace of land growth will be controlled, and land acquisition will basically stop in the second half of the year.

What are the signals from these messages? let's move on.

First, promote sales and buy less land and deal with the tightening of financing

For a long time, the concept of strict regulation of real estate has long been deeply rooted in the hearts of the people. And the biggest change in 2019 isThe focus of regulation and control has shifted from the middle and back-end links such as sales restrictions, purchase restrictions and land price restrictions to the financing steps of real estate enterprises at the source.From rumored restrictions on the issuance of bonds by some radical real estate companies, to restrictions on the use of dollar bonds, to a nationwide inventory of bank real estate loans, financing regulation of real estate companies now covers everything from borrowing, bonds and trusts.

Judging from the current high level of debt, we may understand Mr. Sun's solemn attitude towards financing tightening.By the end of June 2019, the total amount of financing loans reached 320.28 billion yuan, up 31.7 percent from the end of 2018, and the paper cash was 138 billion yuan, up 14.8 percent from the end of last year. As a result, Sunac's latest net debt ratio reached an all-time high of 205.87%.

Sunac attributed the increase in debt to the more aggressive acquisition of land in the first half of the year.According to Carey data, Rongchuang ranked third in the ranking of new land values in June 2019 with 82.92 billion yuan. As for the land acquisition plan in the second half of the year, Sun Hongbin said that Sunac has basically stopped taking land in the open market, unless it is a particularly good location.

However, although the overall debt level is on the high side, the short-term debt repayment pressure of Sunac is not great.In the first half of 2019, due to the growth of pre-sales and the strengthening of rebates, there was a net cash inflow of 43.08 billion yuan, close to the 52.05 billion level for the whole of 2018. As of the end of June, the total cash was 138 billion yuan, covering more than 3.1 times of the game debt due in the second half of the year and more than 1.1 times of the interest-bearing debt due within one year.

In the longer term, if the regulation is tighter for a long time, then cash will increasingly become an important asset for real estate enterprises.In the case of financing, it takes time to release high leverage while sales growth returns cash. According to the semi-annual report, 420 projects are expected to close in the second half of 2019, and the total salable resources are expected to exceed 570 billion yuan, of which more than 80% are located in first-and second-tier cities. Sufficient and well-distributed available resources will support the elimination of sales and contribute to a large amount of operating cash flow.

To promote sales is open source, and to slow down the pace of buying land is to cut expenditure.. In a sense, stopping buying land is a feasible strategy for Fuchuang in theory. On the one hand, it has a large amount of land reserve resources, which is sufficient to support the development for many years in the future. By the end of June 2019, Rongchuang's full-caliber land reserve is about 213 million square meters, and the value of the land reserve is expected to be about 2.82 trillion yuan.However, there are more changing considerations at the implementation level.At the shareholders' meeting at the beginning of 2019, Mr. Sun also proposed to be cautious in buying land, but he still actively bought land afterwards.

On the other hand, even if it stops selling land on the open market, Sunac can expand its land reserve through mergers and acquisitions. In the first half of 2019, in the face of Taihe, Metro and other asset sales, Sunac did not sell. In this regard, Sun Hongbin said that Sunchuang has advantages in receiving mergers and acquisitions, so there are many opportunities, more options and stricter requirements.

Second, the first and second line soil storage + culture and tourism project, the foundation of the turning period of the industry.

However, financing tightening is only a short-and medium-term policy cycle, and the basic strategy of financing and innovation is noteworthy if we look at the longer cycle of population and urbanization.

Over the past 30 years, the core basis of China's rapid real estate expansion is economic growth, population expansion and rapid urbanization. The combined force of these factors has generated a large number of commercial housing demand, thus giving birth to one wealth myth after another in the real estate industry. This is the dividend of the times.

However, the current pattern of the real estate industry has changed, and the industry transition is under way. On the one hand, the overall human dividend began to fade gradually. According to statistics, China's working-age population has shown negative growth for five consecutive years, with an average annual decrease of nearly 2 million. At the same time, China's birth rate and natural growth rate have been on a downward trend for decades. The Chinese Academy of Social Sciences predicts that the era of negative population growth in China may come in 2030.

On the other hand, after so many years of rapid development, China's urbanization has entered the middle and later stage of deceleration. In 2018, China's urbanization rate has reached 59.58%, gradually approaching the level of 80-90% of developed countries in Europe and the United States, there will not be much room for further increase, and the growth rate of urbanization has begun to slow down significantly.

With the arrival of negative population growth and the deceleration of urbanization, the commercial housing market has gradually evolved from rapid growth and scale expansion to gradual convergence and stock competition. More specifically, urbanization has entered a later stage, with the emergence of the metropolitan area, the differentiation between cities will be more obvious. As the regional economic center, the economic growth and crowd gathering of the first-and second-tier cities are much higher than those of the third-and fourth-tier cities, and the housing demand will be greater.

Based on this, we say that in the long run, real estate is gradually forming the characteristics of stable scale and regional differentiation.In this case, the optimal solution of the development business is 1) to lay out the core metropolitan area with positive growth in demand, and 2) to form the advantage of scale and enjoy the stock annexation growth during the period of industry consolidation. Further, it requires real estate enterprises to expand other high-quality business in addition to the development business.

First of all, after years of "winding up" efforts to catch up, the current financing contract sales scale has been stable in the top five in the industry, the scale advantage has been formed, in financing, land acquisition, sales and acquisition of mergers and acquisitions have certain advantages. In particular, it is worth mentioning that Fuchuang accumulated the advantages of M & A resources and the ability of integration, which is a huge addition to the scale of annexation stock in the period of industry integration.

Secondly, at present, Fangchuang has a land storage size of 213 million square meters, with a value of about 2.82 trillion, 83% of which are located in the core first-and second-tier cities, enjoying the dividend of urban growth. Even against the backdrop of tighter industry controls and tighter financing, demand for housing in first-and second-tier cities with dense populations and economic growth still exceeds supply.

Finally, in the longer term, Rongchuang has chosen a new business line for itself, which is currently under restraint and solid exploration. At present, the financial innovation literature travel business has been profitable, but the scale is very small. The management is also more restrained, saying that the cultural travel business will still account for a very small proportion in the next two to three years, and the gradual release of performance will be in the next three to five years. In terms of investment in Wenliu City, considering the cash flow, the current core indicator of financing is that the assets held cannot exceed 20% of the total assets. A total of 12 Wenluicheng projects will be completed the year after next (2021).

III. Summary

To sum up, the capital chain crisis is an urgent problem to be solved in the short and medium term. If the current level of regulation becomes normal, then the rules of the game will change and companies with cash on hand can survive.

And can live better, the answer may be hidden in some marginal changes, we need to continue to track. It includes the change of supply and demand pattern of commercial housing in first-and second-tier cities, the collapse and integration of small and medium-sized housing enterprises, the profitability and replicability of culture and tourism projects, and so on.