At the beginning of 2019, due to the release of rigid demand, housing enterprises ushered in a wave of "small spring". However, on April 19, the Politburo meeting once again stressed the main tone of the property market of "housing speculation", leading to a pullback of inner housing stocks one after another.

On July 30, the Politburo meeting made it clear that "real estate will not be used as a means to stimulate the economy in the short term." Affected by this news, inner housing stocks fell back again.

After two pullbacks, inner housing stocks have risen only 0.65% so far, outperforming the Hang Seng Index as a whole. However, in such a grim industry environment, there are still some housing enterprises out of their own "style", Zhongjun Group (01966) is one of them. By the close of trading on Sept. 20, the stock had risen 48.66% so far, ranking fifth on the list of internal housing stocks.

Behind the sharp rise in share prices is the rapid growth of contract sales of Zhongjun Group. However, due to the acceleration of land acquisition against the trend and the speed of elimination, the weak financing capacity of Zhongjun Group has gradually become prominent. Although the short-term debt pressure has been alleviated, it has increased the medium-term risk. This paper will analyze the core competence of Zhongjun Group from the three core competencies of real estate enterprises: land acquisition ability, de-transformation ability and financing ability.

The third and fourth line of land storage may compress profits.

Due to the tightening of the policy on the real estate industry, the refund pressure of listed real estate enterprises has greatly increased, resulting in real estate enterprises can only reduce the price of some commercial housing, or reduce the acquisition of land, in order to achieve the purpose of reducing the operating leverage of the company. After the real estate enterprises reduced the acquisition of land, the land market also began to fail. In the face of the grim industry situation, Zhongjun Group has stopped buying land since the third quarter of 2018.

However, in order to enrich the land reserve and maintain the development of the company, Zhongjun Group returned to the land market and purchased land for three consecutive months from December 2018 to February 2019. Zhitong Financial APP found that in the first half of 2019, Zhongjun Group and joint ventures and associated companies bought 27 new projects in 19 cities, including Beijing, Tianjin, Chongqing, Hangzhou, Jinan, Nanchang, Foshan and Kunming.

The total cost of the new land is about 24.034 billion yuan (the land cost attributable to Zhongjun Group is 14.438 billion yuan), and the total area that can be built on the ground is about 5.27 million square meters, with an average land cost of about 4560 yuan per square meter, up 5.38 percent from 4327 yuan in 2018. The increase in the average cost of land is mainly due to the increase in the proportion of second-tier land reserves.

As of June 30, 2019, Zhongjun Group's land reserve has a planned construction area of 16.32 million square meters. If the current growth rate of contract sales is maintained, the current soil reserves can meet the development needs of the next 2-3 years. However, from the perspective of the quality of the land reserve, there are some defects. Of the land taken by Zhongjun Group, joint ventures and joint ventures, 12.4% are located in first-tier cities, 65.3% in second-tier cities, and 22.3% in third-and fourth-tier cities.

Although the proportion of land reserves of Zhongjun Group in second-tier cities has increased through the acquisition of land at the beginning of the year, the proportion of third-and fourth-tier cities is still more than 20%. Judging from the current situation, the house prices of overdrawn third-and fourth-tier cities have been adjusted back to a certain extent. Under the main tone of non-speculation in housing, housing prices in third-and fourth-tier cities are expected to continue to face adjustment pressure, while Zhongjun Group's land reserves may compress the company's profits.

In the first half of 2019, Zhongjun Group's gross profit margin was 28.9%, down 3.4 percentage points from the same period in 2018. The main reason for the decline in gross profit margin is that the price limit policy has led to a reduction in the average sales unit price of Zhongjun Group projects.

The two fees have risen sharply to support accelerated elimination.

At the same time of taking land against the trend, Zhongjun Group has achieved the rapid growth of contract sales with the goal of "accelerating elimination and withdrawing funds".

Zhitong Financial APP found that in the first half of 2019, Zhongjun Group's contract sales with joint ventures and associated companies were 37.028 billion yuan, an increase of 77.9 per cent over the same period last year, with a contract sales area of about 2.97 million square meters, an increase of 80.3 per cent over the same period last year.

In terms of projects, in the first half of the year, Zhongjun Group and joint ventures and joint ventures launched 20 new projects, and more than 100 projects were on sale during the period. These projects are distributed in 32 cities, of which Beijing and Chongqing account for relatively high contract sales, which are 11% and 14% respectively, and none of the other cities exceeds 10%.

Picture: specific city distribution map of Zhongjun Group's sales in the first half of the year.

From the city level, Zhongjun Group continues to increase the promotion of second-tier and strong third-tier cities, and the contract amount sold is still dominated by second-tier and third-and fourth-tier cities, and the proportion is similar to that in 2018. And sales in second-tier and third-and fourth-tier cities increased by 98.1% and 65.4% compared with the same period last year, with a faster sales speed.

Figure: city-level distribution map of sales area of Zhongjun Group in the first half of the year

In fact, the more than 40% increase in Zhongjun's share price during the year has a lot to do with the rapid growth of contract sales, which represent the income growth of real estate companies in the next two years. However, behind the rapid growth of contract sales, the current performance has been greatly affected.

According to Zhitong Financial APP, in the first half of 2019, the company's sales and marketing expenses were 231 million yuan, an increase of nearly 70% over the same period last year, while administrative expenses rose to 629 million yuan from 425 million in the same period last year, up 48% from a year earlier. Affected by the substantial increase in fees and charges, Zhongjun Group's net profit plunged 32% year-on-year, while its income increased by 11% over the same period last year, putting pressure on the share price. From this point of view, Zhongjun Group behind the rapid removal, the price paid is not small.

The amount of loans to be repaid in the second year increased by more than 120% compared with the same period last year.

Compared with the ability to acquire land and the ability to remove, the lack of financing capacity may be the biggest weakness of Zhongjun Group.

In the first half of 2019, Zhongjun Group conducted three rounds of financing, with a total financing quota of $1.35 billion, with most of the proceeds used to redeem 10 per cent of the senior notes due in July 2020. But if you take a closer look at the three rounds of financing, you can see that the interest rate is relatively high, with the two-year financing rate of $500 million in January 2019 as high as 8.75%, and the remaining two financing rates exceeding 7%. As a result, compared with the same period last year, the average financing cost of Zhongjun Group increased from 6.4% to 6.7%, and the average financing cost continued to rise. As a small and medium-sized private real estate enterprise, Zhongjun Group is not dominant in financing.

After two rounds of financing in the first half of the year, Zhongjun's asset-liability ratio rose to 80.39% from 78.9% at the end of 2018. However, the asset structure has been optimized, time for space, and successfully extended the life of the debt. As of June 30, 2019, the short-term debt of Zhongjun Group accounted for 22.7% of the total debt and 39% of the cash and bank deposit balances. Thus it can be seen that in the short term, the capital flow of Zhongjun Group is guaranteed to a certain extent.

However, the time-for-space approach does not solve the fundamental problem, although the short-term debt crisis has been alleviated, but the debt has not disappeared, but increased the pressure on repayment in the medium term. Zhitong Financial APP found that Zhongjun Group had a total loan line of 40.355 billion yuan as of June 30, 2019, an increase of more than 20 per cent from the end of 2018.

Among them, the amount of loans to be repaid by banks and other loans in the second year was 6.062 billion, an increase of 103.63% over the same period last year. And the amount of priority bills and domestic bonds to be repaid in the second year was 13.235 billion yuan, an increase of 128.5% over the same period last year. In other words, the total loan to be repaid in the second year was 19.297 billion yuan, an increase of more than 120% over the same period last year.

Due to the rapid growth of loan repayment in the second year, the capital flow pressure of Zhongjun Group will also increase significantly between 2020 and 2021. It is worth noting that if Zhongjun Group maintains the current rate of degradation, the current land reserve can only last for 2-3 years. Therefore, the urgency of the land reserve and the repayment of large loans in 2020-2021 will greatly increase the pressure on the company. At that time, Zhongjun Group will have to choose between protecting development or protecting leverage, but no matter which one it chooses, if the financing cost fails to fall, the company's capital flow will worsen and the performance uncertainty will increase.

As a matter of fact, Zhongjun Group had the intention of countercyclical development in the first half of 2019. When the financing market was not obviously loose, Zhongjun Group returned to the land market and accelerated the removal of commodities, resulting in an increase in the company's overall asset-liability ratio. However, counter-cyclical development has higher requirements for the management's understanding of macro-economy. If the market turns as expected, the practice of real estate enterprises exchanging time for space will achieve obvious results; but if the expected judgment is wrong, debt problems will follow.

On the whole, Zhongjun Group has maintained a high speed of removal, contract sales are growing rapidly, and after returning to the land market, soil storage resources have been replenished, which can meet the development needs of the next 2-3 years at the current rate of degradation. The increase in land reserves and the rapid growth of contract sales have been supported by the rise in shares of Zhongjun Group so far this year.

However, weak financing capacity is a major weakness of the company, although the debt pressure has been alleviated in the short term through asset structure optimization, but the debt problem has only postponed, and the loan amount to be repaid in the second year has soared sharply. In disguise, it has increased the company's desire for low financing, while there is still great uncertainty about whether the low financing market environment can be formed, which will also maximize the company's valuation.