In the performance meeting, when asked about the “three red lines”, Sunac China CFO Gao Xi said that Sunac China also followed this direction before the policy was issued, and with this policy, there will be a more clear timetable. Sunac has ramped up sales, quickly recapitalised itself and reduced leverage.
‘At this stage of the company, size and growth are not the most important things for the company,’ Wang Mengde, Sunac’s chief executive, said at the earnings call. ‘What the company wants in the future is overall competitiveness.’ Referring to the “three red lines” of indicators, Wang Mengde said that the three indicators will be greatly improved by 2020, and two of them have already reached the target. However, Wang stressed that the company’s debt target will continue to be optimized until 2023, and the last one will be completed ahead of schedule in 2022.
“Three red lines” refers to the regulatory authorities will be on the real estate enterprises in accordance with the “red, orange, yellow, green” four management, and accordingly set up “three red lines” : after excluding the advance income, the asset-liability ratio is greater than 70%; Net debt ratio is greater than 100%; Cash to short debt ratio is less than 1 times.
In 2020, Sunac’s net debt ratio and the ratio of unrestricted cash short debt have reached the “three red lines” policy standard. Currently, only the asset-liability ratio has not fallen below the red line.
“From its own point of view, we must continue to optimize the financial indicators and asset structure of the whole group in the next two years, including the liability indicators. This is a very clear thing.” “Mr. Wang said.
In 2020, Sunac China’s gross profit margin was about 21%, down from 24.5 percent in 2019. In this regard, Wang Mengde said that in the context of the big industry, the company’s overall profit margin and gross profit are going to the average level of the market, but the company’s overall profitability will remain stable. Wang Mengde believes that the company in the future to maintain double-digit growth or more leisurely.
“If the industry is not regulated, it can’t be done”
Sun Hongbin, Chairman of Sunac China’s Board of Directors, when talking about concentrated land supply and industry regulation at the performance meeting, believes that the policy of concentrated land supply in key cities is a good thing for the whole industry. “I’m for regulation.” “Without regulation, the industry can’t do it,” Sun said.
“These years why regulation, because this industry is too important. At the meeting in late February 2020, I was the most optimistic. I predicted that the sales would reach 15 trillion yuan last year, but it actually reached 17 trillion yuan by the end of the year, and I believe it will exceed 18 trillion yuan this year. The industry is too big and takes too much money.” “Real estate accounts for more than 30 percent of the entire financial system, and if you add other industries that use real estate as collateral, it’s more than 50 percent,” Sun said. If the industry is not regulated, the impact on the financial system is too great. And it also relates to people’s happiness, so central regulation of the property market is the two logic.”
“The global auto market is now $2 trillion, but it hasn’t grown much in recent years, and you can’t do any incremental growth,” Sun said. But if the real estate industry is not regulated, housing prices and land prices will go to heaven, which is the necessity of regulation. I support regulation, not regulation of the words of this industry can not do. For developers, land prices are rising faster than property prices, making no money. Ordinary people can’t afford it, and no regulation is good for anyone. I have always been in favor of regulation. You see, the problem now is that the central government has regulated the enterprises, but you still buy expensive land, you expect that the housing price will be lifted in the future, but you do not, then you will lose money.”
‘To correctly understand regulation,’ Mr. Sun said. “For us, after the three red lines, we don’t have to worry about our debt ratio, which is now under the control of the central bank. Two years ago, we have been saying that we don’t want to increase our total debt, we want to increase our net assets and sales. The total debt has not increased in three years, and sales have increased so much that the debt ratio must have come down. Regulation has made the industry safe.”
“The policy of centralized land supply in key cities is a good thing for the whole industry”
Sunac China’s financial report shows that in 2020, the company’s new land reserve is about 58.77 million square meters, and the value of new goods is 726.1 billion yuan. By the end of 2020, Sunac China’s land reserve is about 258 million square meters, of which the equity land reserve area is about 161 million square meters, and the value of land reserve is estimated to be 3.1 trillion yuan.
When talking about the policy of centralized land supply in key cities, Sun Hongbin said that the centralized land supply policy in key cities is a good thing for the whole industry.
“The original intention of this policy is to control the government. The central bank’s three red lines concern enterprises, so this policy is to control the government. One of the policies is to ensure the growth of land supply, increase the supply of land, and ensure the transparency of land. This gives everyone an expectation of how much land to supply this year. This policy is good for enterprises in the core cities. For example, if there are 20 or 30 plots at a time, big companies can sign up for them all and take two or three plots out of the 20 plots.” Sun Hongbin believes that the policy will not cause the decline of land in the short term. “Now the supply of land in hot cities is not enough, but maybe people will be more rational, and the competition for land in hot cities will be fierce. I think in the second half of the year or next year, the impact on the land may be relatively large. For Sunac, we use landlord as three sources: the public market, acquisition and industrial projects. “In the open market, we still have a big advantage. Now we have 58 cities covering 120 cities, so we can take advantage of the plate rotation.”
In terms of mergers and acquisitions, Sun Hongbin said, “I believe there will be more companies that can be bought in the second half of the year. In recent years, companies have been rapidly dividing. Some companies have developed well, while others have simply declined and cannot survive. This piece of opportunity will be more in the future, the first few years those companies can not ask for you, I believe there will be a second half can buy the company.”