Buildings in Baotou in China. Evergrande said their sales strategy for third-tier cities is working. Nelson Ching / Bloomberg

But ratings agencies are getting nervous about debt burden

Evergrande Real Estate Group Ltd, the second-largest developer by sales on the mainland, said Tuesday in a business update that its strategy to focus on third-tier mainland cities is bearing fruit as its contracted sales in January jumped 181.6 percent year-on-year to 9.79 billion yuan.

However, Standard and Poor's also released a statement Tuesday saying that the recent surge in bond sales by mainland property firms would weaken their credit profiles.

Evergrande's January sales grew 262.4 percent month-on-month from December, the developer told reporters at a press conference in Hong Kong Tuesday. The surge in January contracted sales was mainly due to Evergrande's plan to deliberately postpone the launch of some projects to January as the company had substantially exceeded its 2010 sales target before the year ended.

In a filing to the Hong Kong Stock Exchange Jan 10, Evergrande said it had set a contracted sales target for 2011 of 70 billion yuan, compared with total contracted sales of about 50.4 billion yuan for 2010.

"The nearly 10 billion (yuan) sales in January set a new record high for a single month in our group," said its Chief Executive Officer Xia Haijun. "If this momentum can continue, the sales we achieve this year would be very significant."

Evergrande, which had previously focused on second-tier cities, has achieved a presence in provincial capital cities across the nation with the exceptions of Lhasa, Xining, Hangzhou and Fuzhou.

Xia said the group has now shifted its geographical focus to third-tier cities - those prefecture-level cities surrounding provincial capital cities with ample population and robust economies, which are exempt from government tightening measures aimed at reining in the red-hot property market.

On Jan 27, the central government raised the minimum down payment requirement for second home purchases to 60 percent of the property's value from 50 percent and limited home purchases in some cities to curb soaring home prices.

As the real estate markets in third-tier cities are still at their start-up stage, Xia said home prices there are relatively low and most purchasers are first-time home buyers. He said government policies, therefore, will hardly affect their business in these markets.

He added that of the five projects launched for sale by Evergrande in January, three are located in third-tier cities. Its development project in Danzhou, the third largest city in Hainan province, achieved total contracted sales of 300 million yuan in the first day of its launch, with an average selling price of 6,000 yuan per square meter.

"Demand in third-tier cities is very buoyant, and these cities will become the main driving force for growth," said Xia.

Xia denied market talk that the group is planning to issue convertible bonds, saying that the developer's stock is trading at a level far below the expectations of the management team, and that "the group is rich in cash through the previous two fundraisings last year".

Evergrande sold $750 million worth of bonds in January 2010 and issued an extra $600 million worth of bonds in April of that year. The developer reported a net profit of 2.5 billion yuan in the first half of 2010, up 381 percent from 520 million yuan in the corresponding period in 2009.

The company also raised a further 9.25 billion yuan through the sale of a synthetic yuan-denominated bond on Jan 14, 2011. Synthetic bonds are priced at the market rate for yuan, but settled in US dollars. It was Asia's biggest high-yield corporate deal ever, according to the Wall Street Journal. They also reported Moody's downgraded the company to negative from stable in January, due to concerns about its debt burden.

Meanwhile, Standard and Poor's warned Tuesday that a surge of bond sales by Chinese property developers had weakened their credit profiles.

Several property developers could be "caught out" if market conditions turn quickly, credit analyst Bei Fu said in a report. Debt issuance is likely to weaken the credit ratios of both Evergrande and rival Country Garden Holdings Company, it said.

"We are skeptical whether property developers will follow through with their plans to refinance onshore borrowings with bond proceeds," Fu said in a statement. "They may be tempted to use the funds to bolster their liquidity buffers and war chests while conditions are favorable." Property developers have raised more than $3 billion in bonds since January, the statement said. Last year they sold a record $8 billion.

Evergrande closed down 1.51 percent in Hong Kong trading Tuesday at HK$3.92 per share.

Dow Jones and Bloomberg contributed to this story.

China Daily

(HK Edition 02/16/2011 page3)