The earnings and profitability of some Chinese property developers could deteriorate further in 2015, and more defaults cannot be ruled out, according to a report that Standard & Poor's Ratings Services published today.
The annual results for 2014 indicate that many developers are in significantly worse shape than in the previous year. Although most of these companies met their sales targets, their profitability generally took a substantial blow, the credit rating agency noted.
"The slack operating performance in recent months has weakened the credit profiles of many Chinese developers," said S&P's credit analyst Christopher Yip. "Continuing slower sales growth and swelling leverage could lead to further negative rating actions over the next 12 months."
S&P expects developers with operations in smaller cities to face more difficultly in destocking and improving profitability this year. Sales in these cities have not picked up markedly despite price cuts owing to severe competition and a pile-up of inventory.
Standard & Poor's expects poor sales execution to weigh on the liquidity of Chinese developers over the next 12 months.
"Liquidity remains a key risk for Chinese developers, and has worsened for a number of already-weak companies. Lower cash balances paired with increased short-term maturities have heightened refinancing risks, particularly for developers carrying high-cost alternative financing," said Yip.
S&P continues to expect stable demand from first-time homebuyers and upgraders, providing a strong basis for steady home sales volume this year. But more price corrections are likely as developers look to clear inventory after lukewarm sales in the first quarter of 2015.
"The Chinese government and the central bank's recent measures aimed at boosting market sentiment should help release pent-up demand," Yip said. "However, the positive impact will likely take time to materialize; more likely toward the second half of 2015."
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