Declining Sales and Tight Cash Flow

On December 10th, 2023, New Town Holdings (601155.SH) released its operations briefing for November 2024, announcing that the company achieved contract sales amounting to approximately 25.14 billion yuan for the monthThis marks a significant decline of 49.74% compared to the same period last year, while the total contracted sales area shrank to about 330,700 square meters, reflecting a decrease of 51.96% year-on-yearCumulatively, from January to November, the company reported total contract sales of around 36.963 billion yuan, which is down by 48.11% from the previous year, alongside a contracted sales area totaling approximately 5.0095 million square meters, a reduction of 44.51%. This downward trend is not surprising, as it continues the pattern observed in the real estate industry's performance in recent years.

The results of this briefing follow a consistent pattern of decline that has plagued the company for several years, intensified since its stock peaked in early 2021. On April 16 of this year, New Town Holdings’ stock price plummeted to a near three-year low of 7.95 yuan per share, with the market capitalization briefly slipping below 20 billion yuan

This stark decline represents an astounding 84% decrease from its peak price, leading to a market value evaporation of nearly 95 billion yuanDespite these distressing numbers, there are signs of recovery in the secondary market, somewhat at odds with the company's financial results.

Throughout 2023, several critical conferences have taken place, bringing forth favorable policies such as the lifting of purchase restrictions in first-tier cities and reductions in financing costsSome areas and localized cities have begun to display signs of improvement, with the second quarter seeing a robust push in policies aimed at releasing demand in the real estate marketThe national government has made it clear that it is determined to stabilize the real estate sector, and this intention has gradually seeped into investor sentiment, leading to a recovery in expectations for the real estate sector overall

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New Town Holdings, in particular, has started seeing some stabilization in its stock price.

As of December 12, 2023, New Town Holdings' stock price stood at 13.79 yuan per share, giving it a total market capitalization of 31.11 billion yuan and a price-to-earnings ratio of 42.20. However, moving forward, the trajectory of the stock price will largely rely on tangible improvements in performanceAs the first "B-share to A-share publicly listed private real estate company," skepticism surrounds whether New Town Holdings can indeed turn its performance around in the future.

The rapid decline in performance raises significant concerns about the company's future, especially with its strategic layout in third and fourth-tier cities showing bleak prospectsRecent years have presented numerous challenges for real estate firms in China, influenced by a multitude of factors including the short-term impacts of COVID-19, mid-term tendencies toward destocking across the industry, and long-term pressures like an aging population

Collectively, these factors have pushed the real estate market into a negative feedback loop marked by shrinking sales volume and prices.

While these declines are anticipated, New Town Holdings' current performance is particularly disappointing when compared to its own prior achievements and the overall state of the real estate market this yearExamining the monthly operational briefings reveals that the year-to-year percentage drop in contract sales amounts and areas has frequently exceeded 40%. In stark contrast, last year's figures hardly ever saw declines of more than 40%, with only the sales amounts in June and July registering declines of 44.86% and 52.11%, respectively.

According to data from the National Bureau of Statistics, the total sales area of commercial housing in the first half of 2024 reached 479 million square meters, reflecting a year-on-year drop of 19.0%. The value of newly constructed commercial housing sales also faced a 25.0% decrease, amounting to 471.33 billion yuan

New Town Holdings, during the same period, managed a cumulative contract sales area of around 3.2622 million square meters, down 36.86%, and a cumulative sales amount of about 23.554 billion yuan, marking a drop of 44.45% from the previous yearThis indicates that New Town's sales decline outpaced that of the overall market, adding further concerns regarding its operational performance.

The underlying causes for these troubling results are multifaceted, encompassing industry-wide issues coupled with specific structural problems within New Town Holdings itselfThe company's latest half-year report revealed that only 40% of its land reserves are located in first and second-tier citiesBy comparison, Gindal Group (600383.SH), which operates in a similar space, had 75% of its land reserves in these more economically vibrant urban areas as of June 30, 2024.

In first and second-tier cities, where economic activity tends to be more robust and residents generally enjoy higher incomes, the purchasing power is considerably stronger

Therefore, both the commercial and residential real estate markets thrive more in these urban areasNew Town Holdings’ concentrated land reserves in less dynamic third and fourth-tier cities limit its potential for performance growth, a situation that is difficult to ignore.

This structural issue in land reserves could also pose risks for annual asset impairment provisions, which would significantly impact the company's financial performance and profitabilityThe company's financial reports indicate that its inventory primarily consists of land intended for development, development costs, and developed productsIn an announcement made on March 29, 2023, concerning the annual impairment provision, it was revealed that this provision had led to a decrease of 5.596 billion yuan in net profit attributed to shareholders of the listed company, with inventory impairments accounting for 55.63 billion yuan—over 99% of the total asset impairment recognized last year

It’s noteworthy that the net profit attributable to the parent company was just 737 million yuan.

This year, though the company has only reported less than 200 million yuan in impairment provision for intangible assets, particularly land-use rights, historical data indicates that both in 2022 and the first half of 2023, impairment provisions remained under 200 million yuanHowever, by the second half of the fiscal year, the losses ballooned into several billion yuanThe accelerated decline in performance as well as the bias towards third and fourth-tier land reserves suggests that the current year's asset impairment provisions may also escalate, which does not bode well for the company moving forward.

Cash flow remains tight, and New Town Holdings faces daunting debt pressuresFor real estate companies, maintaining rapid cash inflow through contract sales is critical for ongoing operations

Unfortunately, New Town's declining performance is adversely affecting its cash flow situationAccording to financial reports, the company has witnessed a persistent negative increase in net cash and cash equivalents since the first quarter of 2023, culminating in a balance of 10.225 billion yuan as of the third quarter report in 2024.

More concerning is the third quarter of this year, where the net cash flow from operating activities turned negative for the first time in nearly two years, amounting to -307 million yuanThis raises serious questions regarding the viability of the company’s operations.

Compounding these difficulties, New Town Holdings grapples with substantial debt obligationsThe chairman of New Town Holdings, Wang Xiaosong, stated that the company’s immediate priority is repaying debtsBy the end of 2022, the company’s interest-bearing liabilities stood at over 71 billion yuan but decreased to 55.803 billion yuan by the mid-year report of 2024. However, the company remains encumbered by an enormous scale of short-term liabilities

As of September 30, 2024, New Town's current liabilities amounted to nearly 199.357 billion yuan.

After excluding outstanding tax amounts, contract liabilities, and advance payments, the company still faces a daunting short-term debt pressure exceeding 50 billion yuan due within one year, alongside further obligations in the forms of payable notes, accounts payable, and short-term loansThis significant gap in funding means that the 10.225 billion yuan in cash on hand is extremely inadequate in addressing these liabilities.

Moreover, the company’s financing situation is equally dishearteningThe China Index Academy reported on December 5 that in November, total bond financing for real estate enterprises reached 48.27 billion yuan, with an average financing rate of 2.73%, showing a year-on-year decline of 0.85 percentage pointsHowever, New Town Holdings disclosed that its average financing cost stands at a staggering 6.05%, much higher compared to its peers.

As of the third quarter’s report, the cash interest coverage ratio stood at only 2.06, showing a significant drop of over 50% since the end of the previous fiscal year

The road to debt alleviation for New Town Holdings appears to be steep.

In light of the significant liquidity and performance pressures, management has not overlooked cost-cutting and efficiency improvement initiativesFrom 2022 to 2023, the company managed to increase revenue per employee from 5.1919 million yuan to 5.4375 million yuan, while simultaneously reducing average employee compensation from 304,300 yuan to 243,200 yuan, equating to a decrease of 20.08%.

Interestingly, management also instituted salary cutsChairman Wang Xiaosong’s salary had been consistently at 6 million yuan from 2019 to 2021 and was reduced to 4.32 million yuan by 2023. However, comparative data suggests his remuneration is more than double the industry average of 1.9515 million yuan for similar roles, a point that raises additional scrutinyFurthermore, independent directors at New Town Holdings are reportedly compensated at 350,000 yuan, which also surpasses the industry average for their positions.

Five years ago, the actual controlling person and former chairman of New Town Holdings, Wang Zhenhua, was sentenced to five years in prison for child molestation