Evergrande seeks to sustain margins after posting industry’s highest-ever first-half profit

China Evergrande Group, the country’s second-largest property developer by sales, said on Tuesday it will stay away from small cities and expensive land to sustain margins, after posting the industry’s highest-ever first-half profit.

Core profit, which excludes revaluation gains and non-recurring items, doubled to 55.01 billion yuan ($8 billion) in January-June, in line with its forecast, helped by lower expenses and an increase in the number of properties delivered.

The result comes as major Chinese developers such as China Vanke Co and Country Garden Holdings Co also post record first-half profits, after sales of apartments built on land purchased cheaply a few years prior.

Profit attributable to shareholders jumped 63.6 percent to 30.81 billion yuan, while revenue rose 59.8 percent to 300.35 billion yuan. Net profit margin improved 5.4 percentage points to 17.7 percent.

“Our future goal is expanding in core tier-one and tier-two cities, and tier-three cities with economic growth; we don’t plan to expand into tier-four cities,” Xia Haijun, Evergrande vice chairman and chief executive, told an earnings conference, saying the firm would build its land bank by targeting large, cheap land.

Evergrande’s net gearing ratio was 127.3 percent at Juneend compared to 184 percent at the end of 2017, with total borrowings down as much as 8 percent from the end of December at 671.13 billion yuan.

In August 2017, the developer, with one of the highest debt ratios in the industry and one of the highest debt piles in China at the time, pledged to cut its net gearing ratio to about 70 percent by June 2020 from 240 percent in June 2017.

To deleverage, Evergrande has slowed down land purchases, analysts said, citing industry data.

Commenting on China’s property market, Xia said government policy measures have helped promote steady development of the sector, and that he expected these non-market measures to be phased out when home prices eventually stabilize.

The developer is planning a so-called backdoor listing in China, where valuations are usually higher than in Hong Kong, by injecting almost all of its property assets held by Hengda Real Estate Group Co into Shenzhen Real Estate.