Gemdale undermined by chairman’s resignation, rating downgrade

Ling Ke’s exit from one of China’s leading property developers has sparked concerns about the company’s debt and sales, adding further pressure to its embattled shares

Key Takeaways:

• Gemdale’s chairman has resigned, following Moody’s earlier downgrade of the company’s rating and lowering of its outlook to negative
• The company’s sales fell more than 40% in the third quarter

By Lau Chi Hang

It seems a quarter century at the helm of property giant Gemdale Corp. (600383.SH) was long enough for Ling Ke. The real estate heavyweight, whose tenure at the top of Gemdale roughly parallels the rise of China’s modern property sector, attributed his sudden decision to retire earlier this month to health issues, a common explanation in many such resignations. But the timing raised more than a few eyebrows, coming as China faces its worst-ever property crisis in the industry’s relatively brief history.

Despite relentless queries and other digging by Mainland Chinese financial journalists, Gemdale continued to insist that Ling’s resignation was really due to health reasons, though it declined to provide further details.

Ling’s health must have really been suffering for him to leave his company at such a critical juncture. Regardless of the reasons, the market response was swift. Gemdale’s Shanghai-listed shares, which are also available to international investors via the Shanghai-Hong Kong Stock Connect program, fell by the daily 10% limit to close at 5.52 yuan after the announcement, hitting a five-year low. A number of the company’s bonds also fell sharply, including “16 Gemdale 02”, which tumbled more than 25%.

The company’s market capitalization now stands at just 24.9 billion yuan ($3.4 billion), less than half of what it was last November. 

Starting from Shenzhen

Like many of China’s earliest entrepreneurs, Ling got his start in real estate in the Southern boomtown of Shenzhen across the border from Hong Kong. It was 1992 when he joined Construction Services Co. of the city’s Shangbu district, which would later become Gemdale. He began as a salesman, and went on to climb the corporate ladder after receiving kudos for his work on several major developments in China’s then-booming real estate market.

He took on the chairman’s job in 1998 when he was just under 40, and took the company public in 2011. Gemdale would go on to become one of China’s top real estate developers with sales of over 100 billion yuan in 2016, alongside other big names like China Vanke(000002.SZ), Poly Developments (600048.SH) and China Merchants Property Development (000024.SZ).

Ling was one of several people whose names became nearly indistinguishable from their companies, similar to Wang Shi, another property entrepreneur at the helm of Vanke. That’s why his abrupt resignation has inevitably sparked speculation about the company and its future. In fact, Gemdale and Ling were almost certainly aware of the shock his departure would cause, even though they kept the news secret until the official announcement.

Gemdale’s finances

Before Ling’s resignation, investors generally believed that Gemdale’s finances were stable despite the broader property market’s woes. The company’s revenue rose 31% to 36.9 billion yuan in the first half of the year, though its profit fell 22% to 1.53 billion yuan. 

Gemdale had 46.1 billion yuan in cash and 109.6 billion yuan in interest-bearing liabilities, with a net debt ratio of 53.5%. While a profit decline is never good, Gemdale’s ability to stay profitable when many of its peers had fallen sharply into the red was a feat in itself in the current market. What’s more, the company’s debt ratio is also much better than its debt-ridden peers, and even looks relatively healthy.

But Ling’s resignation immediately raised eyebrows. Were Gemdale’s finances not as good as many imagined? Was it possible the company, like many of its domestic peers, had hidden debt that was absent from its balance sheet?

It’s common knowledge that many Chinese property developers use such “off-balance-sheet debt” to whitewash their financial statements. But after China cracked down on excessive debt by the group with its “three red lines” policy in 2020, developers rushed to reduce their obligations by selling properties, leading to a huge increase in supply. That glut, combined with resulting price cuts as companies tried to quickly sell their properties, sent the market into a downward spiral. 

Moody’s downgrade

While Gemdale’s current financial position remains healthy, uncertainty is mounting over its sales. The company’s cumulative sales totaled just 121.9 billion yuan in the first nine months of this year, down 25.2% year-on-year, which seems acceptable in the current downturn. But more recent sales tell a worsening story. The company’s sales of 10.5 billion yuan in July, 12.5 billion yuan in August and 13.1 billion yuan in September were all down by more than 40% compared with the same month a year earlier.

That looks quite ominous, since September and October are typically two of the year’s best months for sales. Even with a growing raft of government measures to stimulate the property market, September sales were still less than 5% higher than August, as the measures failed to have much effect. Continued weakness into the fourth quarter could put Gemdale under considerable pressure.

Ratingdog, a Shenzhen-based rating and research agency, estimates that if Gemdale’s sales fall by 30% in the 12 months through next June compared with the year-earlier period, the company will face a debt repayment gap of more than 4.5 billion yuan within a year.

As Gemdale’s troubles appear to mount, ratings agency Moody’s recently downgraded the company from “Ba3” to “B3”. It also lowered its rating for the company’s Famous Commercial Ltd. subsidiary from “B1” to “Caa1”, with negative outlook. Moody’s noted that Gemdale’s credit profile is weakening due to declining contracted sales, deteriorating liquidity, and a large amount of debt maturing in the next 12 to 18 months. The negative outlook reflects uncertainty in the company’s ability to improve its financing sources and operations.

With speculation swirling about its future in a world without Ling, it may be time for Gemdale to break the silence and give a clearer picture of its prospects.

Have a great investment idea but don’t know how to spread the word? We can help! Contact us for more details.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here.

To subscribe to Bamboo Works free weekly newsletter, click here