Ocean Group, with a state-owned shareholder background, has submitted a loss-making performance report.
According to Ocean's announcement, the group's turnover in 2023 was 46.459 billion yuan, a year-on-year increase of about 1%; affected by the continued downturn in the domestic real estate market, the gross profit was 1.183 billion yuan, a year-on-year decrease of about 50%, and the gross profit margin was 3% (5% in 2022); the loss attributable to the owners of the company and the basic and diluted loss per share were 21.097 billion yuan and 2.770 yuan, respectively.
This is the second consecutive year that Ocean has incurred a large loss. Over the past five years (2019-2023), Ocean's net profit attributable to the parent company was 2.656 billion yuan, 2.866 billion yuan, 2.729 billion yuan, -15.93 billion yuan, and -21.097 billion yuan, with a total net loss of 37.027 billion yuan in the last two years. Currently, Ocean's share price on the capital market is only 0.285 Hong Kong dollars per share, with a total market value of only 2.171 billion Hong Kong dollars, and a price-to-book ratio of 0.16.
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As one of the few state-owned real estate companies with a risk exposure in the industry, what is the future of Ocean?
Sales halved and land reserves shrank
In 2023, real estate companies faced a concentrated risk and losses, and Ocean, a state-owned real estate company, was not immune.
"In 2023, the sales area of commercial housing was about 1.12 billion square meters, a year-on-year decrease of 8.5%, of which the sales area of residential housing decreased by 8.2%; the funds in place for real estate development enterprises were about 12.7 trillion yuan, a year-on-year decrease of 13.6%. Real estate companies were generally affected by the reduction of sales repayments, difficulties in asset disposal, and the difficulty of refinancing, facing greater risk challenges, and the industry continued to clear out," Ocean said in its financial report.
Under the above market environment, Ocean's main business of real estate development was affected and the performance was not good. In 2023, Ocean's total contracted sales amount decreased to 50.53 billion yuan, a decrease of about 50% from 100.29 billion yuan in 2022, and the average sales price also decreased by 25%.
Ocean's overall land reserve scale also shrank. As of the end of 2023, the land reserves of Ocean and its joint ventures and associated companies decreased to about 36.213 million square meters (42.981 million square meters at the end of the previous year), and the equity part of the land reserves correspondingly decreased to about 19.073 million square meters.
Looking at the annual profit and loss data, Ocean's revenue did not fluctuate significantly last year, but the scale of losses increased.In 2023, the turnover of Oceanwide increased by about 1% year-on-year to 46.459 billion yuan, with property development business accounting for 84% of the total turnover. The property development income in Beijing, Bohai Rim, East China, South China, Central China, and West China regions accounted for 7%, 26%, 18%, 16%, 29%, and 4% respectively.
In terms of costs, Oceanwide's total sales cost last year was 45.276 billion yuan, with an annual gross profit of 1.183 billion yuan, and the gross margin decreased to 3%. This was mainly due to the continued downturn in the overall domestic real estate market, with no significant recovery in the industry's gross margin, and Oceanwide increased the provision for impairment of inventory.
Factors such as the revaluation of investment properties and impairment losses on financial assets exacerbated Oceanwide's book loss figures.
Last year, Oceanwide recorded a net impairment loss of financial assets of 11.283 billion yuan (2022: 7.85 billion yuan), mainly due to the impact of macro market and industry downturn, financing difficulties, and other unfavorable factors during the year, which led to the provision for expected credit loss on trade and other receivables; affected by the market downturn, the fair value of investment properties decreased by 928 million yuan (2022: 256 million yuan).
In addition, last year, Oceanwide's weighted average interest rate increased from 5.16% in 2022 to 5.63%, and the total interest expense paid or accrued during the year increased to 5.358 billion yuan (2022: 5.064 billion yuan), of which 3.517 billion yuan was written off through the comprehensive income statement due to failure to capitalize.
Affected by the above factors, Oceanwide's attributable loss to owners in 2023 was 21.097 billion yuan, and the main reasons for the loss included the downturn in the overall domestic real estate market during the year, leading to a decrease in gross margin, and an increase in the provision for impairment of property projects; a decline in the performance of joint ventures and associated companies. The management stated that it will continue to focus on improving shareholder returns and take this as the goal of daily work.
Cash and cash equivalents are only 1.99 billion.
For Oceanwide's financial report, the auditor, Lixin DeHao, stated "no opinion on the consolidated financial statements" due to the uncertainty of subsequent continuous operations.
The auditor stated that as of the end of 2023, Oceanwide recorded a net loss of about 20.98 billion yuan, with current liabilities exceeding current assets by about 8.45 billion yuan; the total amount of borrowings is about 96.14 billion yuan, of which current borrowings are about 69.75 billion yuan, and cash and cash equivalents are only about 1.99 billion yuan.
Due to tight liquidity, Oceanwide previously announced a comprehensive restructuring of its overseas debt, and to promote the overall debt restructuring, it has suspended payments under its overseas debt, including seven guaranteed notes with a book value of about 23.25 billion yuan and perpetual subordinated guaranteed capital securities with a book value of about 4.57 billion yuan, until the overseas debt restructuring or implementation of a deferral solution."Due to the suspension of payments, your group has received several demand letters, notices of accelerated maturity, and other legal documents related to foreign debts." The auditors have indicated that there are also multiple unpaid loans, unpaid construction and daily operating payables, project delivery delays, and other litigation cases involved.
In light of this, the auditors believe that due to the limited channels for obtaining external funding to finance its development projects, Oceanwide faces liquidity pressure, and generating operating cash inflows or refinancing guaranteed notes, corporate bonds, and bank and other loans may be more challenging than before. All these events indicate the existence of multiple uncertainties, which may raise significant doubts about the ability to continue operations.
Oceanwide's financial condition is indeed deteriorating. As of the end of 2023, Oceanwide's total cash resources amounted to 5.022 billion yuan, of which cash and cash equivalents were only 1.988 billion yuan; the net borrowing ratio at the end of the period was as high as 438%, a significant increase from 196% at the end of 2022.
Currently, Oceanwide is still seeking restructuring for its foreign debts, while some solutions have been proposed for domestic bonds.
On March 28, Oceanwide announced that seven corporate bonds issued by Oceanwide Holdings Group Co., Ltd. (China) (H18 Oceanwide 1, H15 Oceanwide 5, H15 Oceanwide 3, H19 Oceanwide 1, H19 Oceanwide 2, H21 Oceanwide 1, H21 Oceanwide 2) will resume trading starting March 29.
It is reported that Oceanwide Holdings China held a bondholder meeting from January 18 to January 25, 2024, to review the "proposals related to adjusting the principal and interest payment arrangements of corporate bonds and providing additional security measures," and all the "extension proposals" for the extended bonds were passed. The principal and interest payment arrangements for the seven bonds have been adjusted, and additional security measures have been added.
Among them, the "H18 Oceanwide 1" resolution, which allowed a grace period until January 20, 2024, for the unpaid principal of 200 million yuan, has been adjusted to be paid by June 30, 2024. The remaining principal of 1.5 billion yuan is adjusted to be paid in six installments from the 15th to the 30th month after December 2, 2023, with each payment made every three months and the payment ratio for each installment being 5%, 10%, 15%, 15%, 20%, and 35%, respectively.
The remaining six extended bonds, "H15 Oceanwide 5," "H15 Oceanwide 3," "H19 Oceanwide 1," "H19 Oceanwide 2," "H21 Oceanwide 1," and "H21 Oceanwide 2," have all their principal adjusted to be paid in six installments from the 15th to the 30th month after their original maturity dates, with each payment made every three months and the payment ratio for each installment being 5%, 10%, 15%, 15%, 20%, and 35%, respectively.
Oceanwide also stated that during the suspension period, the existing banknotes of Oceanwide Holdings China, "21 Oceanwide Holdings PPN001" and "22 Oceanwide Holdings PPN001," as well as the first asset-backed note of Oceanwide Holdings Group Co., Ltd. (China) for the year 2021 ("21 Oceanwide Holdings ABN001"), faced principal and interest payment or interest payment, with a total amount of approximately 6.42 billion yuan.
Oceanwide Holdings China held bondholder meetings in January and February 2024 to negotiate payment adjustment arrangements. As of the date of this announcement, no effective resolution has been formed, and they are actively communicating with relevant debt financing instrument investors, studying solutions, and striving to reach an agreement as soon as possible.Looking ahead, in the ocean-going sector, it is anticipated that in the short term, the real estate market will continue to face constraints, with demand potentially stabilizing and then slightly declining. In the medium to long term, there is solid support for the sustained development of the real estate market, with demand from urbanization, improvement, and demolition and reconstruction expected to support the future market size. The Chinese real estate industry remains a major industry worth delving into. "The industry is entering a new development model; the original high-leverage, high-turnover, high-risk development model is unsustainable. Thinning down real estate companies and transitioning to a light-asset model is the general trend, shifting towards sustainable operations relying on products and services."