A spike in barter is likely muddling the financials of China's private developers. To manage construction capital expenditure, some developers are settling their bills by offering residential properties to suppliers and contractors. Such transactions offer temporary relief amid a broad liquidity crunch. But we think the arrangement may lead some entities to overstate their revenues and profits.
What's Happening
Bartering, or gong di fang, has long been a facet of the Chinese property market, but it's ramping up. We estimate barter deals now account for 5%-15% of the sales of rated private developers, many times the level before the downturn.
Why It Matters
Income statements may be distorted. We assume that developers can persuade their contractors and suppliers to accept residential property as payment at a somewhat inflated indicated value. This may improve an entity's profit measures. Crucially, though, the transaction is cashless, and it is not a real indication of market appetite.
Our sensitivity analysis indicates that, if one developer generated 15% of its contracted sales through gong di fang, the noncash sales would translate into 10%-20% inflation of reported EBITDA (see table 1).
The upshot is that an entity's debt-to-EBITDA ratio may be worse than it indicates. We view gong di fang trades as low-quality revenue, not on par with cash transactions generated from homebuyers.
Table 1
| Sensitivity analysis of how barter trades can inflate EBITDA | ||||||||
|---|---|---|---|---|---|---|---|---|
| Degree of EBITDA inflation (%) | ||||||||
| Barter sales account for 5% of total sales | Barter sales account for 15% of total sales | Barter sales account for 25% of total sales | ||||||
| Barter sales margin 5 percentage points higher than normal sales | 7 | 20 | 32 | |||||
| Barter sales margin the same as with normal sales (about 13%) | 5 | 15 | 25 | |||||
| Barter sales margin 5 percentage points lower than normal sales | 3 | 10 | 17 | |||||
| The normal sales gross margin is around 13%, based on our portfolio rated average. Analysis assumes (1) barter sales are mostly for completed units and its revenue is booked in the current year; (2) a company's contracted sales and revenue in current year are of a similar size; (3) we use gross profit percentage change as a proxy for EBITDA percentage change. Source: S&P Global Ratings. | ||||||||
What Comes Next
We assume that contractors and suppliers are also tight on cash and would be motivated to sell their bartered units at discounted levels. This will result in an influx of cheap homes in the secondary market, which may set back any market recovery (see "China Property Watch: Charting A Path To Stabilization," Oct. 17, 2024.) It may also perpetuate a perception among buyers that prices are continuing to drop, hitting sentiment.
The ultimate way out lies in the revival of the China property market. A 73% jump (on month) in the sales of the top 100 China developers in October may have been a temporary response to government stimulus measures announced that month. Alternately, if a sustained recovery is at hand, developers' barter arrangements may eventually be viewed as a resourceful stop-gap measure that carried them through tough times.
Related Research
- Will China's Latest Stimulus Initiatives Achieve Lift-Off? Oct. 25, 2024
- China Property Watch: Charting A Path To Stabilization, Oct. 17, 2024.
This report does not constitute a rating action.
| Primary Credit Analyst: | Esther Liu, Hong Kong + 852 2533 3556; esther.liu@spglobal.com |
| Secondary Contact: | Fan Gao, CFA, Hong Kong + (852) 2533-3595; fan.gao@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.