[Weekly Early Read] Real Estate Downturn Drags on Construction Industry; Sector Shuffle and Overseas Expansion Emerge as New Highlights (AI Translation)

【周刊提前读】地产剧烈下行拖累建筑业 行业洗牌出海成新亮点

Summary

1. Over the past three years, the Chinese real estate market has sharply declined, causing significant distress for associated upstream and downstream industries, with the construction sector being the hardest hit. On August 19, 2024, Xi’an Construction Engineering Group (Xi’an Construction), which had its credit rating downgraded eight times within six months, defaulted on a medium-term note worth 263 million yuan in principal and interest. Xi’an Construction, a leading SOE in Xi’an and the first in northwestern China to hold dual top-tier construction qualifications, has seen its core business—primarily residential construction—severely impacted. The troubles of its major shareholder, Greenland Holdings, compounded by receivable risks from clients like Evergrande, have led to mounting bad debts and asset impairment risks, reflecting a wider malaise in the construction industry nationwide. Many firms, including SOEs, are facing shrinking scale, layoffs, and in some cases, bankruptcy or restructuring, as sluggish real estate hinders payments and liquidity[para. 1][para. 2][para. 3][para. 4][para. 5][para. 6].

2. Since the second half of 2021, China’s property market has reversed a 20-year upward trend, with annual sales by value and area tumbling more than 40% from the 2021 peaks ("double 18"—18 trillion yuan, 1.8 billion sq m) to 2023’s "double 11." Projections suggest that 2024 could see both figures falling below 10 trillion yuan and 1 billion sq m, almost halving since 2021. Notably, sales data are inflated by "mortgage-for-project" properties handed over by cash-strapped developers as debt repayment, which actually overstates market vitality and masks underlying weakness[para. 7][para. 8].

3. Xi’an Construction’s woes exemplify the sector’s instability. After a celebrated mixed-ownership reform in 2017, with Greenland as the controlling 51% stakeholder, Xi’an Construction’s revenue and new contracts surged from 18.7 billion yuan and 48.5 billion yuan (2018) to 43.4 billion yuan and 148.8 billion yuan (2021). However, Greenland’s liquidity crisis, visible since 2022 amid falling sales and tightening financing, subsequently dragged down Xi’an Construction. By 2023, contracts and revenue had plunged by 64% and 67%, respectively. The group also faces severe exposure to Evergrande, having contracted 13 projects worth 4.3 billion yuan, putting further strain on asset recovery amid the latter’s historic 2.4 trillion yuan debt default[para. 9][para. 10][para. 11][para. 12][para. 13][para. 14][para. 15][para. 16].

4. Greenland’s own rise, from a Shanghai landscaping firm in 1992 to a real estate and infrastructure heavyweight with a diversified ownership structure, set the stage for over-expansion. Through mixed-ownership reforms, it acquired stakes in construction entities nationwide, growing big infrastructure revenues from 76.6 billion yuan (2016) to 311.4 billion yuan (2021). However, its aggressive, debt-heavy expansion into infrastructure and commercial property—characterized by landmark skyscrapers in major cities—left it vulnerable under "three red lines" financial regulations and pandemic-era sales shocks. Its liquidity issues have trickled down to affiliate firms like Xi’an and Guangxi Construction, both now struggling with liquidity and workforce reductions[para. 17][para. 18][para. 19][para. 20].

5. Across the industry, chronic payment arrears, cascading bad debts, and widespread use of "mortgage-for-project" property swaps are prevalent. Building contractors, both SOE and private, face mounting uncollectible receivables from both developers and local governments, further heightening risk. For example, China State Construction’s receivables ballooned from 184.4 billion yuan (2021) to 311.9 billion yuan (2024), with nearly 40 billion yuan in impairments in just the first half of 2024. Meanwhile, furniture and steel suppliers tied to the sector also endure collapsing profits, with leading steel enterprises’ profit margins dropping to 0.58% in Q1 2024[para. 21][para. 22][para. 23][para. 24][para. 25][para. 26][para. 27][para. 28].

6. As weaker players exit, the industry is becoming more concentrated. The top central SOEs now account for over half of new contract value. They also enjoy lower financing costs (average bond rates at 2.68% versus the broader sector’s 3.57%) and demonstrate more stable credit profiles, compared to private firms whose default rates remain far higher (87% of defaulted bonds in the sector come from private firms)[para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35].

7. Looking forward, while many construction firms are attempting to “go global” for new growth, the sector’s future remains uncertain. Recovery could depend on fresh infrastructure stimulus, improved property sales, or overseas expansion. However, the industry still faces high risk from continued real estate downturns, local government debt constraints, and potentially the next cluster of bankruptcies as projects undertaken during 2022–2023 reach delivery deadlines by late 2025[para. 36][para. 37][para. 38][para. 39][para. 40][para. 41][para. 42][para. 43].