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After the "position adjustment", Midea Real Estate chose to continue its real estate development business in a different way. On August 19, Midea Real Estate held a 2024 interim performance conference. At this performance meeting, the management of Midea Real Estate responded to the divestiture of the real estate development business at great length: "No matter how difficult it is, it does not mean giving up this industry", "Both major shareholders and management teams still maintain confidence in the real estate industry", "During this special period, the company adopts unconventional response plans to overcome the crisis". From the perspective of actual business operations, Midea Real Estate still maintains control of the entire chain of development business. This part of the business has simply gone "underwater", changing from the original real estate development to construction on behalf of others. The management of Midea Real Estate even shouted that "the development business will return to this stage one day."

Throw away 96% of revenue?

The real estate industry has been undergoing a deep adjustment, and Midea Real Estate has also handed in a not-so-excellent report card. Financial report data shows that in the first half of 2024, Midea Real Estate achieved operating income of 25.134 billion yuan, a year-on-year decrease of 30.83%; gross profit of approximately 2.321 billion yuan, a year-on-year decrease of 51.6%; and profit attributable to the owners of the company was 376 million yuan, a year-on-year decrease of 51.9%.

This seems to explain why Midea Real Estate is determined to divest. On June 23, Midea Real Estate suddenly announced a major restructuring plan to divest its real estate development business. According to the disclosed estimated schedule, Midea Real Estate will complete the physical distribution on October 18 this year. After the series of restructurings are completed, the controlling shareholder Midea Development will hold 100% of the non-listed real estate development business property lines and 81.13% of the equity of Midea Real Estate, which focuses on operating business.

Currently, Midea Real Estate's main businesses include real estate development and sales, property management services, commercial property investment and operation, and real estate technology. In terms of specific business, in the first half of 2024, Midea Real Estate's real estate development and sales revenue was 24.105 billion yuan, accounting for 96% of the total revenue. In comparison, the performance contribution of the other three businesses is still small.

Divesting off the real estate development business means throwing away 96% of revenue? At this earnings conference, Midea Real Estate’s management responded at great length to the divestiture of the real estate development business.

Lingo, executive director and chief financial officer of Midea Real Estate, responded that the entire industry is currently in a difficult phase of liquidation and transformation. Despite the challenges, it does not mean that the industry has been abandoned. Both major shareholders and the financial industry have confidence in real estate. In response to the cyclical changes in this special stage, Midea Real Estate has adopted a special restructuring plan to survive the crisis.

Lingo pointed out that the company has retained an important listing entity. In addition to continuing to provide property management, space services and building technology, the entire team still maintains the full chain of development business operations. The separation of the development business from the listed entity is actually to make more flexible use of shareholder resources to better survive this cycle. "I believe that Midea Real Estate's real estate development business will return to the stage one day. There is a very important consideration behind this, which is the shareholders' confidence in the entire industry and their opinions and recognition of our ability to cope with the cycle." Lingo said.

In terms of actual business operations, Midea Real Estate has begun to emphasize construction on behalf of others, and the core of construction on behalf of others is the real estate development business that has been divested. Wang Dazai, executive director and CEO of Midea Real Estate, said that the divested heavy assets will continue to be developed and constructed in the future, including the continuation of delivery tasks, which is still a very important task for the company in the future. As the company gradually completes the tasks delivered by the controlling shareholder and new opportunities continue to emerge in the industry in the future, the controlling shareholder will also add high-quality projects to the development and construction resources. This is a very good historical continuation of the company's original development chain.

The divestment of the real estate development business does not mean a clean break in operations. Midea Real Estate will still retain the operation of the real estate development business, but the relevant data will not be reflected in the financial statements. After the "position adjustment", Midea Real Estate chose to continue the real estate development business in a different way, and this part of the business simply went "underwater".

From "Expansion" to "Contraction"

In the era of rapid development of the real estate industry, most real estate companies have adopted a heavy asset strategy to actively expand the market and seize market share. The ever-expanding balance sheet has also become a feature of the real estate market at that time.

However, as the real estate industry enters a period of deep adjustment, the past "expansion" strategy has shifted to "shrinking the balance sheet", and "survival" has become the most concerned topic for every real estate company.

Yan Yuejin, deputy director of the E-House Real Estate Research Institute, analyzed that the divestiture of Midea Real Estate is more important to transfer the heavy burden and debt outward. The divestiture of the real estate development business will reduce Midea Real Estate's liabilities and credit risks related to its heavy asset attributes. The continued construction business will continue to show profits.

As of the end of 2023, Midea Real Estate has a total cash and bank deposit of 20.14 billion yuan, of which cash and cash equivalents are 17.55 billion yuan, a decrease of about 4.3 billion yuan from the end of the previous year. If the 1.77 billion yuan pre-sale supervision funds are excluded, the available funds balance is 15.68 billion yuan. Midea Real Estate has a total of 12.23 billion yuan of interest-bearing debts due within one year and 6.27 billion yuan of trade payables with an age of more than one year. It can be seen that the capital pressure is still tight.

Hao Hengle, Chairman of the Board, Executive Director and President of Midea Real Estate, emphasized that after the reorganization of Midea Real Estate's listed platform, the company's total debt can be reduced quickly. The company will be able to move forward with a light load and focus on sustainable and stable operating business. The proportion and growth rate will be more stable in the future, and the proportion of ToC business will also increase significantly.

Xie Yifeng, president of the China Urban Real Estate Research Institute, believes that after the restructuring, Midea Real Estate will continue to operate around the real estate industry chain, and business expansion will not be difficult. With the reduction in debt and the support of the controlling shareholder, there is room for imagination in the future.

Judging from the stock price performance, the divestiture of Midea Real Estate has also been recognized by the capital market. As of the midday close of August 19, Midea Real Estate closed at HK$7.21 per share, up 92.17% from before the announcement of the divestiture, and this increase far exceeded the acquisition price of HK$5.9 per share.

Beijing Business Daily reporter Wang Yinhao