Barclays | China Property 14 June 2012 2 Shareholder value – don’t bank on it The ability of a homebuilder to achieve a return above the cost of capital depends largely on ensuring that the operating model matches the economics of the housing market in which the company operates. Homebuilders’ returns on capital are a function of their wholesaling and development activities: the customer for example cannot build one flat on the 20th floor. This wholesale function and the nature of housing production means that capital is often tied up for relatively long periods, necessitating higher profit margins and lower asset turns than is evident in shorter production cycle industries. Yet the inter-play between margin and asset turn can vary significantly between housing markets. In markets where land is ‘scarce’ – where land cost is a high proportion of total development cost – developers typically buy land at the bottom of the cycle, and during the cyclical upswing extract high profit margins from rising land prices to compensate for their low asset turns from holding large and expensive land inventories. This margin-driven model is evident in markets such as Hong Kong and Singapore, where supply is less responsive to changes in demand and the markets are dominated by a few number of players. Figure 1: HK developer business models – higher margins, lower asset turn Hong Kong Developers 1998 1999 2000 2001200220032004200520062007 2008 200920102011 Operating margin (%) 41.1 43.9 44.4 29.829.623.826.429.638.333.6 37.8 39.940.539.4 Asset turnover (x)0.10.10.10.1 0.1 0.1 0.1 0.1 0.1 0.10.10.1 0.1 0.1 Return on Assets (%)3.48.13.52.0 2.3 0.6 4.2 7.7 6.4 7.88.43.7 9.9 7.0 Leverage multiplier (x)1.61.71.71.8 1.8 1.9 1.8 1.7 1.8 1.81.81.8 1.8 1.8 Return on equity (%)5.1 11.25.13.0 3.6 -0.1 6.912.710.212.9 14.35.916.610.9 Source: Bloomberg, Barclays Research Figure 2: Singapore developer business models – higher margins, lower asset turn Singapore Homebuilders。。。