LEVERAGE-FUELED GROWTH OF CHINESE REAL ESTATE FIRMS —A CASE STUDY ON YANGO GROUP
Financial Analysis, Corporate Finance
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The real estate industry in China is typically capital-dependent with one of the highest leverage levels compared to other industries. Motivations for choosing high leverage and how real estate firms manage the leverage risk and achieve high growth are very important topics in corporate management and corporate finance.
In this paper, I combine theoretical and empirical analyses to study the phenomenon of high leverage commonly employed by Chinese real estate firms. In particular, I study Yango Group Co., Ltd (“Yango”), a real estate firm publicly listed in the Shenzhen Stock Exchange since 1996. In 2012, Yango changed the location of its headquarter from Fuzhou to Shanghai. Since then, Yango has employed high-leverage and achieved 1000% sales growth in just 3 years. By using a high-turnover strategy and diversifying its financing channels, Yango has managed the leverage risk as well.
This case study will provide valuable insights to publicly listed real estate firms, especially small and medium sized developers. Although bank loans were recognized as the most frequently used and most traditional financing channel, government policies have driven real estate firms to finance through non-bank innovative financial instruments such as trust, fund, stock pledge, etc. Because Chinese real estate firms’ financing needs are not met by traditional debt or equity financing channels, these firms have incentives to resort to other forms of leverage channels. As a result of their aggressive expansions with high leverage, these firms face risks of inventory pile-up, cash flow management failure and bankruptcy. Real estate firms could implement high turnover strategy and diversified financing channels in order to manage high leverage risk.
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