Greentown China Holdings' (GTWCF) CEO Cao Zhounan on Q4 2015 Results - Earnings Call Transcript

| About: Greentown China (GTWCF)

Greentown China Holdings, Ltd. (OTC:GTWCF) Q4 2015 Earnings Conference Call March 29, 2016 2:00 AM ET

Executives

Li Qingan – Executive Director

Simon Fung – Chief Financial Officer

Cao Zhounan – Executive Director and Chief Executive Officer

Analysts

Du Jinsong – Credit Suisse

Operator

Ladies and gentlemen, good afternoon, and thank you for taking your time in coming to the 2015 Annual Results Announcement of Greentown China Holdings Limited. First of all, allow me to introduce the members of the management to you. They are Mr. Cao Zhounan, Executive Director and CEO; Mr. Li Qingan, Executive Director; Mr. Simon Fung, CFO.

Our results presentation would first compose of the management walking over the operational review and financial highlights, then we move into a Q&A session.

Li Qingan

Good afternoon. First of all, I would walk over the highlights and performances of 2015 for Greentown. Mr. Simon Fung will then talk about the financial highlights. And lastly, our CEO, Mr. Cao would talk about the outlook and strategy of the company. If you look at the PPT please in 2015, Greentown, the group has recognized a revenue of RMB26.047 billion, that is 18.7% down from 2014. The main reason was because of the splitting of the financial resources and also our GFA for 2015 has seen a decline.

The land reserve in third and fourth city has been impacted. And the property sales is a 22.5% decline from last year is at RMB23.326 million, profit attributable to company and owners of the Company were RMB813 million and that is a 60.8% decline. There are two reasons causing this. First is that in 2015 the provision has increased by $300 million and also there are exchange rates losses and that is a 420 million and also we have been enhancing on our pre-service rate in 2015 and that has increased our cash flow.

And the core profit attributable to owners of the Company was RMB1,033 million in 2015 and that’s 53.8% downwards when compared to 2015, as far as our cash position is concerned we are at $18.239 billion that is sufficient to cover our borrowings and senior notes. And notes that are due within a year net gearing ratio was 73% representing an improvement of 76.7% in 2014.

The third piece is debt capital raising by February – on February 10, 2015 the group has issued an additional 8% senior notes due in 2019 up to $200 million and in August 11 of 2015 we issued a $500 million of new five year senior notes at 5.875% and that is comprising of exchange offer for the company’s USD senior notes with higher coupon. The group also completed a consent solicitation of terms, amendment on the [indiscernible] notes in the second half of 2015 the company has a two tranches of total of RMB7 billion domestic bonds and the average coupon rate was at 4.75%. This would be the third point.

The fourth point of a highlight is that we have from the Greentown Management Group in 2015 we have completed acquisition of the Greentown Dingyi Real Estate Investment Management Company as well as the Greentown Shidai City Construction and Development Company Limited forming the Greentown Management Group and currently a total of 60 projects under this group with a total GFA of 19.21 million square metres.

The fifth point is the pre-sales, in 2015 we have sold a total of saleable area of 3.9 million square metres and a contracted sales was approximately RMB71.9 billion the annual sales target has been achieved – exceeded actually the target of RMB60 billion at December 31 of 2015, Greentown Group recorded subscription rates of RMB1.8 billion.

Sixth highlight is the largest shareholder by CCCG, China Communications Construction Group. This has been completed on March 2015, and they now hold 524 million plus shares in 2015 June 4 CCCG acquired another 100 million share of the company at 11.46 per share, at the date of this announcement CCCG holds 28.899% stake in Greentown becoming the single largest shareholder, now these would be the main happenings in 2015.

Now, let’s talk about – pre-sales overview – number one is Greentown, we are a leading real estate developer, with a very strong brand recognition in 2015. The Greentown Group including Greentown China Holdings Limited and the subsidiaries together has showed a saleable GFA of 3.9 million square metres and the contracted sales is RMB71.9 billion. Total full-year sales has exceeded the target of RMB60.0 billion set at the beginning of the year. At the end of the year we still have RMB1.8 billion of subscription sales. In 2015, there were 120 projects that were on sale, the average selling price was RMB18,449 per square meter, that is a slight decrease over that of 2014.

If you look at these three charts in here, as of December 31 of this year our 2015 pre-sales when compared to 2014 there has been a slight decline. However this has taken out the – platform issues, which a 1.8 billion has been transferred to [indiscernible] now if we compare apples-to-apples in 2015, and there was a significantly higher sales level than 2014, then also average sales rate has been kept stable, versus 2014.

Only experiencing a slight decline. Now the geographic distribution, as you can see in the pie chart, approximately there hasn’t been much differences in Zhejiang and Hangzhou regions continues to be our largest market and then followed by Shandong, Jiangsu, Shanghai and Beijing as well as other cities.

Now another area would be our scale of development as we can see historical GFA under construction on the left chart from 2013, 2014 and 2015. We have kept it at around 10 million square GFA. We have been consistent. We have been insisting on quality development.

Now, the product innovation and the sales strategy that has been systematically reformed for a market based strategy. And we have also promote a part of innovation as implemented 2:6:2 ratio meaning 20% high end, to meet high end demand needs to support the brand value of Greentown. 60% would be for those that have value for money is a fast moving products with a high return ratio and the other 20% is on high quality social products, social housing between in the third and fourth city.

And we have identified 15 cities, Beijing, Shanghai, Guangdong and Shenzhen apart from these four. Then there are also 11 more core cities. So in 2015, our investment basically would be in these 15 cities. Now, another area would be our management – construction management business. It has developed in an orderly manner. Now, we have integrated the construction management platform and centralized suspends on core advantages and resources together in August 2, 2015.

We’ve completed the acquisition of Greentown Dingyi Real Estate Investment Management Company Limited as well as Greentown Shidai City Construction and Development Company Limited. And we have formed the Greentown Management Group and expanding in our scale. At the moment we have 60 projects under this management group with the GFA of approximately 19.21 million square metres.

And the total revenue, we anticipate would reach RMB136.3 billion and we anticipate that we can get a management income, management fee income at the range of RMB5 billion. In 2015, we have recorded a revenue of RMB336 million with a net profit RMB105 million, leveraging the construction brand. And management output we would increase a proportion of asset-light businesses and integrate project managements strength and also to accelerate the formation of a unified and comparative construction management brand.

Now I would also report on newly added land bank in 2015. Greentown, in accordance to our new investment strategy has obtained five high-quality land sites, with a total GFA of 2.51 million square metres, and those attributable to the Group is 1.33 million square metres, the new investment on this land premium is RMB15.3 billion, the average land price is RMB8,066 per square metre.

Now, if you can look at this pie chart, the break-down by region, Hangzhou, 28.7%, Shandong 33.6%, Beijing 11%, however towards the end of last year in Chinese New Year, we’ve also obtained another [indiscernible] in the 4th Ring area of Beijing. So, the Beijing contribution would be ranging the first towards the end of the year, and also there’s a Guangxi [indiscernible] plot land that gives 8.2%, and then Hangzhou, apart from Zhejiang, has 26.4%.

Now if you look at this table here, by end of 2015, Greentown has a total of 81 project sites, that have a total GFA is at 31.24 million square metres, and total sellable – GFA is 23.08 million square metres, of which 13.56 million square metres attributable to the Group.

And there are some very detail numbers here, which I will not go into detail one-by-one, and this is the overall land bank overview.

Now, let’s also look at the brand and accolades last year, may be in three areas. We have consecutive 11 years been awarded – by the Development Research Centre of the State Council and the Institute of Real Estate Studies at Tsinghua University, as the Top 10 largest Chinese real estate enterprises.

And the second accolade was in September 11, 2015, also added 2015 China real estate brand value survey that’s been coordinated by these three organizers. The return has with the RMB21.183 billion of brand value has been named the 2015 Top 10 Brands of Chinese Real Estate Companies and it was also elected as the 2015 Top Brand of Chinese Real Estate Companies in customer satisfaction. And also by December of last year our brand value has increased from RMB900 million plus to RMB21.183 billion over the past 10 years.

And also when we talk about after CCCG becomes a single largest shareholder what are the changes to the share holding structure in 2014 it has been completed and there is no change in 2015. So by January 15 this year, CCCG has appointed Mr. Liu Wensheng Executive Director as well as the Co-chairman of the Board.

So the Mr. Zhu Bixin the original Co-chairman has been – has another assignment from the state transfer. So Mr. Zhuso we have – now have the new Co-chairman as of now in the seven directors that CCCG has appointed some directors and there has been no change in other structures. And also CCCG’s support to Greentown is also in its big operation as well as Board’s composition. Now mainly in three areas they actively participates in the Greentown’s strategic planning. Specifically in the thirteenth and five year plan, five out of the seven executive directors in Greentown are now appointed by CCCG and it also actively participates in Greentown’s daily businesses.

The third area is CCCG in 2015 has consolidated Greentown’s financial segment starting 2015. So as far as the Board structure is concerned I will not repeat the structure has already been reported CCCG is not only a very strong strategic partner but also a very strong leverage as you can see the CCCG Partners has been providing finances to Greentown and also providing various of financing options to Greentown. Now as far as cooperation is concerned and this partnership with CCCG comes in various formats including financial support, strategic partnership brand synergy resources sharing as well as overseas development.

As far as brand synergy is concerned CCCG as a Fortune 500 company and [indiscernible] and Greentown as a top 10 real estate company in China both together can leverage on their complementary brand influence. And as far as overseas developments are concerned it would help Greentown to move abroad and leverage on advantages. So the partnership with CCCG as a multi-directional, comprehensive and deep I mean visionary strategic partner.

Now, let’s move into financial highlights to be given by Mr. Fung.

Simon Fung

Thank you, Mr. Li. Just now Mr. Li has talked a lot about the financial figures already, there isn’t really a lot for me to say anymore. But I would like to share with you about this very challenging year for us. Our revenue has declined by a net – by 18.7% this year as you can see this is has a lot to do with our subsidiaries and the partnership companies. But actually our, we were at, as you are aware last year we have 18 projects that were passed to Zhejiang so those projects of the second half of the year has not been booked into our books.

So however when compare to based on apples to apples we have to have a 20% improvement. So there are three areas that has caused the decline of 60% of profit attributable to share owners. The first would be a revenue decline and gross profit has also declined by, I mean the gross profit margin remains stable but the gross profit reduced by 33.3%.

And also our product mix – if you have been following us, you will know that in the first-tier and second-tier cities for those who’re selling at RMB40,000 and RMB50,000 the margin is not an issue. However, for those that are at a lower price, those have an issue. We are slowly but lacking in these higher priced assets. As you can see in the last couple of plots of land that we had are all in the first-tier cities and coming in at a good costing. So this is where we are working on and this is the growth.

And also our administrative cost has also increased. The administrative cost is RMB400 million of exchange losses. This is calculated at a fair value of closing that’s because of the depreciation of RMB. And we have a lot of U.S. dollar denominated debt and hence the impact, many investment bankers have been asking that we should be actually doing hedging. But hedging is actually very difficult to do. And it is at 6.5% cost, then they do not do it for you at 6.5%, would do at 5.7%. So that’s the strewn gap that you really have to pull money out of your pocket to fill. Then in three years to five years, do you know where that the RMB is going to depreciate or appreciate. So this is very difficult.

So for those hedging tools that are available in the market, we actually did study a lot in detail about them. But I think this is not as simple as an insurance package that you are entirely covered.

Hedging is something that has been clearly calculated, meticulously calculated by the bank. And it only covers this tiny little spot and if you do not fall under that spot then you’d really don’t have any protection. Now there are three hotels that have started into operation in the second half of last year. And that has – that brings RMB1 million of impact to the expenses.

Now ticking out the new hotels as well as the exchange cost, then the true increase of expenses is only 10 plus percentages and that’s in human resources et cetera, which is quite reasonable expenditure. Selling expenses, meaning bonuses in the Rongchuang age there are some policies that we have to track. And therefore bonuses of 2014 have been paid out in 2015, so cutting that off, we have a 12% increase in selling expenses.

Now, our year-on-year sales have enjoyed a 3% increase and that is really under control. As far as financial cost is concerned, this is the number on the P&L. We have a large piece that went to – that was capitalized as a cost. And our total cost in 2015 was 3.2 billion and last year was 3.1 billion, only a slight increase because of our overall debt has increased by 10 billion. And our capitalized percentage, 2014, is 78% and now it’s only 70%. So this was a lower capitalization ratio then our P&L losses become bigger.

Our weighted interest cost is dropping from 7.9% to 7.3%. However, our financing cost has come down, but the overall number of financing has increased. So that’s why you see this number increasing. Now, these numbers have already been explained. Now, if you look at the asset, the balance sheet, as you can see our borrowings increased from 35.8 billion to 44.9 billion, and our – the bank balances has increased significantly, despite the fact that we have a bigger loan, we also have bigger bank cashes and total equity went from 34 billion to 36.6 billion. Bank balances has improved 100.8%.

Now, LAT payable, now when after exchanged – the exchange losses has also been booked. Our net gearing ratio has dropped from 76.7% to 73%. Now our revenue and cost structure, as you can see, are under the breakdown. And you can see our land cost is 23% and our gross profit is 18%. The price has also come down from 15,000 to 14,000. Now, why there is a gap with our anticipated sales price? Anticipated sales price was all for grant areas, but what we have booked in here also included underground areas like car parks, et cetera. So for car parks, typically, we would be selling 7,000 to 8,000 per square meters and therefore diluting the overall price per square meters. Another area would be the taxes. These are after-tax numbers whereas when we do the pre-sales, it included business tax.

Now Page 20 that is debt and cash position. As you can see, loans within a year that’s 12.5 billion into the 27.4 billion. However, all of these financing has been done. Now, we have announced already a 700 million of syndicated loans and we will be announcing other loans in the next several days, so all of our financing has been put in place and it will soon be announced. Our refinancing has been done very well today, I mean, this year for 720 million of borrowing. We only have an average LIBOR rate of 3.3%.

Our net gearing ratio, we have already talked about. Our foreign debt is 15.6 billion that is a 37% of total. Now as far as our financial position is concerned, bank credits, we’re not really concerned about. We have only used a part of – a very small part of what we have been given, only 17.3 billion of the 67.1 billion of facilities that has been drawn. However, we will be very prudent as to how we draw down on our credit facilities and there’s absolutely no pressure with financing.

And also, there has been US$500 million at 5.872 coupon and we have been very successful in launching those. Now with CCCG support, our greeting in Mainland China has actually been improved and we have been enjoying cost of financing that is even lower than what you’re seeing here. Just now we have been talking about, those loans that are within – that would mature within a year has already been in secured and the announcement will be made in the next several days. So please pay attention.

So, let me pass the microphone to our CEO to talk about the outlook.

Cao Zhounan

Good afternoon new and old friends. Mr. Fung and Mr. Li have already talked over the 2015 financial and operating status of the company in 2015. Now quite frankly speaking, I am very much happy to open up and talk to you about the present and the future of Greentown.

Now looking at the data from the financial report, for this year, this is actually a very challenging year. Now, what the figure goes to say is that the company in its operation what are the issues or what not the issues that we can say. For example, you will see that starting. Looking at the GFA and the volume, you can see that the company has not been buying a lot of lands since 2012, now as far as the gross profit margin of all the investment projects is concerned it also goes to say that our investment strategy has a lot of room to be improved. For example in the third and fourth city, our product or size seems to be too big. And this year, our pre-sales has – rate has exceeded 351 million square meters. However, we still have 70 billion yet to be sold, some are in Hainan Province, other third and fourth-tier cities.

Now as far as investment structure and quality is concerned, there is also another reason, for example, in 2015 with Rongchuang, there was – this event that has caused an impact to the pricing as well as the gross profit margin. So I’m open to a frank discussion with you. These data goes to tell the story of our operation and our strategy and our financing as well as our product strategy back in two years to three years ago. Several years ago, we have already – well in 2015, 2015 is the most challenging year for Greentown ever since its funding.

Now looking at the data and is far from our ideal, but I would like to very frankly report to you that since our overall strategy from last year as well as our outlook for the future, the first includes an investment strategies. Starting last year, our investment strategy has been entirely revamped and confirmed. That is we’re decided to be active in 15 cities in Mainland China. Now just like Mr. Li has said in Guangxi, there is a piece of project that we believe is of high value, so we were going up. And now as of second half of last year, we have a 152 plus event and most of those are in the first and second-tier cities.

Now into the future, we would focus on the first-tier cities plus Tianjin, Jinan, Hefei, Nanjing, Hangzhou, Fuzhou, Xiamen and Wuhan as well as Chengdu, and Chongqing. Now apart from these, in principal or fundamentally we will not move into all other cities except from these. Now these have – the result has been under a repeated strategies and the reason is that the Greentown properties and products has to go into cities that can afford this price. Now from quarter one from last year including other way to quarter one, we have been implementing on this. We believe that after two years, our gross profit margin will definitely return to a high level.

Now I have seen many familiar faces, who are very familiar with Greentown. Now as long as we sell high quality products in first-tier or second-tier cities, could we have a pricing power? Now, it has been many years when we have issues with pricing. The key is our cost. Now, I have to frankly tell you, my fellow friends, as far as cost is concerned, we have already strictly control that now with our new products in the common platform. Our cost – our view cost, our building cost as well as other costs has come down greatly. I have compared it sincerely with our peers. We are only a bit higher than them.

Now as far as our financial cost is concerned, now with CCCG help it has come down. And when compared to 2014, our financial cost has dropped by 3% or more. Now as far as management fee and sales fee is concerned, our budget has also indicated a great cut gap. So all in all I believe that our gross profit margin as well as our net profit margin in the next several years. We will not see a great change in the next two years. But however, we will have to focus on strictly implementing our strategy and do not move into the third and fourth cities – fourth-tier cities.

Secondly, we will continue to optimize our product mix. As you can see last year, Greentown in Mainland China has four main key brands in Hangzhou, in Beijing, including brands like [indiscernible] and others. These have been products that we have invested significantly and on for [indiscernible] over one single day, we have been able to sell 1,000 flats and now the Phase 2 is open for sales today. And it has been welcomed significantly by the market.

So the product mix of Greentown continues to be a number one in Mainland China and we continue to step up on our investment. However, as far as quality is concerned meaning that we have targeted our strategy to target the bigger market meaning that our product needs to cover a bigger market segment and I believe that in the next several years, you will continue to see this strategy being implemented. We’re targeting a much larger audience and we are offering much higher value for in our products. So this is another area of change.

And the third is seriously, early part of this year, there has been a lot of reform in our management. The first segment would be investment and development segment and then there is the branding and acquisition business, as you have been told that we have acquired two companies already last year. This business has been RMB350 million plus in this year, it’s already close to RMB1 billion.

We will continue to step-up on this leasing and financing business. And the revenue in the next several years has already exceeded RMB10 billion. Now in the Chinese Real Estate Companies in China only Greentown can build this part of the business. And this business must rely on first – top-end quality and brand value.

So, under normal circumstances, our asset operation group can reach RMB800 million of net profit. Not as if this asset operation business can drive the revenue, net revenue of RMB500 million then we’re already, in the blue as far as this segment is concerned. So these are the fundamentals that we’re building.

The third is – that, the Greentown has already owned 25 hotels, we have invested RMB11 billion and there are other subsidiaries to these hotel business. Greentown, as you’re well aware in Mainland, China we are called Greentown Real Estate Property. And we have two phases, we have two names, one for external and one for the domestic market.

We will continue to optimize our management structure. Not all of these three segments are with the Real Estate currently. And this year, we will conduct some reform, we were single of the Asset Operation Group.

And this is for Greentown. There would be three subsidiaries under Greentown, to be formed quickly and the division of market and responsibility would be very clear. And the headquarters would control investment and control fundings as well as the human resources and performance measurement of the subsidiaries. This is very clear. And the three subsidiaries would operate separately. Now one – clear, it’s only on investments. They’re the one on asset operation group. Just now Mr. Fung was talking about the hotel group and as well as the foreign exchange losses.

In the future with investment in real estate, there’s no such risks as far as a foreign exchange risk is concerned. Now going forward, this will be clearly delineated. I showed this. In all of these results would be folded up and rolled up into the holding company’s performances. We will step up one implementing this strategy and I think we intend as you know very well how we are. Now once we have been able to clear this structure. And also once we have to been able to work on optimizing on our product mix, also with CCCG becoming our main shareholder. That will bring in significant advantage as far as financing cost in concerned. And for CCCG Greentown is a very important component for its real estate business.

They can help us guarantee finances. And we will provide our capability, our high caliber people as well as our experience. So with this strategic corporation and elaborate reform, as well as cleared delineation of roles and responsibilities, as well as our strategy we are prompt to explore to expanding the market.

For a central government and the local government with us supporting policy to the real estate, these cannot go on forever and ever, as you can see deleveraging the – doing the way with this excess – with excessive stocking, these are something that is temporary. And that’s why I think the implementation of Greentown strategy must be completed by mid-next year meaning this year and next year we will have to do away with all of our excessive inventories meaning starting from mid-last year our inventory 90% of that will be built-in new strategies.

If we fail to do this, then the future would be very, very rough. This is key to our future. So I hope that next year is 2017 and 2018 when we sit here, I hope that you will be very happy with what we – what we have achieved. And we will – we hope to be able to sit here very reluctantly by 2018 to share with you our great results. So I’ll just stop here. Thank you.

Question-and-Answer Session

Operator

Thank you. Now, let’s move into Q&A. Before question please name yourself and your company in order to allow maximum opportunity for many or for all to ask please limit yourselves to two questions. The first one please. Gentlemen on the third row.

Du Jinsong

Thank you. I’m from Credit Suisse. I’m Du Jinsong. I’ve two questions. One is just now, when we talk about CCCG. I’ve a small follow-up questions. First is the long-term planning conducted together with CCCG? As you can see, CCCG has just restructured it’s a Asia company Zhongfeng. So I like to understand what is the plan going forward. And what would be the long-term impact and also with the CCCG apart from supporting us on financially will there be any impact on the cost control especially construction cost, because CCCG is a construction company.

And would it have any help and would of have any help to as far as construction costing is concerned. And previously we have been saying that, that maybe some shares that will be distributed after CCCG has that been implemented. And Mr. Zhou has talked about a very component regarding the changing of your product mix. How is that doing? Are you lowering the third and fourth-tier cities pricing. Would that be an impact to the net profit and are you – would you be using other ways, on Page 29, the saleable GFA in 2016 it seems to be smaller than previously. So these would be the two main questions that I have.

Li Qingan

Thank you, Mr. Du. You are a very experienced analyst. As you may well be aware. As you can see, there has been some reform going on. The CRC has also raised multiple questions for CCCG. Quite frankly speaking the business segment of CCCG, I think in this segment Greentown would be the most important component. That’s because of the development capability of Greentown. As far as Chinese construction companies concerned, they are targeting the lower and mid end with not too many projects.

This has to do with history what they have been actively on. There has been a lot of room for improvement for this company. Talking about long-term strategy and planning, CCCG has a strategy for Greentown strictly speaking Greentown is positioned in CCCG’s real estate segment would be defined by a focus in domestic market, mainly first and second tier markets, first and second tier cities. The other products meaning the lower end, middle end, markets would be targeted by other companies under CCCG.

Now for CCCG, in the past year, let’s say – the two plots of lands in Beijing and one in Chongqing, and also in Guangzhou, Shenzhen, – CCCG has played a irreplaceable role in terms of helping Greentown to obtain those lands.

We basically went into the bidding together with all of the bigger plots of land. And as far as I can recall, CCCG is also working with the CSRC and they’re still working on the delineation of different roles and responsibility amongst its subsidiary companies.

However, we do know that we will continue to invest, for example – in Los Angeles, in New York, in Australia. We are working with CCCG on these investment opportunities. As you may well be aware, CCCG is already into 80 cities in the world. According to them, they – believe that there are many projects in the – over these market that actually returns to much higher yield than domestic ones.

No, as to who would do what? That is something that is still being studied by CCCG, as far as this overall strategy is concerned. And you also talked about the changing, the upgrading of the products. Now this may be a simple and yet complicated question. As you may well be aware, last year we have spent RMB15.2 billion on Beijing. And also two other plots of land in Hangzhou and one in Chongqing, one in Chengdu.

And the entire process took four months with a very high gross profit margin. I think this adjusting first would require a capital, a capital that would be deployed in the newly targeted 12 strategically targeted cities. And if we do not complete the new projects, then this is simple and yet not simple. First you will have to have new capital sources in order to deploy your new strategy.

Now where does this money come? First we have to cash in on your existing inventory. And we have already completed 28 point something billion of investment of which RMB13 billion has been completed at the beginning of this year. So – and including the one in the fourth ring which is in Beijing. This project is a highly valued project.

Now with its new deployment completed, I’m highly confident that by end of next year, as long as there isn’t any fundamental changes in the market. Our land bank has at the end of next year would be highly competitive and this is something that we must do. Just now it has already been set. Now within such a short target to time you have to complete your target that it will cause a price issue and also in 2016 and 2017, there would be an impact on the books. But however, we would also be doing sales. So this will also be buffered.

With the amount of delivery, the amount of some revenue that can be booked that may have an impact. However, would not be lower than this year. And the third piece would be the price. We definitely must rely on the central and the local government policies. I’ve said that 2015 is a transition and these two years would be another change in the Chinese real estate property.

Now, if we look at it now, what I’ve said is basically correct. Individual cities considering the own land circumstances, there has been some individual regulations that’s been implied that is natural. However, it does not impact the overall strategy and trend of deleveraging and doing away with inventories that has been stipulated by the central government.

So in the next two years, we would try to do away with our inventory at an appropriate price with the help of the central government. And these are actually a very good opportunity in the next two years when we can swap these products at an appropriate price. If we are successfully doing this, I think we will have a very bright future.

Frankly speaking, I don’t think we should have a very, very high hope meaning that in – if the Chinese are property market is to go back to a normal level in two years time, then it will have to be dependent on providing good quality of products because with the deleveraging with the doing away with inventories and all that only the lowest fitted would survive.

The business tax has already declined to 3% from the original 5%. Originally, we would multiply 11.5% on top of our sales price and what we’re doing now is only 9.3%. So central government will reserve a huge no tax income base on this. The central – with this type of an impact on the central [indiscernible] I think that this regulation would continue for long, long time. I think in two years to three years time, the real estate market will go back to a social level depending on that would allow only those with high quality, high branding, high differentiation to survive and I think that Greentown would be poised for that. And we must grab this opportunity in the next two years to three years.

So this is my view as far as the overall Chinese real estate market outlook is concerned, because competition is going to be very keen. I don’t know whether I’ve answered your question clearly Mr. Du. We have been introducing Mr. Liu, Chairman, Liu from CCCG. The management of CCCG is already deploying on this strategy. Thank you.

Operator

Next question please.

Unidentified Analyst

[Indiscernible] from Morgan Stanley, a quick question. Just now we have talked about short-term loans, that’s been already tackled. And last year, we have shifted some loans from 2018 to 2020. However, there are in February this year, there is still some overall debts. I don’t know with the RMB700 million loan, so would that be to payoff the older loans. And the other ones used on call backs. Is that the case? And last year, we have a RMB7 billion of loans will there be any venturing or financing from private equities, et cetera.

Li Qingan

Yes, your figures were correct. 2018, we have a RMB662 million. The syndicated loans is RMB7 millions that is larger than the original. So we have an additional RMB520 million. So these are the correct numbers and I don’t have anything else to implement or supplement. Last year in Mainland, China, the SCRC has approved this and still have RMB3 billion that I can still issue with private equity loans that is not part of the quota. And this year we’ll be issuing bonds.

Operator

Thank you. Next question please.

Unidentified Analyst

I have a very simple question and that is just now the management said that in the third and fourth-tier products there is still – RMB700 million to be deduced. And then these would be moved to first-tier, second-tier quality land banks. Meaning that the – what are the impacts to the gross profit margin with 2016 and 2017, can you provide a very clear guidance please?

Li Qingan

Excellent question. Thank you. And that would actually cause us to have some discussions. Quite friendly puts in the second half of last year in Beijing and Shanghai and Hangzhou, we have been switching our land bank here. We have actually done a model on investing in Tier 1 cities. So I hope that with this shifting of product mix regardless whether it is a land bank or operation or financing, we hope to be able to deploy in a steady way. Just now Mr. Fung has said as far as cash is concerned, Greentown in the foreseeable future does not have any issue with our cash.

Now in international meetings I emphasize that I mean the sales process what we are looking after or looking for is profits. We don’t want accumulations. And first is you need to have the cash and then you need to have the profit. Now since our cash flow does not have any issues, so in the future what I would go after more would be the profits. You analyst we all know this is the common plane point for the real estate market in China. The sales team is not working in line with the management because their commission is 0.2% to 0.4% of whatever the sales price is. And since Chinese New Year, the market has been changing and the volume has been growing.

Now what the sales team needs is that if this houses – this sold at a price then with the commission, they could get some commission based on the land price, the product price, now if it’s 24,000 per square meters then the additional profit would go to the company. So this is a major problem with the Chinese real-estate companies, meaning the sales teams’ interest is not aligned with the management’s. For example with [indiscernible] the net profit for example is 3 billion.

Then how would you price your product? If you can sell it at this price then the commission would be at 0.4%. Now, if you cannot restart then it – you don’t get that commission. What I wanted to say is that the interest of the sales team has to be aligned with that of the company. This as for the last three decades has been a problem with the entire industry. And I think you have asked an excellent question now in the course of doing way with inventory with some third and fourth-tier cities. Now if the market has not recovered, then, I’m sorry, we will have to do away with it.

And in 2016 and 2017, our profit would continue to be ensured. We have been given targets to our subsidiary companies. And if you cannot meet that target, if you do not fulfill that and I’m sorry we will have to cut the people as well as the commission apart from the net profit from selling houses we also have other operating profits. So to me, I’m hurry, I pay a lot of attention to the protection of the profits in changing of our product mix in 2016 and 2017, not only – not allowing a decrease, we actually would very much go for an increase in that profit margin and thanks for your very excellent question.

Operator

Next question please. Gentleman in the middle row.

Unidentified Analyst

Good afternoon. I’m from [indiscernible] I have two very simple questions. First is regarding the dividend ratio and the other one with – is that in your presentation, you’ll see that some of the products would move to the 2:6:2, 2:6:2 strategy. So what are the respective net gross profit margins that you’re expecting from these?

Li Qingan

As far as profit and dividend ratio, payout ratio is concerned, in our Board meeting this year, the directors – we have explained and discussed in detail with the directors under [indiscernible]. All along we have been quite generous in our dividend payout. In the past, we have been having 50% payout ratio. However, later with cash flow and market changes, last year, we did not give out dividend. Now, this year, as you can see with our performance, if we – there are a lot of reasons to support payout of dividends like we have to be responsible for a return for our shareholders.

But however, despite the debt ratio has come down, cash is not very strong. Now, if we continue to distribute dividends then it has a big impact to the company, so after deliberation, it has been decided that there will be no distribution of dividend this year. So apart from our shareholders, we also have debt holders, which we have to be responsible for. So in the future when business and profit becomes normal again, we will once again very generously distribute dividends. This is no doubt.

Regarding gross profit margin in our 2:6:2 product mix, we will do some adjustments because as far as the policy is concerned, the first two 20% would continue to increase. For 2016 and 2020, now 2020 is high-end and 2016 is the high value products with the largest gross profit margin and the other 20% would be safety, I mean welfare housing.

Now because the market changes, the first 20% would increase just like Mr. Fung has said just now because our gross profit margin remains very high in this segment. My personal view is that was such an investment policy being deployed; the GP margin of Greentown would definitely lead in the industry. Now, if we can look at 25% or maybe 28%, I’m personally very confident about this because with each of our products from – with the entire process from getting the land to building the product, we have all along have gross profit margin in our mind. So, we are committed to bring it back to 25% or 28% or maybe ever higher. This is – we are very confident with GP margin because after the cutting down of our cost including those synergies with CCCG, we do have a lot of opportunities.

Operator

Thank you for your questions and the answers. Because of time constrain, the session today will end here. Thank you very much for being here. Thank you.

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