In the ever-evolving landscape of the Chinese real estate market, the question of what real estate companies can do beyond their traditional business has become more pressing than everAs economic pressures mount and market conditions shift, many of these long-established firms are adopting innovative strategies to survive and thrive.

A recent case that exemplifies this trend is Yuhongyuan A, a leading real estate enterprise from DongguanDespite announcing substantial projected losses ranging from 45 million to 68 million yuan, Yuhongyuan A has experienced a staggering increase in stock prices, achieving a remarkable nine trading limit increases in less than two months, demonstrating investor confidence in its new direction.

Over the past decade, the transformation of real estate companies has been an ongoing phenomenon, but the current shift appears unprecedented in its intensityCompanies are increasingly eyeing high-tech industries, including new energy, advanced materials, and high-end equipment manufacturingThis article explores the unfolding drama of transformation as these firms pivot away from traditional real estate.

Capitalizing on the “Industrial Mother Machine” Trend

One recent announcement from Yuhongyuan A about its anticipated losses, which are projected between 45 million and 68 million yuan, did not deter investor enthusiasm.

On February 24 and 25, Yuhongyuan A (000573.SZ, formally known as Dongguan Hongyuan Industrial Co., Ltd.) achieved consecutive trading limit increases, firmly establishing investor optimism.

So far this year, Yuhongyuan A has recorded nine limit increases since January 3, resulting in a 58% surge in its share price

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Particularly noteworthy was a "six consecutive limit increase," during which it gained recognition on stock market lists for high-performing stocks.

The connection between Yuhongyuan A's stock performance and its pivot away from traditional business is unmistakable.

On the evening of January 2, Yuhongyuan A disclosed a significant announcement concerning its decision to acquire approximately 60% of the shares in Borchuan Intelligent Equipment Co., LtdThis strategic shift signifies a move from traditional real estate operations to high-end equipment manufacturing.

Following this announcement, the stock skyrocketed from 2.97 yuan per share to 5.53 yuan per share, reflecting the enthusiastic market response.

Now, what is Borchuan Intelligent Equipment Co., Ltd., the target of Yuhongyuan A's acquisition?

Borchuan is a high-end equipment manufacturing enterprise aligning itself with the trending "Industrial Mother Machine" concept, though it has faced challenges, including two unsuccessful IPO attempts.

According to Borchuan's prospectus, it specializes in the research, development, production, and sale of intelligent injection molding machinesThese machines are essential for processing composite materials and their advancements are crucial in a digitized, smart, and efficient production environment.

In recent years, the "Industrial Mother Machine" sector has seen a surging interest in capital markets, with leading companies like Weihong Co. and Dafu Technology witnessing stock price increases of over 30% this year.

Borchuan has developed prominent technologies in the large injection molding machine domain and is recognized as the first national manufacturer of ultra-large two-platen injection machines

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Responding to the national strategy of intelligent manufacturing, the company has integrated information technology with its equipment and established research centers focused on intelligent gear development.

However, Borchuan's journey toward becoming a publicly traded company has been rocky, having faced two failed attempts to list on the science and technology innovation boardTheir first attempt resulted in a voluntary withdrawal following a site inspection, while the second was met with scrutiny over the legitimacy of its technology and management practices by the Shanghai Stock Exchange.

With both companies in need of transformation—Yuhongyuan A due to dwindling real estate business and Borchuan due to its unsuccessful IPO history—the acquisition appears mutually beneficialYuhongyuan A seeks to adapt its business model, while Borchuan aims to secure its market presence on the Shenzhen Stock Exchange.

On February 21, Yuhongyuan A disclosed the completion of payment for a pledge on 30% of Borchuan's shares, amounting to 130 million yuan as a sign of commitment to the transactionNevertheless, the final agreement remains subject to further negotiation.

The Tumultuous Transformation of Dongguan's First Listed Company

The story of Yuhongyuan A and its parent group, Guangdong Hongyuan Group, reflects a glorious past followed by a gradual decline amid the nationwide push toward real estate expansion in the late 20th century.

Despite its challenges, the Guangdong Hongyuan basketball team, which has produced several prominent players such as Yi Jianlian and Zhu Fangyu, remains well-known and was funded by the Hongyuan Group

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This glimpse into its cultural contributions highlights the complex legacy of the firm.

Three decades ago, during the wave of reform and opening up in southern China, Dongguan flourished with construction cranes, prompting Chen Lin, the founder of Hongyuan Group, to invest his first fortune into constructing factories and industrial zones, establishing the Hongyuan Industrial Zone on 380 acres of prime land.

This endeavor led to the development of numerous infrastructure projects like Hongyuan Bridge and Hongyuan Hotel, coupled with a foray into residential property development that saw the completion of several residential complexes.

Founded in 1994, Yuhongyuan A not only became the first listed company in Dongguan but also was among the initial batch of township enterprises listed in China.

Yuhongyuan’s ambitions extended toward technological ventures as they sought to diversify their interests in the 1980sHowever, the lack of knowledge regarding high-tech industries hampered these early attempts.

In the following years, as a wealth of low-cost land became available during the real estate boom of the 2000s, Yuhongyuan managed to capitalize on the real estate market, staking its claim through residential and commercial development, which became its economic backbone.

Between 2014 and 2017, the firm's operations were marred by historical high inventory levels, leading to severe challenges amidst fierce competition within the real estate sector.

As competition intensified, Yuhongyuan faced numerous issues, including reduced land acquisitions and declining revenues

This period prompted the company to contemplate a much-needed transformation away from its reliance on real estate, diverting funds toward projects in coal and recycled lead batteries.

By 2017, the major source of revenue for Yuhongyuan still stemmed from its real estate operations, with property rental and sales bringing in 5.29 billion yuan, comprising an astonishing 93.55% of total revenue.

However, the landscape has shifted significantlyThe mid-2024 report showed that revenue from real estate rentals barely reached 17.74 million yuan, with sales trailing closely behind at 7.43 million yuan—combined, they accounted for less than 10% of total revenue, while income generated from the recycling of used lead-acid batteries soared to 224 million yuan, making up 87% of the total revenue.

Despite these shifts, the recycling sector has proved challenging and unprofitable, marked by soaring costs and a meager gross profit margin of merely 4.83%. In stark contrast, the gross profit margins for real estate rentals and sales were notably higher, at 56% and over 41%, respectively.

The projected losses between 45 million to 68 million yuan in 2024 primarily arise from limited revenue in real estate ventures and a year-on-year decline in investment returnsCompounding these issues, Yuhongyuan A has an inventory of real estate projects yet to be launched.

Over the past few years, Yuhongyuan A's journey to transformation has faced significant hurdles

The company has been systematically divesting its coal mining assets—in 2022, it sold a coal mine for 261 million yuan and is currently seeking to divest its 100% equity stake in Guizhou Hongtu Xinye Mining Co., Ltd.

In the realm of real estate, Yuhongyuan A has gradually stepped back from the market, adding only minor land reserves in the past couple of years through minimal equity acquisitions, and there have been no new land acquisitions recorded in 2023 and the first half of 2024.

This recent move to acquire 60% of Borchuan marks a significant departure from previous diversification efforts that centered around “real estate + X.” This time, it represents a major pivot and a desperate bid for revitalization.

A Surge of Real Estate Company Exit Strategies

The push for traditional real estate companies to seek business transformations is becoming a prevalent trend.

Shortly after Yuhongyuan A’s announcement about acquiring Borchuan, another well-established A-share listed real estate company in Ningbo, Ningbo Fuda (600724.SH), revealed significant asset restructuring plans

On January 16, it proposed to acquire a controlling stake in Ningbo Jingxin Electronic Materials Co., Ltd. by cash, marking its entry into the photovoltaic silver paste sector.

Following the news, Ningbo Fuda’s stock price surged and reached its trading limit the following day.

According to Tianyancha, Ningbo Fuda's largest shareholder is the state-owned Ningbo Urban Investment Group, which operates numerous high-end shopping centers in the city and focuses mainly on commercial real estate and cement manufacturing.

Tracing back to its roots as Ningbo Real Estate Co., the oldest residential development enterprise in the area, many long-time residents grew up in developments erected by Ningbo FudaHowever, due to drastic changes in the real estate landscape between 2015 and 2017, significant financial losses forced them to shed their residential projects, focusing instead on commercial real estate and cement-related developments.

After divesting its residential development business, Ningbo Fuda continued to see revenue declines, with mid-2024 figures showing 900 million yuan—down a staggering 48% from the previous year.

The shift to enter the photovoltaic industry marks a critical juncture for Ningbo Fuda.

Jingxin Material, the target of this acquisition, specializes in researching, producing, and selling electronic materials for solar energy photovoltaic and electronic technology, including silver paste essential for photovoltaic cells.

Yet, the fusion of a traditional real estate firm with a high-tech photovoltaic enterprise poses significant challenges, with both sides needing to ensure compatibility for a successful merger.

From market reactions, after the stock price surged on January 17, Ningbo Fuda’s shares have since entered a downward spiral, registering a 25% decrease in value.

Another firm recently announcing a transformation away from real estate development is the well-known China Communications Real Estate (000736.SZ), a state-owned enterprise sanctioned by the State-Owned Assets Supervision and Administration Commission.

On January 21, amid reports of a projected loss of 5.3 billion yuan in 2024, China Communications Real Estate declared the divestment of its real estate development assets and liabilities to its controlling shareholder, China Communications Real Estate Group, signaling a shift toward property services and asset management.

The accompanying stock market response showcased a drop leading to halted trading, with shares falling over 23% compared to their early year highs.

The transformation initiatives of these three recently announced real estate companies illustrate a common struggle faced by private, state-owned, and central enterprises alike

All are grappling with steep declines in profitability from real estate operations, prompting a necessity to explore novel avenues for growth.

This wave of exits from real estate surfaced last year with veteran firms like Huayuan Real Estate announcing a complete withdrawal from real estate operations, while Midea Property restructured by transferring real estate assets from its publicly traded arm to its controlling entity.

History reflects cycles; between 2015 and 2016, the industry also witnessed a wave of transformations triggered by high inventory levels and extreme competitionA subsequent recovery emerged post-2016, but recently, there has been a resurgence in the number of firms pursuing transformation strategies.

So, what can real estate companies pursue beyond property development? Reflections from the previous transformation wave indicated that many companies explored sectors ranging from telecommunications and finance to high-tech industries, while the current trend leans toward emerging sectors like new energy and artificial intelligence.

Reports from Huatai Securities suggest a deeper reform wave may be brewing in the real estate sector, as companies, facing renewed operational pressures and the stringent new delisting regulations, move toward passive transitionsData reveals 51 companies may have latent transformation ambitions, potentially signaling new investment opportunities.