Giant Chinese real estate country garden downgraded to ‘Hold’ with debt risks

China’s largest private-sector developer, Country Garden (02007.HK), was recently downgraded from investment grade due to weak cash flow, moving closer to default. The real estate giant has launched several rounds of self-help efforts since last year, including cutting its founder’s annual salary by 97%.

In an October report, HSBC Research downgraded Country Garden’s rating from ‘buy’ to ‘hold’, given the dramatic slowdown in its cash flow and funding pressure that will intensify in the future. Hong Kong-based Oriental Daily News reported on October 28. .

Country Garden topped all real estate companies with sales of 354.29 billion yuan ($49.6 billion) and 43.64 million square meters of sales area from January to September, according to data from the China Index. September 30 Academy.

Even considered the leader in the real estate sector, Country Garden is suffering from an urgent operational and debt crisis.

financial dilemma

On September 16, Country Garden released its 2022 interim financial report with net profit of 612 million yuan ($86 million), a drop of about 96% from net profit of 15 billion yuan (2, $1 billion) at the same time last year. year.

Country Garden predicted its sharp drop on August 18, blaming “a difficult business environment in the real estate sector” and “the ongoing epidemic”.

On August 3, Fortune released the Global 500 for 2022, Country Garden ranked 138th, second among Chinese real estate companies on the list. However, the company is on the verge of debt defaults.

As of June 30, Country Garden’s current liabilities stood at 1.339 billion yuan ($196 billion), along with non-current liabilities, totaling 1.588 billion yuan ($230.9 billion), as shown in its financial report. Additionally, Country Garden has huge off-balance sheet debt.

It seems to be Evergrande’s story repeating itself. Notable as the world’s most indebted developer, Evergrande (03333.HK) has ranked in the Global 500 for six consecutive years since 2016 and climbed to 122nd in 2021, the year, meanwhile, that l saw paralyzed by a debt crisis that amounted to 300 billion dollars.

Moody’s withdrew its credit ratings on Evergrande and another builder Kaisa Group (1638.HK) on October 11, citing insufficient information, The Wall Street reported.

Unfinished apartment buildings in the Phoenix City residential project, developed by Country Garden Holdings Co., in Shanghai, China on January 17, 2022. (Qilai Shen/Bloomberg via Getty Images)

striving to survive

In the wave of price cuts in the housing market from late September, the Country Garden property in Hengyang, Hunan province, was deemed “too cheap to imagine” by netizens. The 2018 annual net price of 7,892 yuan (about $1,100) per square meter fell to 5,480 yuan (about $760) per square meter in February, down 30%, according to a realtor report from October 6 on the Chinese portal site. Tencent.

In addition to price cuts to drive sales, Country Garden has also released premium assets. For example, a 26% stake in an international financial city project in Tianhe District, Guangzhou, Guangdong Province, although still under construction and expected to be completed by 2026, would be sold to Guan Hongyi, chairman of catering giant Jiumaojiu. (09922.HK).

His self-saving efforts included a significant reduction in the company’s directors’ annual salaries, which took effect on September 7. The company’s interim annual report revealed that board chairman Yang Guoqiang, whose annual salary has risen from 10 million yuan (about $1.4 million) to 300,000 yuan (about $42,000 ), barely 3% of the initial salary; other administrators received a reduction of 75 or 80% of their annual salary.

Country Garden also streamlined its units, with 106 regional businesses consolidated into 65 in the organization’s portfolio at the end of 2021, a compression of around 40%. In addition, it has made several bond buyback offers in 2022. As of Oct. 14, the cumulative amount of domestic bonds repurchased reached 325.12 million yuan (about 45.5 million U.S. dollars).

Country Garden is second only to Evergrande in terms of the size of its overseas US dollar holdings. Like many Chinese property developers, Country Garden has been growing for years in debt.

As of June 22, Moody’s, one of the three largest rating agencies in the world, had lowered Country Garden’s rating outlook from “under review” to “negative”. At that time, Country Garden’s stock price was around HK$4.6 (about $0.6). It has since fallen to HK$1.39 (about $0.18) as of October 21.

Country Garden, founded in 1992, was listed in Hong Kong on April 20, 2007, with a share price issued at HK$5.38 (approx. $0.7) and closed at HK$7.27 (approx. 0 $.95) that day; the market value of total assets exceeded HK$116 billion (about $15 billion). Founder Yang Guoqiang’s second daughter, then 25, Yang Huiyan, has become China’s new richest person with the highest attendance according to Chinese media.

Epoch Times Photo
Pedestrians walk past an unfinished building in Beijing on March 18, 2010. (Frederic J. Brown/AFP via Getty Images)

Housing Market Outlook

Frank Tian Xie, John M. Olin Palmetto Professor of Business and Professor of Marketing at the University of South Carolina Aiken, told The Epoch Times that “almost all of China’s top 100 real estate companies are at risk of payment default due to excessive investment and blind expansion.

Hoping to spur home buying, about 200 provinces and cities passed hundreds of stimulus measures in the third quarter of this year, including lower mortgage rates, but supply and demand cannot react well, according to a report by the China Index Academy published on October 2.

One of the factors affecting sales performance, according to the report, would be the accumulation of unfinished buildings left behind by property developers.

Xie said the outlook for China’s property market would be even bleaker amid the country’s economic slowdown.

Ellen Wan contributed to this article.

Kathleen Li

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Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is a professional engineer, registered in civil and structural engineering in Australia.

Lynn Xu

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Toya J. Bell