China’s Country Garden Warns of $7.7B Loss as Sales Slide

Country Garden Holdings, China’s largest developer by sales in 2022, warned late Thursday that it expects to report a loss of RMB 45 billion to RMB 55 billion ($6.26 billion to $7.65 billion) for the first six months of the year following a decline in sales.

The loss is a turnaround from the RMB 1.91 billion net profit it reported for the same period last year, with the company pinning the blame on “multiple unfavorable factors” in the industry which affected its operating environment. The profit warning came just two days after the company failed to pay $22.5 million in interest due on two sets of US dollar bonds.

Country Garden had already warned in a stock exchange filing on July 31 that it would suffer a loss for the first half of the year, without providing precise estimates.

“The expected net loss was mainly due to the decrease in gross profit margin of the real estate business and the increase in impairment of property projects as a result of the decline in sales in the real estate industry, as well as the expected foreign exchange loss resulted from foreign exchange fluctuations,” the company said in a stock exchange filing on Thursday.

Following the announcement, Country Garden shares dropped by another 5.77 percent on Friday to HK$0.98 (US$0.13) from its HK$1.04 close on Thursday. Analysts with Morningstar cut their fair value estimate for the company’s shares to HK$1.20 from HK$2.80, citing concerns over the company’s potential for default.

Credit Downgraded

Even before the profit warning, Moody’s Investors Service on Thursday downgraded the company’s corporate family rating (CFR) to Caa1 from B1 and revised its senior unsecured rating to Caa2 from B1.

“The downgrade reflects Country Garden’s heightened liquidity and refinancing risks in view of its deteriorated liquidity and financial flexibility, sizable refinancing needs and still-constrained access to funding,” Moody’s senior vice president Kaven Tsang said in a statement.

Moody’s also gave Country Garden a negative outlook due to uncertainty surrounding its ability to meet its obligations in the next six to 12 months. The credit rating agency said a rating upgrade could be possible if the company improves its sales, although it forecast that the company’s sales will decline to around RMB 180 billion for the full year 2023 from RMB 210 billion in the previous 12 months.

From January to July this year, China’s largest developer already saw a 35 percent decline in its contracted sales attributable to shareholders to RMB 140.8 billion.

Task Force Solution

Country Garden said it has set up a special task force to be led by chair Yang Huiyan, and has also created an “operation mechanism for coordination and efficient decision-making” to help deal with the crisis.

The company pointed out that it has already taken steps to ensure liquidity — including securing and injecting more cash into its operations and minimizing its expenditures. Country Garden said it also received support from its chairman, who had contributed HK$38.6 billion through loans and share purchases, along with other contributions. Country Garden said its employees — “with senior management taking the lead” — also took a pay cut to reduce costs, without providing further details.

However, the company’s limited opportunities for external fund were underlined on 1 August when Country Garden abruptly cancelled a planned HK$2.34 billion share placement.

Despite the potential RMB 55 billion loss, the company said it will “spare no effort” to ensure timely delivery of its projects nationwide.

Default and Destiny

While Country Garden aimed to sooth investor fears on Friday and promised to deliver better sales, Morningstar Equity Analyst Jeff Zhang in a note said that current market conditions are not working in the company’s favor.

While China’s housing market started the year on an upswing, home sales by the country’s top 100 developers fell 28.1 percent in June from a year earlier, according to data from China Real Estate Information Corp.

Morningstar sees Country Garden’s focus on China’s smaller markets working against it as recovery is expected to be led by the country’s largest hubs. “[Country Garden] remains heavily exposed to projects in lower-tier cities, which we do not believe will see a material sales improvement due to exposed homebuying sentiment,” Zhang said.

“While the firm has not massively acquired land parcels in the first half, we forecast that most of its existing projects should post lower margins given faltering selling prices and the tempered pace of turnover,” he added.