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

Country Garden Holdings, China’s largest developer by gross 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 primary six months of the 12 months following a decline in gross sales.

The loss is a turnaround from the RMB 1.91 billion web revenue it reported for a similar interval final 12 months, with the corporate pinning the blame on “multiple unfavorable factors” within the trade which affected its working setting. The revenue warning got here simply two days after the corporate didn’t pay $22.5 million in curiosity due on two units of US greenback bonds.

Country Garden had already warned in a inventory trade submitting on July 31 that it will endure a loss for the primary half of the 12 months, with out offering exact 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 corporate mentioned in a inventory trade submitting on Thursday.

Following the announcement, Country Garden shares dropped by one other 5.77 p.c on Friday to HK$0.98 (US$0.13) from its HK$1.04 shut on Thursday. Analysts with Morningstar minimize their truthful worth estimate for the corporate’s shares to HK$1.20 from HK$2.80, citing issues over the corporate’s potential for default.

Credit Downgraded

Even earlier than the revenue warning, Moody’s Investors Service on Thursday downgraded the corporate’s company household score (CFR) to Caa1 from B1 and revised its senior unsecured score 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 chairman Kaven Tsang mentioned in a press release.

Moody’s additionally gave Country Garden a unfavorable outlook on account of uncertainty surrounding its potential to fulfill its obligations within the subsequent six to 12 months. The credit standing company mentioned a score improve may very well be potential if the corporate improves its gross sales, though it forecast that the corporate’s gross sales will decline to round RMB 180 billion for the complete 12 months 2023 from RMB 210 billion within the earlier 12 months.

From January to July this 12 months, China’s largest developer already noticed a 35 p.c decline in its contracted gross sales attributable to shareholders to RMB 140.8 billion.

Task Force Solution

Country Garden mentioned it has arrange a particular process power to be led by chair Yang Huiyan, and has additionally created an “operation mechanism for coordination and efficient decision-making” to assist take care of the disaster.

The firm identified that it has already taken steps to make sure liquidity — together with securing and injecting additional cash into its operations and minimizing its expenditures. Country Garden mentioned it additionally acquired help from its chairman, who had contributed HK$38.6 billion by means of loans and share purchases, together with different contributions. Country Garden mentioned its workers — “with senior management taking the lead” — additionally took a pay minimize to scale back prices, with out offering additional particulars.

However, the corporate’s restricted alternatives for exterior fund had been underlined on 1 August when Country Garden abruptly cancelled a deliberate HK$2.34 billion share placement.

Despite the potential RMB 55 billion loss, the corporate mentioned it should “spare no effort” to make sure well timed supply of its initiatives nationwide.

Default and Destiny

While Country Garden aimed to sooth investor fears on Friday and promised to ship higher gross sales, Morningstar Equity Analyst Jeff Zhang in a notice mentioned that present market circumstances usually are not working within the firm’s favor.

While China’s housing market began the 12 months on an upswing, dwelling gross sales by the nation’s prime 100 builders fell 28.1 p.c in June from a 12 months earlier, based on information from China Real Estate Information Corp.

Morningstar sees Country Garden’s concentrate on China’s smaller markets working towards it as restoration is anticipated to be led by the nation’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 mentioned.

“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.