China hailed a property developer with $64 billion in revenue as a role model. Now the country’s property crisis threatens to send it into default too
2023-08-10 - Scroll down for original article
Company: Country Garden
Country Garden is one of China's largest privately owned property developers. The company has been considered a model developer, avoiding default during China's property crisis and delivering audited results on time. However, the company is now facing financial difficulties and is at risk of defaulting on its bonds. This has raised concerns about the overall health of the Chinese property sector.
The article highlights that Country Garden failed to make a $22.5 million interest payment on its dollar-denominated bonds. If the payment is not made within the 30-day grace period, the company will be in default for the first time. The struggle to address even a modest coupon payment indicates the extent of the company's cash crunch. The article also mentions that Country Garden warned of a net loss in the first half of 2023, blaming it on the downward slide in home prices.
The overall sentiment of the article is negative towards Country Garden. It suggests that if the largest privately owned developer in China goes down, it could trigger a crisis of confidence in the property sector. The article also highlights the decline in Country Garden's stock price, down over 60% since the start of the year.
Historically, news of financial difficulties and potential default has had a negative impact on the stock price of companies in the property sector. Investors tend to react negatively to uncertainties and concerns about the financial health of the company. In the case of Country Garden, the stock price has already declined significantly since the start of the year, indicating that investors have been cautious about the company's prospects.
The article suggests that investor sentiment towards Country Garden has been negatively impacted by the news of the potential default. The decline in the stock price and the trading of the bonds at just 8 cents to the dollar indicate that investors have priced in the possibility of a default. The cancellation of a $300 million share sale further adds to the concerns about the company's financial situation.
Country Garden's main competitor in the Chinese property sector is Evergrande Group. Evergrande's default in 2021 marked the start of China's property crisis. While Country Garden has been considered more financially prudent than Evergrande, the overall slowdown in the property sector has affected both companies. The article suggests that Country Garden's focus on China's poorer areas may be backfiring, as home price declines have been steeper in less developed cities.
The potential risk factors for Country Garden include the company's cash crunch, potential default on bonds, and the overall slowdown in the Chinese property sector. The decline in home prices and the possibility of easing restrictions on property purchases in wealthier cities could further impact the company's performance. The article also mentions the company's net loss and the charges incurred from writing down the value of its properties.
The news article on Country Garden highlights the company's financial difficulties and potential default on its bonds. The negative sentiment towards the company and the decline in its stock price indicate investor concerns about its financial health. The overall slowdown in the Chinese property sector and the decline in home prices pose additional challenges for the company. Investors should closely monitor the company's financial situation and the broader property market in China before making any investment decisions.
This financial report is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with a financial professional before making any investment decisions.
Country Garden was supposed to be a survivor of China’s property crisis. Officials hailed the company, led by chair Yang Huiyan, as a model developer. It avoided default even as competitors missed payments in late 2021 and early 2022. It delivered its audited results on time, while auditors were busy bailing on the sector. And investors were hopeful that Country Garden, which generated $64 billion in revenue last year, would benefit from Beijing’s promised support measures for the housing market. Yet now China’s property crisis is getting so bad that even this role model is now under threat, and it doesn’t bode well for the industry. “If Country Garden, the biggest privately owned developer in China goes down, that could trigger a crisis in confidence for the property sector,” Edward Moya, a senior market analyst for Oanda, wrote in a Tuesday note. On Tuesday, Country Garden confirmed that it failed to make a $22.5 million interest payment on some of its dollar-denominated bonds. If it doesn’t pay within a 30-day grace period, it will be in default for the very first time. “The developer’s struggle to address even a modest coupon payment underscores the extent of its cash crunch,” Sandra Chow, head of Asia-Pacific research at CreditSights, told the New York Times. The bonds in question are now trading at just 8 cents to the dollar, according to the Wall Street Journal citing Tradeweb data, a sign that traders have all but priced in a default. In a stock filing to Hong Kong’s exchange on July 31, the developer had warned of a net loss in the first half of 2023, down from a net profit of $264 million in the previous year’s period. It blamed the loss on charges incurred from writing down the value of its properties following a downward slide in home prices. In its filing, Country Garden said it would “actively seek guidance and support from the government and regulatory authorities.” The very next day, however, the developer abruptly canceled a $300 million share sale, citing a failure to come to a “final agreement.” Story continues Investors now fear that Country Garden could be the next major developer to fall in China’s already yearslong property crisis. Shares in the developer are down by over 60% since the start of January. Country Garden vs. Evergrande Founded in 1992, Country Garden stood in contrast to China Evergrande Group, the massive property developer whose default in 2021 arguably marked the start of China’s property crisis. Evergrande, at one point China’s largest developer, loaded up on debt to fuel its rapid expansion. The company splurged on big, expensive projects, like Ocean Flower Island, a $35 billion set of artificial islands similar to Dubai’s Palm Jumeirah. Yet new rules on how much debt developers could hold sent Evergrande into a liquidity crisis, and the company defaulted on its foreign-held debt in December 2021. Other developers, like Kaisa Group and Shimao Group Holdings, also defaulted on their payments. Last month, Evergrande finally revealed that it has lost a combined $81 billion in 2021 and 2022. The developer also reported $340 billion in liabilities, including $85 billion in more short-term borrowings. Unlike Evergrande, investors saw Country Garden as far more financially prudent. The developer didn’t borrow as heavily as its peers, and focused on building affordable homes in China’s less prominent and less developed cities. The developer had $199 billion in liabilities at the end of 2022, according to Bloomberg. Still, Country Garden could not escape the overall slowdown in China’s property sector, and the developer was forced to report a $900 million loss for 2022 after revenue slumped by a fifth. Yet the hopes of Country Garden’s investors had initially been buoyed by official promises of support for the property sector late last year. The sector received access to billions of dollars in loans from Chinese state-owned banks, as part of a broader scheme to provide liquidity to developers. Now, more than halfway through 2023, the story is far different. Home prices are falling again: An official index of home prices in 70 cities reported a 2.2% year-on-year decline last month, and investment bank Goldman Sachs is warning of “persistent weakness” in the real estate sector. Country Garden’s decision to focus on China’s poorer areas may also be backfiring, since home price declines have been steeper in less developed cities. Wealthier cities are also considering easing restrictions on property purchases, threatening to soak up demand from low tier cities, which account for 70% of national new home sales volume, analysts at Nomura noted in a report last week. 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