Country Garden, one of China’s largest property developers and a colossus in the industry, has issued a warning that it may post a net loss of up to $7.6 billion for the first half of the year, underscoring the significant challenges confronting the world’s second-largest economy.
The recent official data revealed China’s first deflation in over two years, accompanied by a substantial decline in exports and a historic high in youth unemployment.
Shares of Country Garden Holdings experienced nearly a 10% decline during Hong Kong trading on Friday.
The company stated that it is anticipating a net loss ranging from approximately RMB45 billion to RMB55 billion for the first six months of 2023, a stark contrast to the $265 million profit recorded during the same period the previous year.
To address these issues, the company has established a special task force, led by its chairman Yang Huiyan, to strategize a turnaround.
Furthermore, Moody’s, the credit rating agency, recently downgraded Country Garden’s rating due to heightened liquidity and refinancing risks.
Bonds, Shares of Country Gardens Crashed Over Potential Loss Announcement
Country Garden Holdings Co.’s bonds and shares have plunged this week after bondholders failed to receive coupon payments of two dollar notes by an initial deadline, raising concern it will be the next giant to default.
Late on Thursday, the company revealed the depth of its funding challenges by saying it expects to post a net loss of 45 billion yuan to 55 billion yuan ($7.6 billion) for the first half of 2023. That compares with earnings of 1.91 billion yuan a year earlier. On Friday, local media Yicai reported Country Garden is preparing for restructuring and has hired a financial adviser, citing unidentified people.
Country Garden’s financial struggles are confirming investors’ worst fears about the nation’s vast property market, which has resumed a downturn after a brief first-quarter rebound. Home sales tumbled the most in a year in July, making it harder for real estate firms to get cash needed to alleviate the credit crisis. Failure by Country Garden to pay its debts would pummel fragile investor sentiment just as Beijing seeks to revive the troubled property market.
“Country Garden may have willingness to pay its debts, but it is too cash-strapped,” said Monica Hsiao, founder and chief investment officer of Triada Capital. “Short of a positive policy surprise, restructuring is likely only a matter of time.”
Investors are pricing in a worst-case scenario. A Country Garden dollar bond due January has fallen 14.7 cents to 8.7 cents this week, according to data compiled by Bloomberg. In December, it was trading at 75 cents. The firm’s debt was downgraded three notches Thursday by Moody’s Investors Service to Caa1 from B1.
The company’s shares fell as much as 14% Friday to HK$0.89, on course to close below HK$1 for the first time ever. It has tumbled 65% this year, the worst performer on Hong Kong’s Hang Seng Index. The firm didn’t respond to requests for comment by Bloomberg.
China raises concerns about the pace of recovery
The deteriorating economic situation in China has raised concerns about the pace of recovery after the pandemic.
Notably, China’s exports plunged by a larger-than-expected 14.5% in July compared to the previous year, and the country is grappling with challenges in its housing market and escalating local government debt.
These economic challenges have led US President Joe Biden to label China’s situation as a “ticking time bomb,” emphasizing the country’s mounting unemployment and aging workforce.
The struggles faced by China’s property market were further highlighted by Evergrande, once the nation’s largest real estate firm, which reported combined losses of $81.1 billion for 2021 and 2022.
The company, burdened with an estimated $300 billion in debt, reflects the profound impact of the property market crisis on China’s economy in recent years.
Headquartered in the southern city of Foshan in Guangdong province, Country Garden was China’s largest developer by contracted sales from 2017 — when it took the top spot from Evergrande — through 2022. The company dropped to sixth place this year as its sales slumped. The firm focused on building housing developments in lower-tier cities, which have been harder hit by the slowdown than first-tier cities such as Beijing and Shanghai.
“Due to the recent deterioration of sales and refinancing environment, the available funds in the book of the company have been continuously reduced, resulting in a phased liquidity pressure,” Country Garden said in Thursday’s statement.
