Plummeting December Sales Worsen Country Garden’s Woes

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

Following the biggest drop in sales in at least six years in October last year, Country Garden reported another month of dismal performance in December, as its contracted sales less than halved year-on-year, exacerbating the beleaguered property developer’s woes.

According to a brief filing of the unaudited operating figures for December 2023 to the Hong Kong Stock Exchange on Jan. 4, “the Company achieved contracted sales attributable to the shareholders amounted to approximately RMB6.91 billion [and a sales of] approximately 0.68 million square meters.”

This represents over a 68 percent drop in year-on-year revenue sales and about a 76 percent drop in yearly volume sales, according to analysts.

Last year’s contracted sales totaled 174.3 billion yuan (about $24.5 billion), a 51 percent slide from the previous year.

Before plunging to seventh place in 2023, the developer had been the top builder in the nation by contracted sales for a number of years. With over 3,000 active housing projects, Country Garden could have a more significant effect on the housing market than the 2021 financial collapse of China Evergrande Group.

According to company filings, contracted sales fell 81.1 percent year-on-year in October, following a dip of 80.7 percent in September.

Country Garden, which has projects in almost every province in China, forecasted the drop in sales after warning in August of “major uncertainties” around the redemption of its bonds.

The company had defaulted on a U.S. dollar-denominated bond due to a delayed interest payment of $15.4 million in October, which resulted in cross defaults across Country Garden’s other bonds.

According to official estimates, the company had over $15.2 billion in outstanding international debts and loans at the end of June. It is one of dozens of other Chinese property firms, including Evergrande, wobbling to stay afloat as its cash crunch worsens daily.

The offshore debts aside, Country Garden owed the equivalent of $187 billion to creditors as of June, which includes contract liabilities amounting to $83 billion, the majority of which was the value of units it had yet to deliver to homebuyers.

In a filing with the Hong Kong Stock Exchange earlier in October, Country Garden also stated that it had failed to make a $60 million principal payment and did not anticipate meeting all payment commitments outside of China when due or within assigned grace periods.

Consequently, its bondholders had been organizing discussions to urgently address the situation with the company, leaving stakeholders wondering what lies ahead.

Hence, the continuing drop in sales numbers underscores the grim days facing Country Garden.

The focus now will be on how the company’s debt restructuring will proceed, according to an analyst’s note by CreditSights.

Tough Times Ahead

China has a severe real estate problem, and its housing stock under construction could take more than 10 years to clear, Hao Hong, the chief economist and partner at GROW Investment Group, told CNBC Streets Signs Asia on Thursday.

Home sales and prices have remained sluggish as real estate developers have been mired in a spiraling debt crisis since 2020, when Beijing initiated a broader deleveraging of the once-bloated property sector, which accounts for roughly one-third of China’s economic activities directly and indirectly.

According to the China Index Academy, overall sales of China’s top 100 developers fell 17.3 percent year-on-year to 6.3 trillion yuan (about $883.7 billion) in 2023, as property companies focused on cost management and stable development rather than aggressive expansion.

However, while Beijing has initiated a round of easing measures since August by cutting mortgage rates, lowering down payment ratios, and easing restrictions on home transactions, they have not been enough.

As the nation’s property sector continues to consolidate and more private developers fall victim to the sector’s worsening debt crisis, private surveys reveal that state-affiliated developers have begun to dominate China’s home sales and land acquisition market.

According to a Reuters report on Jan. 2 that quoted China Index Academy, the top six home sellers last year were state-owned or state-backed developers, with Poly Developments, China Vanke, and China Overseas Land & Investment leading the league table.

Some analysts predict that the trend will intensify this year. This is why it should come as no surprise that Country Garden’s sales momentum will likely remain weak based on prevailing market dynamics, said investment bank HSBC in a client note late in October.

More Warning Signs

Meanwhile, in yet another sign of trouble, Beijing’s Intermediate People’s Court accepted the bankruptcy liquidation of Zhongzhi Enterprise Group, the Chinese shadow banking giant, according to a statement on the court’s WeChat account on Jan. 5.

Chinese officials announced in November that they had begun criminal investigations into the group’s money management operation. The company previously disclosed a $36.4 billion gap on its balance sheet.

Shadow banks, like Zhongzhi, are unregulated financial institutions that pool household savings to give out loans and invest in real estate, equities, bonds, and commodities.

Despite the recent troubles in the shadow banking sector following the property market collapse and the debt crisis, Zhongzhi and its affiliates extended funding to problematic developers and acquired assets from companies such as China Evergrande Group.