This aerial photo taken on Oct. 31, 2021, shows a logo of Chinese developer Country Garden Holdings on top of a building in Zhenjiang, in China's eastern Jiangsu Province. STR/AFP via Getty Images
China’s largest private-sector developer, Country Garden (02007.HK), was recently downgraded from investment level due to its sluggish cash flow, closing to a debt default. The real estate giant has launched several rounds of self-help efforts since last year, including cutting the annual salary of its founder by 97 percent.
HSBC Research in an October report downgraded Country Garden’s rating from “buy” to “hold,” in the light of its cash flow dramatically slowing down and financing pressure further escalating in the future, Hong Kong-based Oriental Daily News reported on Oct. 28.
Country Garden led all real estate companies with sales of 354.29 billion yuan ($49.6 billion) and 43.64 million square meters of sales area from January to September, according to data by China Index Academy on Sept. 30.
Even seen as the leader in the real estate industry, Country Garden has been suffering from a pressing operational and debt crisis.
Financial Dilemma
On Sept. 16, Country Garden released its interim financial report for 2022 with a net profit of 612 million yuan ($86 million), a roughly 96 percent plummet compared to the net profit of 15 billion yuan ($2.1 billion) in the same period last year.
Country Garden predicted its sharp decline on Aug. 18, blaming “a tough business environment in the real estate sector” and “the ongoing epidemic.”
On Aug. 3, Fortune released the Global 500 for 2022, Country Garden ranked 138th, the second among the Chinese real estate companies on the list. However, the company is on the verge of debt faults.
As of June 30, Country Garden’s current liabilities mounted to 1.339 trillion yuan ($196 billion), along with non-current liabilities, totaling 1.588 trillion yuan ($230.9 billion) as stated in its financial report. Besides, Country Garden has a huge amount of off-balance sheet debt.
This seems to be the history of Evergrande repeating itself. Notable as the world’s most indebted developer, Evergrande (03333.HK) had ranked in the Global 500 for six consecutive years since 2016 and climbed to 122nd in 2021, the year, meanwhile, that saw it being crippled by a debt crisis that amounted to $300 billion.
Moody’s withdrew its credit ratings on Evergrande and another builder Kaisa Group (1638.HK) on Oct. 11, citing insufficient information, reported The Wall Street.
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
Efforts for Survive
In the wave of price cuts in the housing market starting from late September, Country Garden’s property in Hengyang of Hunan Province was rated “too cheap to imagine” by netizens. The 2018 annual net price of 7,892 yuan (about $1,100) per square meter had fallen to 5,480 yuan (about $760) per square meter in February, a 30 percent drop, according to an Oct.6 real estate agent report on the Chinese portal site Tencent.
In addition to price reductions to promote sales, Country Garden has also put premium assets on the market. For example, a 26 percent stake in an international financial city project in Tianhe District, Guangzhou of Guangdong Province, even though it is still under construction and is expected to be completed by 2026, would sell to Guan Hongyi, chairman of the catering giant Jiumaojiu (09922.HK).
Its self-save efforts included a significant reduction in the annual salaries of the company’s directors, which took effect on Sept. 7. The company’s interim annual report disclosed that the chairman of the board, Yang Guoqiang, whose annual salary shrunk from 10 million yuan (about $1.4 million) to 300,000 yuan (about $42,000), a mere 3 percent of the original salary; other directors received a 75 percent or 80 percent cut in annual salary.
Country Garden has also streamlined its units, with 106 regional companies being consolidated into 65 in the organization portfolio at the end of 2021, a compression of about 40 percent. Furthermore, It has made several offers to repurchase bonds in 2022. As of Oct. 14, the cumulative amount of domestic bonds repurchased reached 325.12 million yuan (approximately $45.5 million).
Country Garden is second only to Evergrande in terms of the size of its overseas U.S. dollar debt holdings. Like many Chinese property developers, Country Garden has been developing for years by raising debt.
As early as June 22, Moody’s, one of the world’s top three rating agencies, had downgraded Country Garden’s rating outlook from “under review” to “negative.” At that time, Country Garden’s share price was around HK$4.6 (about $0.6). It has since dropped to HK$1.39 (about $0.18) as of Oct. 21.
Country Garden, founded in 1992, was listed in Hong Kong on April 20, 2007, with a share price issued at HK$5.38 (about $0.7) and closed at HK$7.27 (about $0.95) on that day; the market value of total assets exceeded HK$116 billion (about $15 billion). The founder Yang Guoqiang’s second daughter, then 25-year-old Yang Huiyan, became China’s new richest person with the largest shareholding according to Chinese news media.
Pedestrians walk past an unfinished building in Beijing on March 18, 2010. Frederic J. Brown/AFP via Getty Images
Housing Market Prospects
Frank Tian Xie, the John M. Olin Palmetto Chair Professor in Business and Professor of Marketing University of South Carolina Aiken, told The Epoch Times that “almost all of China’s top 100 real estate enterprises are at risk of debts defaults due to excessive investment and blind expansion.”
In the hope of stimulating home buying, around 200 provinces and cities issued hundreds of incentive measures during the third quarter of this year, including lowering mortgage rates, but both the supply and demand sides cannot respond well, said a report by China Index Academy published on Oct. 2.
One of the factors affecting sales performance, according to the report, would be the accumulated unfinished buildings left by real estate developers.
Xie said that the outlook for the Chinese property market would be even poorer amid the nation’s economic downturn.
Ellen Wan contributed to this article.
Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.
