But why does Country Garden, China’s largest home builder by revenue from 2017 to 2022 and a company known for conservative debt management compared to its peers, find itself in such dire straits? Have you fallen into this?
Analysts say the company’s strategy to focus on China’s lower-tier cities, once a strength that propelled it to the top, has become an albatross as China’s housing market faces potential structural decline. .
“The company will face serious operational challenges amid the market decline,” said Edward Chan, director of corporate ratings at S&P Global Ratings.
“Even if repayments are not missed in the future, the company may face significant difficulties in selling homes as homebuyers may be concerned about the company’s ability to complete the project, and the company may not be able to resume normal operations. It will be difficult to restart.”
To understand why country gardens focused on small cities rather than Beijing or Shanghai, we need to look to their roots.
Founder Mr. Yang, who had little formal education and reportedly didn’t own his first pair of shoes until he was 17, got into real estate development by chance.
He joined a county-level construction company in his 20s and worked his way up to general manager in the early 1990s. In the face of a local government shutdown, he took the company private and shortly thereafter took on the company’s first residential development project after the bankruptcy of his major client.
Given its founder’s humble background, the company focused on China’s smaller cities, with many of its initial operations located in its home province of Guangdong.
When Country Garden went public in Hong Kong in 2007, his daughter Yang Huiyan became China’s richest person at the age of 26, with a reported fortune of US$16.2 billion at the time, according to Forbes magazine. . Mr. Yang was appointed sole chairman of the company in March after his father’s retirement. He will continue to serve as a special advisor to the company.
The company also benefited from China’s “slum redevelopment” policy, which began in 2008 by tearing down and replacing substandard housing across the country and providing subsidies to residents of lower-tier cities to buy new homes.
Country Garden’s annual profits increased 24 times during the first 10 years of the program, and the company expanded its footprint to every province in China except Guangdong. By that time, it was widely seen as the vanguard of mass housing in China.
But Chinese developers have taken on huge debts over the years to build at a breakneck pace across the country and expand beyond real estate into areas such as robotics and electric vehicles. Difficulties were looming.
The Chinese government’s adoption of the “three red lines” policy in 2020 to deleverage the real estate sector has led to some of the country’s largest developers buying land, paying suppliers and completing projects. It has become very difficult to borrow funds to do so.
By the end of 2021, Evergrande and several major developers had defaulted on offshore debt, and confidence in the real estate sector had declined.
Despite a 23% decline in profits in 2021, Country Garden outperformed many of its peers during what the company described as a period of “turbulence and upheaval” as the sector’s sales cooled and liquidity tightened. It was performing well. Sixty-eight percent of its revenue that year came from third- and fourth-tier cities in China, rather than cities like Beijing or Shanghai.
The worst is yet to come as markets brace for fallout from Country Garden’s debt
The worst is yet to come as markets brace for fallout from Country Garden’s debt
At the time, only about 19% of the total debt of 1.6 trillion yuan was corporate bonds and bank loans, of which 43% were related to pre-sale properties that were required to be delivered in the following year.
Unlike its debt-heavy peers, Country Garden was considered stable by many investors. When the Chinese government moved to support the sector last November, the company was one of the few developers to receive credit lines from state-owned banks.
Problems at Country Garden didn’t really surface until spring 2022, about four months after Evergrande defaulted on its first bond.
Country Garden sales fell by 42% in March of the same year, by a further 57% in April, and by 50% in May as developers faced pressure from lower expectations, weak sales and falling property prices. Diminished.
By the end of the year, Country Garden’s contracted revenue had fallen 36% to 357.5 billion yuan, reporting its first annual loss since going public 16 years ago and calling 2022 a “year like no other”. He said it was a big blow to the country’s real estate sector. We were experiencing a “harsh winter.”
Country Garden has lost HK$151 billion (US$19 billion) in market capitalization since its share price peaked on January 11 last year, before the cash crunch became public in August.
There were hopes that the sector would recover after the Chinese government abandoned its zero-corona policy earlier this year and lifted social distancing regulations across the country, with home sales for the top 100 developers in March It reached 660.9 billion yuan (511.5 billion yuan in the same period last year).
Gary Ng, senior economist at Natixis Asia Pacific, said: “Home sales in many cities slowed very sharply or actually declined in April. “This explains why we are in such a predicament.”
To avoid further losses, when Country Garden reported its annual results in March, it announced changes to its organizational structure and “increased focus on core areas in tier 1 and tier 2 cities, as well as tier 3 and 4 cities. “I will.” .
Tier 3 and 4 cities account for a large portion of China’s economy (equivalent to 60% of gross domestic product) and have been the focus of much attention for country gardens and other developers over the past decade. However, they face challenges such as economic slowdown and aging and shrinking populations.
“Despite projected population declines and (according to our estimates) significant price declines, a disproportionate share of construction continues to be concentrated in tier 3 cities. 2008-2018 While real estate construction may have contributed to boosting growth, our analysis suggests this has not been the case since 2018.”
In tier 3 cities, which accounted for about 80% of China’s construction three years ago, home prices fell by almost 20% from early 2021 to mid-2022, with overall home valuations in these cities decreasing. It is likely to fall by 15% per year. According to the paper, it is expected to reach 162 trillion yuan by mid-2022.
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At the annual results briefing earlier this year, Country Garden’s president Mo Bin vowed that the company would focus on core cities and gradually increase its investment portfolio and land bank in first-tier cities.
As of the end of last year, about 42 percent of the total floor space for future development was located in rural areas away from first- or second-tier cities. Previously, tier 3 and 4 cities accounted for over 62% of the company’s land bank.
As part of its turnaround efforts, Country Garden resumed bidding for land in tier 1 and tier 2 cities in April this year after being off the market for about 18 months. According to a May press release, the company has so far acquired six pieces of land worth 5.8 billion yuan.
“But the adjustment is too little, too late,” said Lawrence Lu, senior director and analytical manager of S&P Global Ratings’ China real estate and conglomerates team, adding that the company has no real estate assets as contract sales plummet. He pointed out that there was not enough cash flow to purchase.
In its interim report in August, Country Garden said it “failed to grasp the potential risks associated with disproportionately large investments” in lower-tier cities.
“If Country Garden survives, it will become a much smaller company,” said Andrew Collier, managing director of Orient Capital Research and author of “Country Garden.” Shadow banking and the rise of capitalism in China. “And there will be a lot of investors who will lose a lot of money.”
In addition, Country Garden is still working to deliver homes it has already sold, completing approximately 700,000 pre-sales last year and a further 278,000 sales in the first half of this year.
By comparison, China Vanke, China’s second largest developer, delivered around 280,000 sold homes in 2022 and 128,000 homes in the first half of 2023.
Country Garden posts interim loss of US$6.72 billion due to growing problems
Country Garden posts interim loss of US$6.72 billion due to growing problems
S&P’s Chan said a sharp decline in home sales, especially in lower-tier cities, along with deadline pressures are exacerbating Country Garden’s cash flow problems.
New home prices in Chinese cities fell at a faster pace in August than in July, with only 17 of 70 cities recording price increases last month, according to data from the National Bureau of Statistics. In July, there were 20 cities.
In response to the lackluster performance, credit rating agencies such as Moody’s Investors Service and Fitch Ratings have lowered their forecasts for contract home sales this year in recent days.
“As the population exodus continues, lower-tier cities, particularly economically weaker regions, will bear the brunt of the expected sales decline,” with contract sales expected to decline by about 5% over the next six to 12 months, Moody’s said. Then I see it.
Investment management firm Pimco said the business environment could remain challenging, especially in tier 3 and 4 cities, despite moves by the Chinese government to support the sector.
“What’s important is whether or not there is actual demand and population growth, and how the demographics will behave,” Stephen Chan, a portfolio manager at Pimco in Hong Kong, said at the company’s media summit held in London on September 13. The statement was made at the company’s media summit held in London on Sunday. As time goes on…I think this cycle may continue for a few more years. ”
Additional reporting by Peggy Sito
