Country Garden, China’s largest private property developer by sales, has posted a record loss of $7bn for the first half of 2023, as the country’s real estate sector faces a deepening crisis.
The company, which is controlled by billionaire Yang Guoqiang and his family, reported a net loss of Rmb44.9bn ($7bn) for the six months ended June 30, compared with a net profit of Rmb18.4bn in the same period last year. The loss was mainly due to a Rmb51.2bn impairment charge on its land bank and projects under development, reflecting the sharp decline in property prices and demand.
Country Garden’s revenue fell 16 per cent year on year to Rmb226.9bn, while its contracted sales dropped 8 per cent to Rmb308.8bn. The company’s gross margin, a measure of profitability, plunged to 11.6 per cent from 31.5 per cent a year ago.
The developer also faced a severe liquidity crunch, as its cash and cash equivalents fell 42 per cent to Rmb77.6bn, while its short-term borrowings rose 18 per cent to Rmb232.5bn. Its net debt ratio, which measures the level of indebtedness, soared to 186.9 per cent from 85.7 per cent at the end of 2022.
Country Garden struggles to cope with regulatory tightening and market downturn
The dismal results underscored the challenges facing Country Garden and other Chinese developers amid a regulatory crackdown on the property sector and a market downturn triggered by the debt woes of Evergrande, China’s second-largest developer by sales.
The Chinese government has imposed a series of measures to rein in the excessive leverage and speculation in the property market, such as the “three red lines” policy that caps the debt ratios of developers, and the “common prosperity” campaign that aims to reduce social inequality and curb luxury spending.
These policies have squeezed the financing channels and profit margins of developers, while also dampening the demand and confidence of homebuyers and investors. The situation worsened after Evergrande defaulted on its bond payments in September 2022, sparking fears of contagion and systemic risk in the financial system.
Country Garden has been trying to cope with the adverse environment by cutting prices, accelerating sales, reducing land acquisitions, diversifying its business segments, and improving its operational efficiency. However, these efforts have not been enough to offset the impact of the regulatory tightening and market downturn.
Country Garden faces uncertain outlook and rating downgrades
The outlook for Country Garden remains uncertain, as the company faces the risk of further rating downgrades, refinancing difficulties, and legal disputes.
In January 2023, Moody’s downgraded Country Garden’s corporate family rating to B1 from Ba3, citing its deteriorating credit profile and liquidity position. The rating agency also placed the company on review for further downgrade, indicating that it could lower its rating again if it does not improve its cash flow generation and debt reduction.
Country Garden also faces challenges in refinancing its maturing debt, as it has about $8.4bn of bonds due in 2023, according to Refinitiv data. The company has been trying to extend the maturities of some of its bonds by offering investors incentives such as higher coupons or equity conversion options, but it has not been able to complete all of its exchange offers.
Moreover, Country Garden has been involved in several legal disputes with its creditors, suppliers, contractors, and customers over unpaid bills, delayed deliveries, quality issues, and contract breaches. The company has said that it will try to resolve these disputes through negotiations or arbitration, but it cannot guarantee that it will not incur significant losses or liabilities as a result.