Country Garden Plunges After Bonds Suspended

Morgan
Stanley
lowered
its
recommendation
on
the
value
to
“underweight”,
highlighting
increased
risks
of
deterioration
in
liquidity
which
“could
lead
to
a
default
in
the
short
term.
This
could
further
deteriorate
the
value
of
the
company’s
assets
and
its
operations
and
take
years
to
rectify
the
situation.”

The
news
weighed
on
Chinese
equity
markets
at
the
start
of
the
week
and
the
yuan
has
returned
to
November
2022
lows.

Country
Garden
is
a
privately
owned
real
estate
giant
that
is
listed
among
the
Forbes
500
largest
companies
in
the
world.

Its
boss,
Yang
Huiyan,
was
until
recently
the
richest
woman
in
Asia.

In
2022,
the
company
achieved
a
turnover
of
nearly
£52
billion,
compared
to
£4.48
billion
in
2012,
and
generated
a
loss
of
£736
million.

On
the
stock
market,
Country
Garden
withstood

the
difficulties
encountered
by
China
Evergrande
in
2021,
before
experiencing
a
first
significant
stock
market
correction
in
2022,
which
it
partly
overcame
at
the
end
of
the
year.

The
group,
which
has
long
been
deemed
to
be
financially
sound,
was
unable
to
make
interest
payments
on
two
offshore
bonds
on
August
7.

Country
Garden
has
a
30-day
grace
period
and
risks
default
in
September
if
it
doesn’t
pay.

According
to
market
sources,
the
company
has
engaged
leading
investment
bank
CICC
bank
to
prepare
the
financial
restructuring
of
its
financial
debts,
amounting
to
£31
billion
at
the
end
of
2022.

Like
Evergrande,
Country
Garden
going
bankrupt
would
have
catastrophic
repercussions
on
the
Chinese
financial
system
and
economy,
which
is
already
struggling
to
regain
a
more
sustained
growth
dynamic
after
years
of
zero-COVID
policy.
President
Joe
Biden
described
China
as
a
“ticking
time
bomb”
amid
a
run
of
poor
data
and
fears
the
country
may
be
entering
a
period
of
deflation.

Country
Garden
already
issued
a
profit
warning
on
August
10,
anticipating
a
net
loss
of
around
45
to
55
billion
yuan
(between
£4.8
and
£6
billion)
for
the
first
six
months
of
the
year
2023
(against
a
profit
of
1.91
billion
yuan
for
the
same
period
of
the
previous
year).

“Since
2021,
the
industry
has
entered
an
unprecedented
difficult
period
with
multiple
adverse
factors,
resulting
in
severe
difficulties
and
challenges
for
industry
sales
and
open
market
financing,”
Country
Garden
said
in
a
statement.

The
company
invites
its
shareholders
to
“carefully”
read
the
press
release
which
will
accompany
its
half-year
results
at
the
end
of
August.

The
Morningstar
View
–
Analyst
Jeff
Zhang 

We
have
cut
our
fair
value
estimate
for
Country
Garden
Holdings
to
HKD
1.20
from
HKD
2.80
given
the
higher
weighted
average
cost
of
capital
on
potential
defaults
and
more
compressed
margins.
CGH
missed
a
$22.5
million
interest
payment
on
two
offshore
bonds
on
August
7,
fuelling
the
market’s
concerns
that
it
may
eventually
default
after
the
30-day
grace
period
as
evidenced
by
the
plunge
in
its
bond
and
share
prices.

While
management
cited
liquidity
pressure
due
to
a
deterioration
in
sales
and
the
refinancing
environment,
they
underscored
an
ongoing
effort
to
arrange
coupon
payments.
That
said,
we
remain
cautious
about
the
likelihood
of
CGH’s
default,
given
its
weak
sales
and
elevated
overseas
funding
costs.
As
such,
we
raised
our
assumptions
for
CGH’s
cost
of
debt
and
cost
of
equity
by
550
basis
points
and
200
basis
points,
respectively,
leading
to
WACC
rising
to
12.8%
from
9.5%,
according
to
our
prior
estimate.
In
addition,
following
CGH’s
profit
warnings,
we
think
pressured
housing
prices
in
lower-tier
cities
have
further
eaten
into
CGH’s
profitability
and
lowered
our
2023
gross
margin
forecast
to
6.1%
from
9.9%.

We
think
CGH’s
missing
offshore
interest
payment
may
not
be
an
isolated
event
given
its
worsened
liquidity
status
currently
compared
with
the
end
of
2022.
For
the
first
half
of
2023,
the
firm’s
attributable
sales
value
has
tumbled
by
over
30%
year
on
year,
adding
to
the
pressure
on
operating
cashflow.
Also,
CGH’s
overseas
financing
on
the
debt
and
equity
front
has
been
muted
since
2023,
implying
that
the
firm
has
likely
used
its
cash
denominated
in
foreign
currencies.
Aside
from
coupon
payments
due
in
August,
we
estimate
that
CGH
needs
to
fulfill
at
least
$137
million
of
bond
interest
payments
through
the
rest
of
2023.

Without
additional
credit
support
from
Chinese
regulators
and
sizeable
financial
institutions,
CGH
should
continue
to
see
an
elevated
risk
of
defaulting
on
its
overseas
debt,
in
our
view.
Another
negative
for
CGH
is
that
management
expected
net
losses
for
the
first
half
of
2023,
mainly
due
to
a
gross
margin
decline,
inventory
impairment
increase,
and
foreign-exchange
losses.
CGH
remains
heavily
exposed
to
projects
in
lower-tier
cities,
which
we
do
not
believe
will
see
a
material
sales
improvement
due
to
depressed
homebuying
sentiment.

While
the
firm
has
not
massively
acquired
land
parcels
in
the
first
half,
we
forecast
that
most
of
its
existing
projects
should
post
lower
margins
given
faltering
selling
prices
and
the
tempered
pace
of
turnover.
The
recent
credit
event
may
further
dent
homebuyers’
confidence
in
CGH’s
ability
to
promptly
deliver
presold
projects,
in
our
view.
Hence,
we
revise
our
long-term
margin
assumptions
and
foresee
CGH
delivering
an
8.0%
gross
margin
in
2027
versus
15.0%
previously.

Note
published
on
August
10

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