Country Garden Posts Six-Month Loss of $6.7B, Acknowledges Future in Doubt

Country Garden Holdings posted a first-half loss attributable to shareholders of RMB 48.9 billion ($6.7 billion), reversing a RMB 612 million profit recorded a year earlier, as the embattled Chinese developer acknowledged for the first time that “material uncertainties” threaten its ability to continue as a going concern.

Country Garden’s revenue in the six-month period rose 39 percent year-on-year to RMB 226.3 billion, but deliveries of lower-margin homes and the provision for write-downs of projects placed great strain on profits, the Foshan-based homebuilder said late Wednesday in a filing with the Hong Kong stock exchange.

The company confirmed that it had failed to adopt timely measures as China’s property market underwent upheaval and had not grasped the risks associated with its disproportionately large investment in third-, fourth- and lower-tier cities.

“All these shortcomings have led to the most severe difficulty that the company has ever faced since its establishment,” Country Garden said. “The company felt deeply remorseful for the unsatisfactory performance. However, while reflecting on its faults, the company should not lose sight of the path ahead.”

Cash Burn

Country Garden’s net write-down of under-development and completed properties held for sale ballooned to RMB 40.3 billion in the January-June period — nearly eight times the year-earlier level. The company reported unrestricted cash and equivalents of RMB 101.1 billion, down from RMB 128.3 billion at the end of last year.

The cash balance should cover Country Garden’s RMB 69.5 billion in borrowings due within a year, said Morningstar analyst Jeff Zhang. But he cautioned that recent events suggest the company’s available cash may be inadequate for making principal and interest payments.

“Moreover, we foresee that subdued homebuyers’ confidence in CGH will be the main overhang on sales in the future, further affecting the firm’s ongoing cash flow,” Zhang said.

The developer chaired by Yang Huiyan revealed on 16 August that “significant uncertainties” existed regarding the settlement of onshore bonds with an issued amount in excess of RMB 14.6 billion ($2 billion).

The lion’s share of the debt is from a Shanghai-listed RMB 5.83 billion bond with a remaining balance of more than RMB 3.9 billion that comes due on 2 September. Bloomberg reported Tuesday that Country Garden has proposed a grace period of 40 calendar days for the maturing bond as it seeks to win creditor support to stretch payment into 2026.

Elevated Default Risk

Country Garden already missed $22.5 million in interest payments on a pair of offshore bonds in early August. There is a 30-day grace period for those obligations, but the developer has $397 million in offshore bonds maturing this year, plus $1 billion in USD notes due on 27 January.

“Given the continuing absence of USD-denominated bond interest payment, we believe CGH’s default risk remains elevated, barring substantial credit extension or financial support,” said Morningstar’s Zhang, who foresees negative earnings for the company through 2024.

In a bid to alleviate what it terms “phased liquidity pressure”, Country Garden has sought to raise cash through various asset sales. On Wednesday, the company announced an agreement to sell HK$270 million ($34.4 million) in new shares to Kingboard Holdings in order to make a loan payment to the Hong Kong-based laminates maker and property investor.

The shotgun share sale to Kingboard followed last Friday’s news that Country Garden would sell its 26.67 percent stake in a Guangzhou joint venture to its JV partner, state-backed China Overseas Land & Investment, for RMB 1.29 billion ($180 million).