China’s Biggest Developer Country Garden Warns of 70% Profit Drop

Country Garden Holdings says that its net earnings are likely to have plunged by as much as 70 percent in the first half of 2022, as China’s deepening real estate crisis hammers the country’s largest developer.

Guangdong-based Country Garden issued a profit warning on Thursday estimating that its core net profit for the first six months of the year could range from RMB 4.5 billion to RMB 5 billion ($660-$740 million), which would be less than a third of the RMB 15.2 billion which it earned during the same period a year ago.

The developer led by farmer-turned-tycoon Yang Guoqiang traced the evaporation of its income to the “tough business environment” for real estate companies in China and the lingering impact of the COVID-19 pandemic on the sector. After the profit morning was issued in the early hours of Thursday, investors reacted by driving Country Garden’s share price down by 5.16 percent. The company’s stock has now lost 65 percent of its value since the start of the year.

“Country Garden’s profit warning shows the massive pressure on China’s real estate sector from tight regulations and a zero-COVID policy, especially for private developers,” said Gary Ng, an economist covering Asia Pacific for investment bank Natixis. “It means Country Garden will not be alone, and China’s real estate sector is far from out of the woods.”

Attributable Profit Down at Least 93%

Once considered to be among China’s healthiest property developers, Country Garden said it expects to achieve net profit attributable to shareholders of from RMB 200 million to RMB 1 billion for the first half, or just a fraction of its RMB 15 billion income in the same period last year.

The Foshan-based developer said sales revenues dropped amid a prolonged market downturn on the mainland, which accounts for the bulk of its business, and also pointed to a slowdown in construction work on its projects.

Its finances have been eroded further by a shrinking profit margin as well as impairment and foreign exchange losses. Despite its weak results, however, the company assured that its financial position remains secure and that its cash flow continues to be stable.

“The board is of the opinion that most of the above factors affecting profits were non-cash in nature, and the operation of the Group is in good condition with sufficient cash available and cash flow remains stable,” the company said in its disclosure.

The developer booked contracted sales worth RMB 34.5 billion in June – down 35 percent from the same month last year – which contributed to a 38.5 percent drop in contracted sales during the first half, when it tallied deals worth just RMB 184.8 billion for the six month period, according to data from China Real Estate Information Corporation.

Despite the precipitous drop, Country Garden continued to rank as the top Chinese developer by contracted sales during the first half of 2022, followed by state-owned Poly Real Estate in second place.

Country Garden’s underperformance has continued into the second half with the company reporting RMB 30.11 billion in contracted sales for July, which was down more than 40 percent from the same month in 2022.

Sector Outlook Bleak

Country Garden’s 70 percent earnings implosion is more than double the 30 percent decline which JP Morgan Chase analysts predicted for China’s real estate industry as a whole earlier this week, as more developers report their first half earnings in the coming days.

Natixis’ Ng said home sales and property investments remained sluggish for the whole sector and noted that the lower mortgage rates and heightened policy support provided by the government in recent weeks have so far proved insufficient to restore confidence in the market

“It is unlikely to see any strong recovery in corporate profit in 2022 in the real estate sector,” he said.

Samuel Hui, a director with the Asia Pacific corporates team at Fitch Ratings, said a quick recovery will be difficult to achieve as developers continue to suffer from constrained funding sources locally and abroad, while weak market sentiment dampens sales.

“The key to a sustained recovery in the sector is a restoration of homebuyer confidence and stabilisation in sales,” Hui told Mingtiandi. “Without a rebound in sales, we believe cash flow pressure may only ease in 2H23, taking into account the construction cycle and the fact that sales began to decline in 2H21.”

Junk Credit Rating

Fitch earlier this week lowered Country Garden’s credit rating from BBB- to BB+. The downgrade moved the mainland property giant from investment grade to a junk status associated with heightened credit risk.

Fitch said the company’s “adequate” liquidity buffer is being tested by weak sales while deteriorating capital market conditions limit its access to onshore funding sources. The credit agency expects Country Garden’s contracted sales attributable to shareholders for the full year of 2022 to drop 30 percent from a year earlier, before levelling out in 2023 as China’s property crisis persists.

Hui said Fitch is keeping a “Rating Watch Negative on Country Garden’s ratings, as we see a heightened probability of a rating downgrade over a relatively short period.”

Fitch’s competitors at Moody’s Investors Service had already downgraded Country Garden to junk status during June.

In a scramble to maintain its cash reserves and cover maturing debt, the developer has been raising funds since the start of the year, including announcing a plan late last month to sell HK$2.83 billion (then $361 million) in new shares at a 13 percent discount. In January, Country Garden issued $500 million in convertible bonds.