Country Garden Holdings Faces Liquidity Scrutiny Ahead of H1 Results Amid Property Sector Turmoil

 

In the heart of China's economic landscape, the focus is now squarely on Country Garden Holdings (2007.HK), the nation's largest private property developer, as it gears up to release its first-half results on Wednesday. Against the backdrop of a tumultuous property sector and economic uncertainty, the market is eager to gauge the extent of Country Garden's financial challenges.

The spotlight on the company intensified this month when it failed to meet two dollar coupon payments and sought to extend repayment for an onshore private bond, revealing the liquidity stress it faces. This situation has exacerbated concerns about the ripple effect across China's struggling property sector and the broader economy.

By the end of 2022, Country Garden had accrued total liabilities of approximately $194 billion. The firm has already signaled a substantial net loss of up to 55 billion yuan ($7.55 billion) for the first half of the year. This staggering decline contrasts sharply with the 6.7 billion yuan loss incurred in the second half of 2022 and the net profit of 1.9 billion yuan reported a year earlier.

The company, once China's property sales leader until this year, suffered the impact of plummeting property sales and home values in the backdrop of China's decelerating economy. Shrinking margins, exacerbated by the economic slowdown, lower sales, and constrained access to fresh capital, have aggravated Country Garden's liquidity squeeze.

Investors are closely watching for insights into the company's short-term debt and new bank loans, crucial details that shed light on its cashflow predicament. Due to the bulk of its funds being locked in escrow accounts, earmarked for project contractors and home deliveries over the next two years, the company faces limited liquidity for repaying debt at the group level.

About 60% of Country Garden's onshore bonds are set to mature in the coming months. The company's ability to extend these repayment deadlines may prove pivotal in stabilizing its operations and cashflow, according to an unnamed company official. The prospect of such extensions, if realized, could provide a reprieve amidst these financial uncertainties.

JP Morgan estimates that completing all ongoing construction projects, including both sold and unsold properties, would require an investment of around 316 billion yuan.

Country Garden chose to abstain from commenting ahead of its earnings release. Surprisingly, the company also opted not to engage with analysts and the media post-earnings announcement, a departure from its usual practice.

In recent developments, the firm proposed a 40-day grace period for the repayment of a 3.9 billion yuan private onshore bond due on Saturday. The proposal, if approved, would extend the full repayment period by three years. China International Capital Corporation (CICC) has been brought on board as a financial advisor, signaling potential restructuring efforts in the pipeline.

Despite challenges, Country Garden demonstrated resilience by selling its stake in Guangzhou Asian Games City to state-owned counterpart China Overseas Land & Investment for 1.3 billion yuan. Moreover, the company reaffirmed its commitment to a $100-billion project in Malaysia.

As the economic landscape evolves, Country Garden's upcoming results are anticipated to provide crucial insights into the trajectory of both the company and the broader property sector in China.