Country Garden: Survivor of China’s Property Bloodbath

In the northwest corner of Shanghai, more than a hundred black-clad vendors gathered around a replica Country Garden housing estate as an enthusiastic instructor offered guidance on how to sell apartments.

Behind Project Exquisite’s gleaming showroom, workers and cement trucks moved in and out of a sprawling construction site where scaffolding towers were nearing completion.

The scene evoked the glory days of China’s decades-long real estate boom, but the sector is in crisis. Country Garden, the country’s largest developer by sales, has emerged as a leading survivor in an industry plagued by construction delays, delinquencies and declining sales for more than a year.

Beijing’s new political backing has fueled investor hopes that the worst is over. The government this week said it was ready to distribute more than $162 billion of credit from state banks to developers in what is the most significant cash injection ever in the struggling sector.

Country Garden was one of the beneficiaries, receiving a Rmb 50 billion ($7 billion) new credit line from the Postal Savings Bank of China and access to a share of $91 billion in new loans from the Industrial Bank and trade of China. When supportive policies were first unveiled last week, which extend deadlines for bank debt maturities and support bond issuance, the developer’s shares soared and it announced a new rights issue for raise approximately $500 million.

With thousands of projects nationwide, Country Garden is not only of interest to its shareholders and bondholders inside and outside China. It’s also a barometer of the health of the real estate industry.

“Before the policies we weren’t sure any of the private sector companies could survive,” said Andy Suen, head of Asia ex-Japan credit research at PineBridge Investments, describing the government’s moves as a “game changer”.

“After this set of policies, we think at least some of them can survive. This gives investors an opportunity to pick survivors.”

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“Rescue Rally”

The rally was led in part by relief efforts. Country Garden came under increasing pressure due to what it called a “major depression” in the housing market. One of its 2024-maturity bonds fell as low as 14 cents on the dollar earlier this month, and is still trading at distressed levels of about 41 cents today.

In October, the company’s total sales were Rmb 33 billion, well below Rmb 54 billion in the same month two years ago and last year’s total of Rmb 46 billion, when the crisis was already in full swing. deed.

But unlike Evergrande, the world’s most indebted developer, Country Garden has so far not defaulted on its debts, which totaled nearly RMB300 billion ($42 billion) at the end of June.

Investment grade developers in China’s real estate sector are largely state-owned. In the private sector, where companies have leveraged aggressively, only a handful of companies, including Vanke, still have an investment grade rating, while many other names, such as Evergrande, Fantasia Holdings, Modern Land (China), and Kaisa Group , have missed payments.

Country Garden, which lost its investment grade rating earlier this year, is somewhere in between. It was able to rely on its ample liquidity, amounting to Rmb150 billion at the end of June, to weather the sector slowdown, exacerbated by Beijing’s policies aimed at deleveraging developers. It made a small profit of Rmb612 million in the first half of 2022, according to its interim report.

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That number pales in comparison to its Rmb29 billion profits in 2017, after a two-decade period in which reforms and rapid urbanization spurred the rise of private real estate development in China.

Country Garden chairman Yang Guoqiang was born to a poor family in rural Guangdong, a southern province, in 1955. According to Chinese media reports, he wore no shoes as a child and could only finish his middle school exams after a government grant of Rmb2 (28 cents). Before going public in 2007, she transferred his shares to her daughter Yang Huiyan, making her Asia’s richest woman.

Today, Country Garden has over 3,000 projects, more than double the number in 2017, with the vast majority outside Guangdong. The land for the Exquisite development in Shanghai was purchased in June last year, well after the real estate crisis had already taken hold. While it won’t be completed until 2024, 600 of its 700 apartments have already been sold.

A company manager at the Exquisite site said construction was only delayed during the city’s two-month lockdown to control a Covid outbreak. “The new policy has minimal impact on projects in Shanghai,” he said, saying the problems for developers were in lower-tier cities.

“In general, Shanghai buyers are more confident in their government,” he added. “When people buy a house, they buy the place”.

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The risks remain

The situation in Shanghai masks the risks for the company. Most of the Country Garden projects are not in China’s wealthiest cities.

“The economic situation of the lower tier cities has been weaker [during] the economic slowdown in China and also property prices have fallen more than in high-end cities,” said Moody’s Kaven Tsang.

He added that Moody’s is unaware of any construction delays at other Country Garden sites, but says the company has relied on cash to pay off its debts and faces problems accessing finance.

A Country Garden spokesperson said that while it had focused on upscale cities in recent years due to their high certainty, it “hasn’t given up on the lower-tier market.”

“Some lower tier cities still have large populations and people trust Country Garden.”

The difficulty of assessing progress at thousands of sites in China, especially when pandemic rules have severely restricted access to and movement within the country, is a major challenge for investors and analysts.

Many of Country Garden’s bonds, especially those that are several years past due, carry a risk of default. S&P cited “narrowing funding channels” when it downgraded it last week and withdrew its ratings at the company’s request.

The government’s new policies, which S&P say could mark a turning point and free up Rmb1tn of new liquidity, are designed to address this problem.

On the fringes of Shanghai’s Exquisite project, the last 100 apartments are expected to be sold within the next month. For Yang Guoqiang and the investors in his company, the question is whether the same is true across China.

Additional reporting of Hudson Lockett in Hong Kong

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