Country Garden: survivor of the real estate bloodbath in China

On the northwest outskirts of Shanghai, more than a hundred vendors in black suits crowded around a replica of a Country Garden residential development as an enthusiastic instructor gave them tips on how to sell apartments.

Behind the glittering showroom of Project Exquisite, workers and cement trucks drove in and out of a vast construction site where the scaffolding towers were nearing completion.

The scene evoked the glory days of China’s decades-long property boom, but the sector is in crisis. Country Garden, the nation’s largest developer by sales, has become one of the most prominent survivors of an industry plagued by construction delays, defaults and declining sales for more than a year. year.

Beijing’s new political support has raised investor hopes that the worst is over. The government said this week it was ready to roll out more than $162 billion in state bank credit to developers in what is the biggest injection of cash yet into the struggling sector.

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

With thousands of projects all over the country, Country Garden is not only of interest to its shareholders and bondholders inside and outside China. It is also a barometer of the health of the real estate sector.

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

“After this set of policies, we believe that at least some of them can survive. This gives investors the ability to pick the survivors.”

“Relief Rally”

The rally was driven in part by relief. Country Garden has come under increasing pressure from what it called a “severe depression” in the housing market. One of its bonds maturing in 2024 fell to 14 cents on the dollar at the start of the month, and is still trading at troubled levels around 41 cents today.

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

But unlike Evergrande, the world’s most indebted developer, Country Garden has so far not defaulted on its debts, which at the end of June stood at almost Rmb300 billion ($42 billion). .

Prime-rated developers in China’s real estate sector are largely state-owned. In the private sector, where companies have borrowed aggressively, only a handful of companies, including Vanke, are still rated in the investment grade, 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, falls somewhere in between. It was able to draw on its large cash reserve, which stood at 150 billion yuan at the end of June, to ride out the sector slowdown, made worse by Beijing’s policies aimed at reducing developer debt. It made a small profit of Rmb612 million in the first half of 2022, according to its interim report.

That figure pales in comparison to its Rmb 29 billion profit in 2017, after a two-decade period in which reforms and rapid urbanization spurred a boom in private real estate development in China.

Country Garden chairman Yang Guoqiang was born into a poor family in rural Guangdong, a southern province, in 1955. According to Chinese media, he wore no shoes as a child and could not finish his college exams only after a government scholarship. of Rmb2 (28 cents). Before listing the company in 2007, he transferred his shares to his daughter, Yang Huiyan, making her the richest woman in Asia.

Today, Country Garden has more than 3,000 projects, more than double its 2017 level, with the vast majority outside Guangdong. The land for the Exquisite development in Shanghai was purchased last June, well after the real estate crisis had already set in. Although it will not be completed until 2024, 600 of its 700 apartments have already been sold.

A company official 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 little impact on projects in Shanghai,” she said, saying the problems for developers were in lower-tier cities.

“Overall, buyers in Shanghai trust their government more,” she added. “When people buy a house, they buy the location”.

Risks remain

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

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

He added that Moody’s was not aware of any construction delays at other Country Garden sites, but said the company was relying on the cash to pay off debts and was having problems accessing finance. .

A spokesperson for Country Garden said that although it has focused on top tier cities in recent years due to their high certainty, it has “not abandoned the lower tier market”.

“Some lower tier towns still have a large population and people trust Country Garden.”

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

Many Country Garden bonds, particularly those that do not mature for several years, involve the 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 says could mark a turning point and free up 1 billion yuan of new liquidity, are designed to address this issue.

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

Additional reporting by Hudson Lockett in Hong Kong