Chinese property giant Country Garden warns of $7.6 billion loss as it nears default

By Michelle Toh, CNN

Hong Kong (CNN) — One of China’s biggest property developers says it has burned through up to $7.6 billion in the first half of the year, compounding the crisis coursing through the country’s embattled real estate sector.

Country Garden warned investors in a Hong Kong stock exchange filing Thursday that it would likely record a loss of 45 billion to 55 billion Chinese yuan (about $6.2 billion to $7.6 billion) for the six months through June.

That compares with a profit of approximately 1.9 billion yuan ($264.3 million) for the same time last year.

The disclosure lays bare the financial woes currently facing Country Garden, a massive builder of hundreds of thousands of homes annually across China.

The developer, which employs some 300,000 people, has a massive debt pile that’s being compared to that of Evergrande, the world’s most indebted property group.

In recent weeks, the company has become the latest sign of China’s economic troubles, as it teeters on the brink of default and, by its own admission, works to save itself.

Country Garden shares plunged 8.7% in Hong Kong Friday following its loss warning, as well as a report from Chinese news outlet Yicai that the firm was preparing for a debt restructuring, citing unidentified sources.

CNN has not independently confirmed Yicai’s reporting.

The company had said in its filing that it would “consider adopting various debt management measures,” without elaborating further, as well as lean on a task force newly set up to “cope with” its challenges. Country Garden did not immediately respond to a request for comment.

As of early afternoon in Hong Kong Friday, its stock had reached a record low of 95 Hong Kong cents, below its previous low of 98 Hong Kong cents reached in October 2008.

Cash crunch

Earlier this week, Country Garden stoked concerns by missing two bond payments, according to analysts. The company did not respond to multiple requests for comment from CNN on the matter.

Its failure to pay up raised concerns about its overall liabilities, which racked up to a whopping 1.4 trillion yuan (about $194 billion) as of the end of last year.

Some of the company’s debt — roughly $4.3 billion in onshore and offshore bonds — will come due or “become puttable” through the end of 2024, meaning the company will face obligations to bondholders, according to Moody’s.

For the rest of this year alone, “we estimate that CGH needs to fulfill at least $137 million of bond interest payments through the rest of 2023,” Morningstar analyst Jeff Zhang wrote in a report Thursday.

News of the missed payments led to the company being downgraded, with Moody’s bumping down its credit rating from B1 to a Caa1 on Thursday, a level that signals “very high risk” in holding its debt. A lower rating could push funding costs for the company even higher.

The downgrade reflects Country Garden’s cash flow problems, “in view of its deteriorated liquidity and financial flexibility, sizable refinancing needs and still-constrained access to funding,” Kaven Tsang, a Moody’s senior vice president, said in a report.

“The negative outlook reflects the uncertainty over Country Garden’s ability to service its debt obligations, including coupon payments, in a timely manner over the next [six to] 12 months,” he added.

Zhang also said Morningstar believed the missed payments “may not be an isolated event.”

“Country Garden is likely to default,” he wrote in his report.

Sales slump

The company is working to stem the bleeding.

In its filing Thursday, it attributed the expected first-half loss to a series of problems, from falling property sales to lower profit margins.

New home sales by China’s 100 biggest developers dropped by 33% in July from a year ago, according to data released last week.

“Facing such an extremely difficult situation industry-wide, the company [has] worked together to carry out self-rescue by all means,” Country Garden told investors.

But “the overall market has not yet recovered, the absolute scale of the industry has declined, and the capital market needs time to restore its confidence.”

The company also detailed how its chairwoman, who is also its controlling shareholder, had personally tried to contain the crisis.

Since the company’s listing in 2007, Yang Huiyan and her family have pumped in approximately 38.6 billion Hong Kong dollars ($4.9 billion), in the form of new loans and share and bond purchases, the firm said in its filing.

Some of that debt — about 6.6 billion Hong Kong dollars ($844 million) is unsecured, it added.

But Yang alone won’t be able to turn things around. In its report, Moody’s cited “the absence of new external financing” as one reason it now considers the firm’s liquidity “weak.”

The assessment was reached despite Yang’s willingness to provide “funding support to the company,” the agency added.

One of China’s wealthiest women, Yang has seen her own fortune plunge recently, dropping 84% since June 2021, or $28.6 billion, according to the Bloomberg Billionaires index.

That’s the biggest wealth drop of any billionaire in the world over the past two years, according to its calculations.

The impact of Country Garden’s problems won’t be felt in China alone, according to Alfredo Montufar-Helu, head of the China Center for Economics and Business.

“The global economy is losing one of its engines of growth,” he told CNN.

“That’s why everyone should care about what is happening to real estate. Real estate is the main drag right now on confidence levels, on demand, and on industrial productivity.”

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— CNN’s Marc Stewart contributed to this report.