China’s biggest builder warns core profit could plunge 70%

Published Thu, Aug 18, 2022 · 11:34 AM

CHINA’S largest developer Country Garden Holdings warned that first-half earnings probably tumbled by as much as 70 per cent amid an escalating property crisis in the country.

The Foshan-based company said preliminary core profit could reach 4.5 billion yuan (S$920 million) to 5 billion yuan for the first 6 months of the year, down from 15.2 billion yuan a year earlier, according to a filing on Thursday (Aug 18).

Country Garden, once considered among China’s safer real estate companies, has been engulfed by the sector’s unravelling following regulatory crackdowns and pandemic restrictions that have pummelled housing sales. The developer lost its last investment-grade rating after Fitch Ratings downgraded it to junk on Tuesday.

A liquidity crisis among China’s property developers has led to a plunge in new projects and put about 5 per cent of existing apartment construction on hold, sparking mortgage payment boycotts by angry homebuyers. The market collapse could lead to profit declines at other firms.

Country Garden “will not be the only one”, said Shujin Chen, an analyst at Jefferies Financial Group. Chen expects more private developers to report 25 per cent profit declines in the first half given weak sales.

The developer’s Hong Kong shares dropped as much as 5.6 per cent in Thursday trading, extending the decline this year to 66 per cent. Its dollar bonds were indicated down by as much as 2 US cents on the dollar, according to Bloomberg-compiled prices. Most of its bonds are below 35 US cents on the dollar, after some traded near face value early this year.

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Country Garden said net income in the first half reached about 200 million yuan to 1 billion yuan, down from 15 billion yuan a year earlier. The company expects to report full results in the second half of August.

As China’s only large developer with a lower-end market push, Country Garden is facing weaker home-buying demand. Almost four-fifths of its land bank is in so-called tier-3 and tier-4 cities, where the developer has sought migrant workers looking to upgrade to affordable apartments near their hometowns. Home sales in the world’s second-largest economy have tumbled for more than a year, and prices have dropped for 11 straight months.

The company cited a tough business environment because of Covid-19, a decrease in revenue recognised for properties sold caused by a downturn in the market, along with impairment and foreign exchange losses.

Late last month, it sold stock at a 13 per cent discount to raise HK$2.83 billion (S$500 million), signalling that even the healthiest developers are in distress. Some of the proceeds will be used to repay offshore debt, it said. Country Garden has the most junk bonds among all issuers, according to data compiled by Bloomberg. BLOOMBERG

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