China’s largest developer posts record 96% profit slump

Published Tue, Aug 30, 2022 · 04:24 PM

COUNTRY Garden Holdings said first-half earnings plunged 96 per cent, the most since its 2007 listing in Hong Kong, as China’s property crisis engulfed the nation’s largest developer by sales.

Unaudited net profit slumped to 612 million yuan (S$123.5 million) in the 6 months ended June, a filing by the Foshan-based company showed Tuesday. Core net profit, which adjusts for items including property revaluations, dropped 68 per cent.

Country Garden had earlier warned that earnings would tumble, underscoring how the sector’s woes have spread to developers once considered to be relatively safe. The company is trying to shore up its balance sheet after losing its investment grade at Fitch Ratings and Moody’s Investors Service.

Unlike its largest peers, Country Garden focuses on the lower end of the market, making it more vulnerable to weakening demand from homebuyers during an economic slowdown. Many of its customers are migrant workers who are finding it harder to upgrade residences as incomes dwindle and job security worsens.

Shares of Country Garden fell as much as 3.9 per cent on Tuesday afternoon in Hong Kong trading, extending this year’s decline to 64 per cent. Most of its offshore bonds are below 50 cents on the US dollar, after some traded near face value earlier this year.

Other key figures from the results:

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  • Revenue shrank 31 per cent from a year earlier
  • Gross margin declined to a record low of 10.6 per cent
  • The builder continued to meet 2 of the “three red lines” – debt metrics imposed on developers as part of a crackdown on leverage in the industry – according to Bloomberg calculations based on company data
  • Net debt to equity improved, while cash coverage to short-term debt slipped
  • Liabilities to assets climbed slightly to 74 per cent, still breaching an imposed 70 per cent ceiling

The company provided 34.7 billion yuan in guarantees for certain liabilities of joint ventures and other parties, down from 43.2 billion yuan at the end of 2021.

A sector-wide liquidity crunch has prompted concerns about debt repayment for even the largest developers, and many have sought extensions. Chinese authorities have recently stepped up support for the debt-straddled industry, including on fundraising.

On a positive note, Country Garden was among developers chosen to sell new onshore bonds with a state-owned entity’s guarantee, part of regulatory efforts to stem the cash squeeze. Rival Longfor Group Holdings sold a 1.5 billion yuan bond last week near the lower end of the initial price range.

A Country Garden executive assured investors in mid-August that its cash flow remained strong even under extreme stress tests. Still, it has taken steps to shore up financing. Last month, it sold stock at a 13 per cent discount to raise HK$2.83 billion (US$361 million), with some of the proceeds to be used to repay offshore debt. BLOOMBERG

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