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No picnic for Country Garden as shares tumble despite buybacks

[HONG KONG] Share buybacks are doing little to help stem a US$24 billion selloff in China's biggest developer by sales.

One of the worst performers on Hong Kong's equity benchmark, Country Garden Holdings Co has fallen 46 per cent from its January peak even as it spent more than US$125 million in share repurchases. China's crackdown on the real estate market and concerns over a sales slowdown have weighed on the sector, while fatal accidents at Country Garden project sites have deepened concerns.

The stock has slumped even as the developer reported its fastest first-half earnings growth in nine years - and it's not yet near the bottom according to Alex Wong, Hong Kong-based director of asset management at Ample Capital Ltd. He says he has no plans to buy even if the shares fall further. On Thursday they slipped 1.9 per cent as the Hang Seng Index sank 1.7 per cent.

"You can argue that the valuation is very cheap, but you have to assume the company will continue to be able to deliver those kinds of sales," said Mr Wong. "It will be very difficult to repeat the miracle every year. I don't think buybacks would mean much - people aren't buying the story."

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Flows into the city through Hong Kong-mainland stock links - which helped lift Country Garden in 2017 - are below levels seen earlier this year. The Hang Seng Index is among the year's worst performers globally, with sentiment sapped by a slowing Chinese economy and deepening US trade tensions. "Right now the Chinese money is drying up," Mr Wong said, adding that worries about leverage and sustainability have hit the sector.

Country Garden surged more than 240 per cent in 2017 on soaring sales as it rode China's property boom, while a series of buybacks in September last year helped accelerate the gains.

But its rapid expansion has meant more debt, about 19 per cent of which is due for refinancing this half, followed by another 29 per cent next year. A key funding source is also now at risk as authorities mull banning the practice of selling apartments before they are finished - a method Country Garden relied on to fuel its growth.

Other developers have also tumbled. China Overseas Land & Investment Ltd. and China Vanke Co. are down at least 21 per cent from their peaks this year, compared with 20 per cent for the Hang Seng Index.

Country Garden said this month it may spend up to HK$3 billion more on buybacks. Analysts' average price target implies a 75 per cent upside over the next year, according to data compiled by Bloomberg. The stock is trading at 4.2 times estimated earnings, its lowest since 2015 and less than half that of the Hang Seng Properties Index.

But a sense of gloom persists.

"Country Garden has sent a clear message to the market that it will continue buying back its shares," said Toni Ho, an analyst at Rhb Osk Securities Hong Kong Ltd. "But the moves may not be enough to offset people's worries about the tightening policies over China's housing market."

BLOOMBERG