China Country Garden Reports 10 Trillion Won Net Loss in First Half of Year... Concerns Over Chain Defaults

Housing Sales Down 35% Year-on-Year
Funding Difficulties Due to Real Estate Crisis
Stock Price Plunge Turns Stocks into Penny Stocks
Concerns Over Real Estate Market Impact in Case of Default

Country Garden, one of China's top three real estate companies, recorded a net loss exceeding 10 trillion won in the first half of this year alone. As concerns arise that Country Garden, pushed to the brink by an earnings shock, may fall into default, fears are spreading that a chain reaction crisis could engulf the Chinese real estate market.

Country Garden [Image source=Bloomberg]

According to Bloomberg on the 11th (local time), Country Garden announced the previous day that its provisional net loss for the first half of the year reached 45 billion to 55 billion yuan (approximately 8.223 trillion to 10 trillion won). In contrast, the company posted a net profit of 1.91 billion yuan in the first half of last year.

The main cause of the deficit was a sharp decline in housing sales. From January to July, Country Garden's housing sales amounted to 140.8 billion yuan, down 35% compared to the same period last year.

After the earnings announcement, the stock price plummeted. On the 10th, Country Garden's stock closed at 0.89 Hong Kong dollars (150.90 won), down 14% from the previous closing price, falling below 1 Hong Kong dollar for the first time ever. Back in 2019, when Chinese authorities began regulating the real estate market, the stock price had soared to as high as 12.94 Hong Kong dollars, but it has since fallen to penny stock status in just four years.

Country Garden rose to the forefront of the real estate market after Evergrande Group fell into a default crisis. In November last year, the government selected it as an excellent real estate developer. The company had been regarded as having a solid financial structure within the industry. However, as the Chinese government tightened regulations on developers to stabilize the real estate market, Country Garden fell into a liquidity crisis.

Country Garden explained the poor performance by stating, "Due to the recent downturn in the real estate market and worsening financial conditions, the accounting available funds have continued to decrease," adding, "This has gradually caused liquidity pressure."

The market is also forecasting that Country Garden could fall into default due to severe liquidity problems. On the 7th, Country Garden failed to repay interest of 22.5 million dollars (approximately 33 billion won) on a 1 billion dollar face value corporate bond. Before officially notifying a default, Country Garden has a 30-day grace period to pay the interest. Bloomberg reported that the company currently holds 71.756 billion yuan in outstanding bonds. As of the end of last year, total debt is estimated to reach 1.4 trillion yuan.

Monica Xiao, Chief Investment Officer (CFO) of hedge fund Triada Capital, warned, "Country Garden may have the willingness to repay its debt, but it is in a very cash-strapped situation," adding, "Without additional policy announcements, the company's restructuring is likely just a matter of time."

Country Garden's default is expected to have a significant impact on the Chinese real estate market. Compared to Evergrande Group, which defaulted earlier, Country Garden holds four times as many construction projects. Moreover, since the company has focused on building homes in regions outside major cities like Beijing and Shanghai, the impact on local governments is also expected to be substantial.

Christy Hung, an analyst at Bloomberg Intelligence, expressed concern, saying, "Country Garden's debt crisis will have a broad impact on the sentiment of China's housing market," and "It could significantly undermine consumer confidence in private real estate developers."