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Country Garden: survivor of the China property bloodbath

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More than 100 black-suited salespeople gathered around a replica of a country-garden residential development in Shanghai’s northwestern edge, where a dedicated instructor showed them how to sell an apartment.

Behind Project Exquisite’s glitzy showroom, workers and cement trucks scurryed back and forth across a sprawling construction site where a tower of scaffolding was nearing completion.

The scene evoked decades of the glory days of China’s real estate boom, but the sector is in crisis. Country Garden, the nation’s largest developer by revenue, has emerged as one of his most prominent survivors in an industry plagued by more than a year of construction delays, defaults and declining sales.

New policy support from Beijing has raised investors’ hopes that the worst is over.The government said this week it was ready to deploy Over $162 billion Credit from state-owned banks to developers is the most significant liquidity injection to date to the struggling sector.

Country Garden is one of the beneficiaries, receiving a new RMB 50 billion ($7 billion) line of credit from China Post Bank and access to a portion of a new $91 billion loan from Industrial and Commercial Bank of China. The developer’s share price soared last week when it first announced supportive policies to extend the maturity of bank debt and support bond issuance, announcing a new rights issue to raise about $500 million. .

With thousands of projects across the country, Country Garden is not only of interest to domestic and foreign shareholders and bondholders. It is also a barometer of the health of the real estate sector.

Andy Suen, head of credit research for Asia ex-Japan at Pinebridge Investments, described the government’s move as a “game changer” and said, “Before the policy comes into force, there is little doubt that the private sector will survive. I didn’t have it,” he said.

“We believe that at least some of them will survive after this set of policies. This will give investors a chance to pick survivors.”

“Relief meeting”

Part of the rise was due to relief. Country gardens are under increasing pressure due to what has been described as a “deep recession” in the real estate market. One of the 2024 maturity bonds fell to 14 cents on the dollar earlier this month and is still trading at a distressed level of about 41 cents.

The company’s total sales in October totaled RMB 33 billion, well below RMB 54 billion two years ago in the same month and RMB 46 billion last year when the crisis was already underway.

but not EvergrandeCountry Garden, the world’s most indebted developer, had not defaulted on nearly RMB 300 billion ($42 billion) at the end of June.

Most investment-grade rated developers in China’s real estate sector are state-owned enterprises. In the private sector, where companies are actively borrowing, only a handful of companies are still rated investment grade, including Vanke, while others such as Evergrande, Fantasia Holdings, Modern Land (China) and Kaisa Group Many other companies default on their payments.

Country Garden, which lost its investment grade rating earlier this year, is somewhere in between. The large cash reserves of RMB 150 billion at the end of June helped us weather a sector slowdown exacerbated by Beijing’s foreign policy. Reduce developer leverageIt made a modest profit of RMB 612 million in the first half of 2022, according to an interim report.

This figure pales in comparison to 2017’s RMB 29 billion profit, two decades after reform and rapid urbanization spurred the rise of private property development in China.

Yang Guoqiang, chairman of Country Garden, was born in 1955 to a poor family in rural Guangdong, a southern province. of Rmb2 (28 cents). Before listing the company in 2007, he transferred his shares to his daughter Yang Huiyan, making her the richest woman in Asia.

Country Garden now has over 3,000 projects, more than double the number in 2017, most of which are located outside Guangdong. The land for the exquisite Shanghai development was purchased last June after the real estate crisis had already taken hold. Completion is he in 2024, but 600 of his 700 units have already been sold.

The manager of the Exquisite site company said that construction was delayed because of the city’s 2 months lockdown Control the Covid outbreak. “The new policy will have little impact on projects in Shanghai,” she said, noting that the problem for developers is in the low-rise city.

“Overall, Shanghai buyers are more confident with the government,” she added. “When people buy houses, they buy places”.

risk remains

The situation in Shanghai masks the risks facing the company. Most of the country garden projects are not in China’s richest cities.

“The economic situation in low-rise cities is deteriorating [during] China’s economic slowdown and property prices have also fallen below those in luxury cities,” said Kaven Tsang of Moody’s, who downgraded Country Garden from investment grade earlier this month.

He added that Moody’s was not aware of construction delays at other country garden sites, but said the company relies on cash to pay off its debt and is facing problems with financing. .

A spokesperson for Country Garden said that while it has focused on top-tier cities in recent years due to the high degree of certainty, it “isn’t giving up on lower-tier markets either.”

“Some low-rise cities are still heavily populated and people trust country gardens.”

The difficulty in assessing the progress of thousands of sites in China is a major challenge for investors and analysts, especially when pandemic rules severely restrict access to and movement within China. is.

Many Country Garden bonds, especially those that do not mature for several years, imply default risk. S&P withdrew the rating at the company’s request, citing “reduced funding channels” when it downgraded last week.

The government’s new policy, which S&P said could mark a tipping point and will unlock RMB 1 trillion of new liquidity, is designed to address this issue.

The final 100 apartments on the Shanghai edge of the Exquisite project are expected to go on sale within the next month. The question for Yang Guoqiang and his company’s investors is whether the same is true across China.

Additional report by Hudson Lockett in Hong Kong

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