Country Garden: A Chinese estate that survived the bloodbath

In the northwestern suburbs of Shanghai, more than a hundred black-suited salesmen gathered around a replica of the Country Garden apartment building, giving enthusiastic instructors instructions on how to sell apartments.

Behind the gleaming showroom for Project Exquisite, workers and cement trucks weaved in and out of the sprawling construction site where the scaffolding towers were nearing completion.

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

Beijing’s new policy support has raised investors’ hopes that the worst is behind them. The government said this week it was ready to release more than $162 billion in loans from state-owned banks to developers, the most significant injection of liquidity into the still-struggling sector.

Country Garden was one of the beneficiaries, accessing a new credit line worth Rmb50 billion ($7 billion) from the Postal Savings Bank of China and part of a new $91 billion loan from the Industrial and Commercial Bank of China. The developer’s shares soared last week when the support policies, which extend the deadlines to repay the bank debt and back the bond issue, were announced last week to raise about $500 million.

With thousands of projects across the country, Country Garden is not only interested in shareholders and bondholders inside and outside of China. It is also a barometer of the health of the real estate sector.

“Before the policies, we weren’t sure that any of the private sector companies would survive,” said Andy Suen, head of Asia ex-Japan credit research at PineBridge Investments, describing the government’s moves as a “game changer”.

“After these policies, we think that at least some of them can survive. This gives investors an opportunity to pick the survivors.”

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‘Help Rally’

The rally took place with partial relief. Country Garden has come under increasing pressure due to what it calls a “severe depression” in the property market. One of its bonds maturing in 2024 fell to 14 cents on the dollar earlier this month and is still trading at difficult levels around 41 cents today.

The company’s total sales in October were Rmb33 billion, well below Rmb54 billion in the same month two years ago, and last year’s total of Rmb46 billion, when the crisis had already hit.

But unlike Evergrande, the world’s most indebted developer, Country Garden has yet to default on its debt, which stood at almost 300 billion Rmb ($42 billion) at the end of June.

Investment-grade developers in China’s real estate sector are mostly state-owned. In the private sector, where businesses have been borrowing aggressively, only a handful of firms, including Vanke, are still investment grade, while many other names such as Evergrande, Fantasia Holdings, Modern Land (China) and Kaisa Group have missed payments.

Country Garden, which lost its investment-grade rating earlier this year, is in the middle. It was able to rely on a large cash pile of Rmb150bn at the end of June to stave off a slowdown in the sector, aggravated by Beijing’s policy of reducing developer leverage. It made a small profit of Rmb612 million in the first half of 2022, according to its interim report.

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The figure is down from a 2017 profit of Rmb29 billion, after two decades in which reforms and rapid urbanization have fueled China’s private real estate boom.

Yang Guoqiang, the chairman of Country Garden, was born in 1955 into a poor family in the southern province of Guandong. According to Chinese media, he did not wear shoes as a child and was only able to finish his high school exams after receiving a government scholarship. Rmb2 (28 cents). Before taking the company public in 2007, she transferred her shares to her daughter Yang Huiyan, making her Asia’s richest woman.

Today, Country Garden has more than 3,000 projects, more than double its 2017 level, and the vast majority are outside Guangdong. The land for the luxury development in Shanghai was acquired in June last year, long after the property crisis had already hit. Although it will not be completed until 2024, 600 of the 700 apartments have already been sold.

A company manager at Exquisite said construction was only delayed during the city’s two-month lockdown to control the Covid outbreak. “The new policy has little impact on projects in Shanghai,” he said, adding that the challenges for developers are in lower-tier cities.

“In general, Shanghai shoppers are more confident in their government,” he said. “When people buy a house, they also buy the land.”

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Risks remain

The situation in Shanghai hides the risks the company faces. Most Country Garden projects are not in China’s wealthiest cities.

“The economic situation of low-level cities was weaker [during] China’s economic slowdown and property prices have also fallen more than in top-tier cities,” said Kaven Tsang of Moody’s.

He added that Moody’s is not aware of construction delays at other Country Garden sites, but says the company is relying on cash to pay its debts and has had problems accessing financing.

A spokeswoman for Country Garden said that while it has focused on high-end cities in recent years due to its high definition, it “has not given up on the low-end market”.

“Some lower-tier cities still have large populations, and people there rely on Country Garden.”

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

Many Country Garden bonds, especially those that do not mature within a few years, carry the risk of default. S&P cited “narrowing funding channels” in its downgrade last week and withdrew its ratings at the company’s request.

The government’s new policies, which S&P said could be a turning point and open up Rmb1 trillion of fresh liquidity, are designed to address the problem.

The last 100 apartments in the Exquisite project on the outskirts of Shanghai are expected to be sold within the next month. The question for Yang Guoqiang and investors in his company is whether the same will happen in China.

Additional reporting by Hudson Lockett in Hong Kong

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