China’s largest property group warns of 70% plunge in profit

Earnings at Chinese property developer Country Garden fell as much as 70 per cent in the first half of the year, as the country’s largest real estate group by sales was drawn into a crisis that has raged through the heavily indebted sector.

Core profit could have dropped to between Rmb4.5bn and Rmb5bn ($6634mn-$736mn) in the first six months of 2022, down from Rmb15.2bn a year earlier, according to a filing on Thursday.

Country Garden, which lost its last investment-grade rating after Fitch downgraded it to junk status on Tuesday, cited a market downturn, the effects of the coronavirus pandemic and foreign exchange losses for the fall in earnings. Unlike a growing number of its highly leveraged peers, Country Garden has not defaulted on its debts.

The Chinese property sector has been rattled by a liquidity crisis following the high-profile collapse of Evergrande, the world’s most-indebted developer, last year.

Country Garden had managed to retain access to offshore bond markets for refinancing, helping the group maintain some stability at a time when tens of thousands of Chinese homebuyers are refusing to pay mortgages on unfinished apartments.

However, as Beijing has sought to revive the sector with refinancing loans, there are signs that confidence in Country Garden is receding.

The company’s Hong Kong-listed shares slumped as much as 15 per cent during a single trading session in July, wiping about $1.7bn from its market value, after it announced a heavily discounted capital raising.

Alicia García Herrero, chief economist for Asia-Pacific at French investment bank Natixis, said Country Garden was suffering from worsening investor sentiment towards the sector. There are fears of falling prices as demand wanes and new apartments remain uncompleted, with cash-strapped developers running out of money.

“Now even Country Garden couldn’t basically proceed with presales for new projects because the contagion is so extreme,” she said.

China’s economic planners have for months been moving to unwind efforts to deleverage the sector and encourage people to buy new houses. China’s central bankers have eased lending rules and cut interest rates in a bid to combat the downturn.

Shares in Chinese property companies, including Country Garden, rose sharply earlier this week on reports that Beijing may order state-run groups to guarantee some developer bonds issued in the country’s onshore market.

While García Herrero expects such policy loosening would continue, investors are also watching for clearer signs of direct state support for private sector property developers facing a liquidity crunch.

“The government’s strategy is not to extend the bailout to the worst performers . . . will they go beyond this for good names? My sense is that it’s going to be very risky because it’s a humongous moral hazard, which will then go into other sectors.”