Once China’s biggest developer according to sales, Country Garden Holdings Co. has succumbed to growing liquidity issues and increasing scrutiny of its operations, finally becoming a penny stock on the Hong Kong exchange.
By early Friday, the stock fell by as much as 14.4%, to HK$0.89, on course to close below HK$1 for the first time in its history, marking a fall of about 70% from its peak in January, and leaving it with the title of the worst performing stock over that time period. Its market value has now fallen from an all-time high of roughly $50 billion in 2018 to just $3.3 billion now.
The fall of Country Gardens is an analogy for how some of China’s strongest private builders are still being affected by a persistent slump in property prices. Although the Foshan-based developer would have once been seen as relatively immune to a societal credit crunch, now it is seen as an example of the financial contagion within an industry which is responsible for about one quarter of the entire gross domestic product of the nation.
Concerns have been growing following reports that the firm’s dollar bondholders are reporting that they have not yet received coupon payments which were due essentially on Monday. The company now has a 30 day grace period in which to make the payments before it officially undergoes its first default.
On Friday, a gauge for Chinese developers was off by as much as 2.9% on Friday, with the worst performer in the gauge being Country Gardens. It is on course for its worst performance since October, since the nation began reopening following its lifting of Covid restrictions. In its worst weekly loss since March, the mainland benchmark CSI 300 index fell 1.9% Thursday.
It is expected the developer, and employer of over 70,000 people, will book as much as a $7.6 billion net loss for the first half of 2023. It has not addressed its difficulties in making coupon payments in an exchange filing Thursday night. The developer had earlier been downgraded three notches by Moody’s Investor’s Service, to Caa1, based on “heightened liquidity and refinancing risks.”
The stock’s rating has been downgraded by at least three brokerages since Tuesday, including HSBC Holdings Plc, and CLSA ltd. According to Bloomberg-compiled data, the average 12-month price target has fallen from an all-time high of more than HK$19 in 2018, to HK$1.32, according the data complied by Bloomberg. Goldman Sachs Group analysts have cut their price target in half based on weak sales and liquidity concerns, as they have maintained it at a neutral rating.
In a note, JPMorgan Chase & Co. analysts including Karl Chan wrote that the profit warning is probably “the prelude to an ultimate credit event,” and that the company “might already be in preparation for debt restructuring,.” They went on, “Up until now, we still see no signs of further government support or bail-out.”
