Chinese Property Giant Country Garden Tries to Prove Its Doubters Wrong
Net profit last year fell 23%, but the company said it is in a strong financial position and believes it can weather the downturn
HONG KONG—In a property sector plagued by slumping apartment sales and rock-bottom bond prices, one of China’s biggest private developers is trying hard to convince home buyers and investors that it is doing just fine.
Country Garden Holdings Co. 2007 6.29% , the country’s largest developer by contracted sales, on Wednesday said its net profit for 2021 fell 23% to the equivalent of $4.2 billion, in what it described as a year of turbulence and upheaval for China’s property-development industry.
The company, which is based in China’s southern Guangdong province, said the cooling down of the property market and a tougher financing environment “has posed big challenges to all industry participants.” Country Garden added, however, that it has acted prudently and is in a strong financial position, and believes it can weather the downturn.
Mo Bin, the company president, said the past year had been volatile and it could take time for China’s property market to recover fully. But he said recent regulatory changes set the industry up for long-term healthy growth. “We are confident about the future of the market,” Mr. Mo told reporters.
Chinese real-estate developers have been hit hard by an unprecedented regulatory crackdown on their borrowing activities, which has coincided with the coronavirus pandemic and a slowing economy. More than 10 property companies have defaulted on dollar debt in the past year, and many others have endured steep declines in their stock and bond prices, as a crisis of confidence among investors has dragged on for months.
The malaise has also affected Country Garden, which has long been viewed by investors and global credit raters as one of the more financially prudent developers. The company’s bonds—some of which have investment-grade ratings, unlike most Chinese developers’ junk-rated debt—earlier this month plunged to a low of around 40 cents on the dollar before recovering recently, according to Tradeweb. Country Garden’s Hong Kong-listed shares, meanwhile, have dropped 39% over the past year.
The company’s release of audited results contrasted with delays that at least nine Chinese developers have reported in recent days. Industry heavyweights China Evergrande Group and Sunac China Holdings Ltd. were among those that said they wouldn’t be able to publish their audited annual results by a March 31 deadline. Auditors have resigned from a series of property companies, and some developers have blamed Covid-related disruptions for the delays.
Country Garden was founded by Yang Guoqiang, an entrepreneur who set out to capitalize on China’s urbanization three decades ago. His daughter, Yang Huiyan, now controls the company and is the wealthiest property tycoon in mainland China.
The company expanded rapidly for years, but did so without borrowing aggressively like Evergrande. In the first half of 2016, Country Garden boasted that it acquired 181 pieces of land—averaging about one a day—and started selling apartments less than five months after it acquired the land, according to its website. Last year, it said it bought 219 pieces of land in the first half, and shortened the average period between acquisition and home sales by more than a month.
Much of Country Garden’s business involves building affordable housing in smaller and less developed cities in China. The company said more than two-thirds of its sales revenue in 2021 was derived from so-called tier 3 and 4 cities. Many lower-tier cities have experienced bigger sales declines and price drops in the past year than more densely populated and economically advanced cities.
Country Garden said its 2021 contracted sales totaled 558 billion yuan ($87.7 billion), down about 2% from a year ago. Its average selling prices, however, decreased by 6.6% from the previous year, and were down 11% from their pre-pandemic level in 2019.
Some of the developer’s price cuts have upset buyers who previously paid more for apartments. In February, some homeowners from a Country Garden development in Shenyang in Liaoning province complained in letters to the city’s mayor that the developer had cut prices significantly, hurting the value of their properties. The local real-estate bureau said it looked into the issue and concluded that the price cut wasn’t in violation of any laws. The regulator also said it has asked developers to “control the pace and extent of price reductions, and consider the psychology and interests of owners who have purchased houses.”
Earlier this month, when Country Garden’s bonds sold off sharply, the company upped its efforts to calm investors. It said it had received regulatory approval to issue new onshore debt and obtained the equivalent of $8.6 billion in funding from two major state-owned banks for purposes including acquiring projects from other developers and providing mortgage loans to home buyers. It also said it has repurchased some dollar bonds and fully repaid all its yuan bonds due this year.
Kenny Ng, a securities strategist of Everbright Securities International, said Country Garden’s 2021 results showed a significant business slowdown.
On a positive note, he said Country Garden has reduced its leverage and taken steps to conserve cash given its uncertain operating environment. “Country Garden’s business will still face certain pressure in the short term, but as one of the leading companies in the industry, it is expected that after the downturn period, the group will still have the opportunity to resume its growth pace in the future,” Mr. Ng added.