Country Garden: Valuation Lowered and Uncertainty Rating Raised on Formal Default

We cut our fair value estimate on Country Garden Holdings 02007, or CGH, to HKD 0.50 from HKD 1.20 following the company’s essential default on offshore bond interest payment in October 2023. Although this is no surprise given CGH’s expectation of not meeting offshore payment obligations within grace periods, we expect the formal default to further weigh on homebuyers’ confidence in Country Garden’s brand. Hence, our updated forecast reflects lingering sales and revenue decline through 2027, with 2024-25 seeing the most pronounced drop. We also factor in more protracted operating losses for CGH through 2025, compared with 2024 previously, due to weaker assumptions on sell-through rates and home prices in lower-tier cities. Moreover, we lift CGH’s Morningstar Uncertainty Rating to Extreme from Very High amid its depressed earnings and muddled outlook of overseas debt restructuring. With CGH’s liquidity subdued by the sales slump, the company’s survival hinges on bondholders’ acceptance of a proposed repayment schedule, in our view.

With CGH missing coupon payment and appointing financial advisors, we think its debt restructuring should be expedited in the next few months. Although the company successfully extended the maturity for nine series of onshore corporate bonds, we think overseas creditors will likely demand a larger proportion of the amount to be repaid earlier for a higher margin of safety. In addition, creditors may reject the holistic solution suggested by CGH, leading to an eventual liquidation of the company’s assets. As CGH remains heavily exposed to projects in less-developed areas, we suspect that further asset divestment could materially lift CGH’s debt-servicing capability. Given a lack of regulatory push or financial institutions’ support, we caution that CGH’s status as a going concern will remain in the balance.