Country Garden Earnings: High Default Risk Remains Amid Weak Sales and Heavy Debt Obligations

Country Garden Holdings 02007 , or CGH, first-half 2023 results reflected significant loss on write-offs and lower average selling prices. While the company is focused on averting default, we think the lack of cash flow details has added to the murkiness of CGH’s debt servicing capability. We now project a net loss of CNY 44.7 billion and CNY 4.5 billion in 2023 and 2024, respectively, after factoring in inventory write-offs of CNY 10.7 billion and CNY 3.0 billion. Despite the negatives, we maintain our fair value estimate of HKD 1.20, as we have addressed CGH’s high likelihood of default by previously raising the weighted average cost of capital and cutting gross margin estimates. Given the continuing absence of USD-denominated bond interest payment, we believe CGH’s default risk remains elevated, barring substantial credit extension or financial support.

While CGH reported a CNY 101.1 billion cash balance, which should cover CNY 69.5 billion borrowings due within a year, recent credit events suggest a shortfall of cash available for principal and interest payments. Moreover, we foresee that subdued homebuyers’ confidence in CGH will be the main overhang on sales in the future, further affecting the firm’s ongoing cash flow. The near-term debt pressures remain severe, and CGH still needs to set aside funds to cover its offshore debt and may need to rely on refinancing to do so. We are also wary of over 10 domestic bonds that are suspended from trading pending a restructuring. We think a quick resolution should benefit CGH, but this appears unlikely unless there is a regulatory push. If this issue drags on, it will remain an overhang for CGH.