Back in 2021, the world was rocked by the Evergrande crisis – at the time and since then, our analysts have highlighted the crucial need for developers to generate home sales, both to maintain sufficient cash on hand and to navigate a challenging credit environment.
For many, home sales did not materialize. Last month, the monthly contracted sales of the 100 largest developers recorded a 25% decline in value compared to the second quarter of 2022, when the physical home sale booths were closed.
The latest company to fall victim is Country Garden (02007) for two main reasons. First, Country Garden was significantly affected by sluggish housing sales and faltering prices, but second, crucially, the firm through this time continued its years-long rapid expansion into lower-tier cities. Now, even as sales are recovering in upper-tier cities, Country Garden continues to be hampered by its lower-tier city portfolio, where sales remain slow.
Even as we await clarity from Country Garden’s coupon payment as well as its interim earnings due this month, the destruction of investor confidence will take much time to restore. Our equity analyst Jeff Zhang expects Country Garden to default.
Zhang also believes that after the Politburo meeting, policies will be adjusted faster. In his view, the government may consider the removal of homebuying constraints and reducing the down payment ratio to entice potential homebuyers. With a larger extent of policy support, coupled with potential discounts offered by developers still in business, the home market is expected to only see its bottom before the end of this year.
For Morningstar, I am Kate Lin.
Country Garden Stock Bulls Say
- The low-cost landbank, coupled with a low selling price, characterizes CGH’s differentiated positioning with a focus on lower-tier cities with well-contained costs.
- A strong presence in lower-tier cities implies weaker competition for CGH during the sector roll-up.
- New ventures such as construction robotics may further improve CGH’s operating efficiency as well as potentially building up market leadership in robot units.
Country Garden Stock Bears Say
- Heavy exposure to lower-tier cities makes CGH more susceptible to faltering housing demand.
- Low average selling prices of projects in less affluent areas will squeeze the profitability of CGH.
- The switch of CGH’s strategies to acquire land parcels in higher-tier cities will see stiff competition from sizable state-owned developers.
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