(Bloomberg) -- China’s largest developer Country Garden Holdings Co. warned that first-half earnings probably tumbled as much as 70% amid an escalating property crisis in the country.
The Foshan-based company’s preliminary core profit could reach 4.5 billion yuan ($664 million) to 5 billion yuan for the first six months of the year, down from 15.2 billion yuan a year earlier, according to a filing on Thursday.
Country Garden, once considered among China’s safer real estate companies, has been engulfed by the sector’s unraveling following regulatory crackdowns and pandemic restrictions that have pummeled housing sales. The developer lost its last investment-grade rating this week after Fitch Ratings downgraded it to junk.
A liquidity crisis among China’s property developers has led to a plunge in new projects and put about 5% of existing apartment construction on hold, sparking mortgage payment boycotts by angry homebuyers. The market collapse could lead to profit declines at other firms.
Country Garden “will not be the only one,” said Shujin Chen, analyst at Jefferies Financial Group Inc. Chen expects more private developers to report 25% profit declines in the first half given weak sales. Still, cash flow will replace profit as key focus in upcoming earnings season, she added.
The developer’s Hong Kong shares dropped 5.2%, extending the decline this year to 65%. Its dollar bonds erased early losses to rise about 2 cents on the dollar, according to Bloomberg-compiled prices. Most of its bonds are below 35 cents on the dollar, after some traded near face value early this year.
Country Garden said net income in the first half was about 200 million yuan to 1 billion yuan, down from 15 billion yuan a year earlier. The company expects to report full results on Aug. 30.
In an investor meeting held after the warning, a Country Garden executive said the firm’s cash flow remains strong even under extreme stress tests, according to people on the call who asked not to be identified. The company saw a 92% cash inflow from 185 billion yuan of contracted sales in the first half, the people said. A Country Garden media representative didn’t immediately comment.
As China’s only large developer with a lower-end market push, Country Garden is facing weaker home-buying demand. Almost four-fifths of its land bank is in so-called tier-3 and tier-4 cities, where the developer has sought migrant workers looking to upgrade to affordable apartments near their hometowns. Home sales in the world’s second-largest economy have tumbled for more than a year, and prices have dropped for 11 straight months.
The company cited a tough business environment because of Covid-19, a decrease in revenue recognized for properties sold caused by a downturn in the market, along with impairment and foreign exchange losses.
Late last month, it sold stock at a 13% discount to raise HK$2.83 billion ($360 million), signaling that even the healthiest developers are in distress. Some of the proceeds will be used to repay offshore debt, it said. Country Garden has the most junk bonds among all issuers, according to data compiled by Bloomberg.
Investors are watching to see whether fund raising will get easier after the government sought to help some builders issue debt. Country Garden said on the call that it plans to sell an onshore bond with a guarantee from China Bond Insurance Co., without elaborating on the potential size, the people said.
That government backing will likely provide support for the company’s bonds, according to Bloomberg Intelligence analysts Daniel Fan and Adrian Sim.
“First-half’s disastrous sector conditions are well known and market focus is less on accounting profit than cash flow, especially repayment risk,” they said in a research note. “The firm’s outlook in this area may have improved.”
(Updates with details from investor call in fourth, 12th paragraphs)
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