By A grim assessment from Morgan Stanley has heightened concerns about the troubled Chinese property developer, Country Garden Holdings Co. Ltd. The company’s stock plummeted to a record low after announcing the suspension of trading for at least 10 onshore bonds. With shares down 46% for August, the real estate sector in China is facing fresh worries about its high debt levels.
Bleak Outlook
Morgan Stanley analysts have expressed doubts about Country Garden’s ability to recover from its liquidity issues anytime soon. They warned that the company’s worsening financial situation may lead to a higher risk of default, further deteriorating its asset value and operations. This assessment comes as a blow to one of China’s largest developers, which now faces significant challenges.
Lingering Memories of Evergrande Crisis
This crisis in the Chinese real estate market has reignited memories of the 2021 collapse of China Evergrande Group, which triggered a selloff in China stocks that briefly impacted Wall Street. However, Country Garden’s situation is even more critical due to its extensive portfolio of projects. The potential consequences of its financial struggles could be much more far-reaching.
Bleak Results and Downgrade
Country Garden has already warned of a substantial loss for the first half of the year, amounting to around RMB55 billion ($7.62 billion). Additionally, Moody’s downgraded the company further into junk territory after it allegedly missed interest payments on its debt. This string of negative developments has prompted Morgan Stanley analysts to downgrade Country Garden shares to underweight from equal-weight. They have also significantly reduced their share price target.
Sales Expected to Deteriorate
The Morgan Stanley analysts anticipate that Country Garden’s sales may worsen in light of the negative news flow surrounding the company. Homebuyers are likely to be concerned about stalled construction and undelivered projects, further impacting the company’s financial performance.
Challenges Faced by Country Garden Amidst Liquidity Crisis
Country Garden, a prominent real estate company in China, is currently facing significant challenges due to liquidity issues. Local governments have the ability to tighten regulations related to the company’s pre-sales deposits, while at the same time, suppliers can restrict the availability of building materials. These factors are expected to further worsen the company’s asset value and liquidity position, leading to a slowdown in construction projects and severe margin compression.
Experts, including Cheung and his colleagues, express concern about the extensive exposure of Country Garden in low-tier cities, predicting that it may take several years for the company to recover from its current liquidity challenges. Avoiding default relies on increased support from regulators, and even with potential sales improvements and policy easing, both scenarios are deemed challenging.
The situation is further complicated by sluggish China data, which has a detrimental effect on companies like Country Garden. In July, credit reports indicated that new yuan loans reached their lowest level since 2009. The hope for stimulus measures from China’s Central Bank to bolster the struggling real estate sector has been met with disappointment. These policies have failed to address the persistent issues plaguing the property industry, which in turn poses a risk of spreading to other sectors.
The repercussions of these challenges are visible in the stock market. Hong Kong’s Hang Seng index (HK:HSI) has dropped by 1.5% and has faced a loss of over 6% throughout the month. Similarly, China’s CSI 300 Index (XX:000300) has fallen by 0.7% and has experienced a decline of more than 3% in August.
These developments emphasize the urgent need for Country Garden to address its liquidity concerns and implement effective strategies to navigate through this difficult period for the real estate market in China.
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