Country Garden Holdings Company Limited

Country Garden Holdings Company Limited (02007.HK) is a real estate developer that has long ranked among the top in China by sales, and for a number of years it focused on the dividends of urbanisation, consistently concentrating on third- and fourth-tier cities. In 2022, Country Garden Holdings continued to top the industry in sales, but suffered its first loss in the 16 years since its listing: a net loss of 2.96 billion yuan and a net loss attributable to shareholders of 6.05 billion yuan, compared with net profit and net profit attributable to shareholders of 40.98 billion yuan and 27.0 billion yuan respectively in 2021. According to Cheng Guangyu, executive vice president of Country Garden Holdings, speaking at the results briefing on 30 March 2023, judging from the whole of 2022, the supply-demand relationship in third- and fourth-tier cities had deteriorated markedly, inventories were high and house prices had fallen sharply. Thereafter, as China’s housing crisis continued, private developers fell into difficulty one after another, and Country Garden Holdings, Evergrande and Sunac were regarded as the largest among them, each having recorded annual contracted sales of more than 500 billion yuan at their peak.

Since the second half of 2023, despite continued rounds of policy easing, credit risk in the property market has not dissipated and has even spread faster from troubled developers to benchmark high-quality ones. According to Caixin, in July 2023 Sino-Ocean Group (03377.HK), a property investment platform controlled by China Life Insurance (Group), a central state-owned financial enterprise, became locked in a protracted tug-of-war with investors over extending its onshore bonds; a month later, Country Garden Holdings, long the industry leader by sales, suddenly announced that it was seeking to restructure its onshore debt, shocking the market, which immediately began to worry about who would be next. After its debt risk surfaced, Country Garden Holdings’ credit deteriorated rapidly and its sales plunged: its monthly attributable sales began falling in March 2023 but still held between 12 billion and 25 billion yuan through July; from August to October, monthly attributable sales dropped sharply to 7.98 billion, 6.17 billion and 6.31 billion yuan respectively, at least 50% lower than before the default. According to Caixin, a person close to Gemdale’s management said Country Garden Holdings’ sudden official announcement of an onshore debt restructuring in August 2023 caught developers that had not yet run into trouble off guard; Gemdale’s crisis was partly triggered by Country Garden Holdings, and Gemdale, Longfor and Vanke subsequently began to attract negative attention.

The speed at which Country Garden Holdings’ cash flow deteriorated surprised financial institutions. According to Caixin, the head of the risk-control department at a major bank said that when they met Country Garden Holdings executives in March 2023 things still seemed fine, and no one expected the cash flow to deteriorate so quickly afterwards. Another person at the Shenzhen branch of a joint-stock bank noted, by way of example, that Country Garden Holdings had signed credit lines of more than 300 billion yuan, and that had these been drawn down one by one, the company would not have defaulted in mid-year.

Country Garden Holdings also moved into logistics real estate. According to a 2017 report by the Economic Observer, with the support of its second-largest shareholder Ping An, Country Garden Holdings acquired a 25% stake in CIMC Industry & City Development; CIMC Industry & City Development mainly develops and operates industrial real estate, with industrial parks in 10 cities across China. The report also said that GLP, the leader in logistics real estate, had likewise been interested in cooperating with CIMC Industry & City Development, but Country Garden Holdings moved more decisively.

Country Garden Holdings also expanded into the Hong Kong market. In 2017, it bought a 60% stake in the site of the residential project “The Spectra” from Hong Kong developer Wang On Group (01222.HK), at a price 50% higher than Wang On’s earlier acquisition price. The project was co-developed by Country Garden Holdings, Wang On Group and China State Construction Engineering, focusing on mid-to-high-end housing. “The Spectra” officially went on sale on 26 November 2018; despite payment discounts of up to 14% and staff discounts, fewer than 20% of units were sold on the first day, which Hong Kong media described as the worst first-day sales of a large new development in nearly five months; nearly two months after launch, only 87 of the first batch of 110 homes had been sold. A property agent said Hong Kong buyers knew little about the Country Garden Holdings brand and its partner Wang On Properties was not a large developer in Hong Kong either, so buyer interest was relatively low at launch. According to Hong Kong’s South China Morning Post, a surveyor said the overall cost of “The Spectra” was about HK$15,500 to HK$16,000 per square foot (about 144,300 to 148,800 yuan per square metre), suggesting Country Garden Holdings might be selling at cost.

Country Garden Holdings adopts a high-turnover development model, and internally it once had a working requirement code-named “456”: launching sales four months after acquiring land, recovering funds in five months and turning cash flow positive in six months. According to Caijing, the high-turnover rule proposed by Country Garden Holdings has been summarised as “4568”, which, in addition to “456”, requires reinvesting in new projects eight months after acquiring land.

In industrial chain investment, Country Garden Venture Capital (Shenzhen Country Garden Innovation Investment Co., Ltd.) and Poly Capital jointly initiated the “Poly-Country Garden Industrial Chain Fund”, with the two parties cooperating as dual GPs. According to Zhou Anmi, general manager of Poly Capital, in an exclusive interview with China Real Estate Finance in January 2022, Poly Capital chose to cooperate with Country Garden Holdings, first, because the two sides thought alike and reached a consensus, and second, because Poly and Country Garden Holdings complement each other’s strengths, and they hoped to achieve results by relying on the backgrounds of both sides’ shareholders, similar investment strategies and a shared investment direction; as the partner, Country Garden Venture Capital, whose shareholder Country Garden Holdings has business empowerment capabilities on the property development side and capabilities for implementing scenarios on the property services side, could join hands with Poly Capital to make deployments and empower each other, jointly expanding the industrial chain ecosystem.