““We see more signals that Country Garden’s worsening liquiditymay lead to a higher chance of default in the near term. Thismay further deteriorate the company’s asset value andoperations, and take years to recover from.””
A grim assessment of Country Garden Holdings Co. Ltd. from Morgan Stanley added to pressure on the troubled Chinese property developer on Monday.
Country Garden’s
2007,
stock tumbled 18% to a record low in Hong Kong trading, the day after it announced to the Hong Kong regulator that trading for at least 10 onshore bonds would be suspended. Shares have lost 46% for August so far, raising fresh concerns over China’s highly indebted real-estate sector. Other real-estate stocks also fell, such as China Jinmao Holdings
817,
The crisis has stirred uncomfortable memories of 2021, when a meltdown of rival developer China Evergrande Group sparked a selloff for China stocks that briefly spread to Wall Street. But the stakes could be higher as Country Garden, one of the country’s biggest developers, has far more projects.
In recent days, the company warned of a loss of up to RMB55 billion ($7.62 billion) for the first half of the year, and has been downgraded deeper into junk by Moody’s territory over apparently missing interest payments on debt.
In a note to clients, also dated Sunday, Morgan Stanley analysts slashed Country Garden shares to underweight from equal-weight, or neutral, and cut their share price target by 69% from HK$2.40 to HK$0.75.
Analysts led by Stephen Cheung predicted the company’s sales could worsen on negative news flow that may worry home buyers further over stalled construction of undelivered projects.
“Also, local governments could tighten the usage of the company’s presales deposits, while suppliers may limit the supply of building materials. These may further deteriorate the company’s asset value and liquidity position, thus leading to slower construction and severe margin compression,” said Cheung and his colleagues.
“Considering its large exposure in low-tier cities, we believe it could take years for Country Garden to recover from its liquidity challenges,” they added. Avoiding default will depend on more support from regulators, while more sales improvement and policy easing could ease liquidity concerns, but both scenarios were “more challenging,” said the bank.
Analysts have also pointed to sluggish China data complicating matters for companies such as Country Garden, with July credit reports showing new yuan loans at their lowest level since 2009.
“There had been high hopes that stimulus from the [China’s] Central Bank might bolster the fragile state of the sector, but policies have underwhelmed investors and have failed to quell continuing troubles across the property landscape which risk spreading to other sectors,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown, in a note to clients.
Hong Kong’s Hang Seng
HK:HSI
dropped 1.5% and has lost more than 6% this month, while China’s CSI 300 Index
XX:000300
fell 0.7%, down over 3% for August.
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