Country Garden — Can this Non-SOE Developer Survive?

• Recently, Country Garden became the market focus. There is a lot of negative news, rumours and signs that the Group's liquidity is tight. It is suspected to be "lying flat", without an intention to repay the offshore debt. As a result, its USD bonds dropped to $8-$17 while the onshore bonds plunged to $20-$30, reflecting the market's expectation that Country Garden will face a debt default.

• Indeed, the Group admitted that it is facing liquidity issues. It did not pay two USD coupons originally due on 6 August, amounted to around USD 22.5 million. The two coupons have 30-day grace periods. The actual maturity date will be 6 September.

• At the end of July, the Group intended to place and issue new shares to get the proceeds of around HKD 2.34 billion. While the demand for the shares was sufficient, it voluntarily suspended the share placements. It seems that the Group is “lying flat” and giving up the repayment of debts.

• The president and executive director of the Group’s sister company (Country Garden Services), Changjiang Li, reduced his shares in Country Garden Services again by 3.23 million shares, with an average selling price of HKD 8.92 per share and proceeds of about HKD 28.79 million. This is the largest amount of holdings that Changjiang Li has ever reduced, which led the market to suspect that the Group is about to game over.

• The founder family, Yang Guoqiang family, also weirdly transferred part of its shares in Country Garden Services to Guoqiang Public Welfare Foundation (Hong Kong), amounting to 674 million shares of Country Garden Services (20% of the issued shares). Besides, Country Garden Services also paid a dividend of around RMB 1.25 billion early. The timing of the transfer and early dividend payment is unusual, which might reflect the tightening liquidity of Yang Guoqiang family or Country Garden and their desire to protect their personal wealth.

• As shown in Chart 1, the Group’s attributable contracted sales for the first seven months were around RMB 140.8 billion, dropped by 35% YoY, with the monthly sales in July further deteriorating to RMB 12.1 billion, a 60% YoY decline. The sales performance was poor. The cash collection from sales is the key to the Group’s debt repayment. We believe that monthly contracted sales of around RMB 40 billion will enable the Group to have sufficient ability to repay the interest on the debt (ignoring the principal repayment at the moment). That said, since the Group is getting further away from this RMB 40 billion monthly sales target, the chance of failing to make the interest payment will only get higher and higher.

Chart 1: Monthly Sales since Year-to-date

• We think the falling down (i.e. default on the public market) of Country Garden will be sooner or later, given the poor sales figures, severe regulatory pre-sales proceed requirements and tightening refinancing channels. However, there is still a month to go before the actual maturity date of two USD bond coupons. The Group could liquidate its assets (such as the venture capital with a book value of around RMB 20 billion) or seek help from the Government and wait for further guidance from the Government.