How Can Country Garden Survive and What is in Its Balance Sheet?

Mention the China Property Debt Crisis, 2 companies come to mind- China Evergrande and Country Garden. China Evergrande has fallen with its bankruptcy proceedings. Country Garden on the other hand is still in survival mode and lurching from repaying each month's interest trying to ensure no impairment or corporate action to dilute existing shareholders.

Currently Country Garden has a HKD$26.2 billion (RMB$24.5 billion) in market capitalisation)

Balance Sheet is Barely "Balanced"

Debt

Unlike the headline news which claims Country Garden has hundred billions in USD of debts, the truth is that developer has only RMB 257.9 billion (less than USD 100 billion) in debts. Below is the latest debt standing in its financial report as of end June 2023.

Cash

The developer has RMB 101.1 million in unrestricted cash (Net debt position = RMB 156.9 billion) with RMB 29 billion which wil be released if its properties and loans are repaid.

Properties Under Development

  

Country Garden has close to RMB 1 trillion in properties for development or completed. Do note China has a different housing payment system as opposed to Singapore. In China, a person has to pay 100% of the home purchase to the developer at the start. To the developer, the amount collected is classified as unearned revenue (trade payables) under the developer's liability section, While the property is classified as "Properties Under Development" under the asset section

Below is the snapshot of Country Garden's Assets and Liabilities:

What I am more interested is seeing how many unsold units there are in Country Garden's Balance Sheet (which is clearly shown). We can see that there are RMB 56.8 billion in properties ready for sale (aka unsold). 

Given the knowledge that most of Country Garden developments are in Tier 3/4 China cities, in Malaysia, the deduction is that the RMB56.8 billion is not the true value, a haircut is necessary and I believe a 50% discount warrants it (RMB 28.4 billion) to quickly sell it if there is cash crunch.

Recent Sales

Secondly, we would be aware that Country Garden recently sold off an associate company. There will be a cash infusion and realisation of RMB 0.5 billion in gaines.

Lastly, the company recently extended the maturity of 8 onshore China bonds (which amounted to about RMB 7.6 billion). Instead of maturing in 2023, it has been brought to 2026 for maturity.

Cashflow Perspective

Therefore from a cashflow perspective, Country Garden has about RMB$91 billion in funding gap it has to bridge. This has to be achieved by the sale of its unsold properties. Luckily for the company RMB$56 billion + RMB $7.6 billion of its debts mature from 2025 onwards

While in terms of bank borrowings, it has RMB $38 billion maturing from 2025 onwards.

So the real cash crunch for Country Garden starts from 2025. If it is unable to sell enough of its land bank and unsold units to bridge the RMB$91 billion funding gap, from 2025 country garden will declare insolvency and it may mean a large wipe off in value for shareholders (similar to China evergrande)

Equity

As of end June 2023, Country Garden has about RMB$254 billion in equity. However given the awareness that there are unsold completed units (RMB$28 billion deduction) + uncompleted apartments (which are hidden under the RMB$818 billion under development line item).

Using its current market cap of RMB$24.5 billion, this means the market is pricing in a further RMB$201 billion in write down from its RMB$818 billion of properties under development. To question to stock market punters is that is a 25% haircut excessive or still not enough?