foreword
On August 10th, Country Garden suddenly issued a profit warning, predicting a net loss of 45 billion to 55 billion yuan in the first half of the year. This is mainly due to the decline in sales in the real estate industry, the decline in business gross profit margin, and exchange losses.
In the past years, Country Garden’s net profit has remained at the scale of 10 billion yuan, and this large loss is unprecedented. Country Garden executives apologized for this and promised to turn the crisis into an opportunity. But for many investors, these apologies can’t dispel their doubts. Overinvestment in third-and fourth-tier cities and large-scale layout failure seem to be the root cause of Country Garden’s predicament.
Country Garden’s net loss in the first half of 2022 may reach 55 billion.
The real estate market continues to be sluggish, and the industry’s leading enterprises are also doomed. Recently, Country Garden, one of the top 100 A-share real estate enterprises, announced that the net loss in the first half of 2022 is expected to be as high as 55 billion yuan, which is about 57 billion yuan more than the same period last year. Under the background that the whole industry is in trouble, even the strong can’t be immune.
Country Garden’s main business covers many cities across the country, covering residential, office and other sectors. Over the years, its sales scale ranks among the best in the industry. However, under the double pressure of repeated epidemics and tightening macro policies, Country Garden can’t escape the bad luck of sales decline generally faced by housing enterprises.
According to public data, from January to July 2022, Country Garden achieved sales of about 140.8 billion yuan, down 35% year-on-year, and nearly 60% lower than that in 2021. In July alone, sales plummeted by 78% year-on-year, and fell for the fourth consecutive month. The sharp contraction of sales directly leads to the loss of performance, and the decline of gross profit margin is also an important factor.
In addition to sales, the exchange loss caused by the fluctuation of RMB exchange rate and the increase of the impairment loss of the stock property value have also increased the loss pressure of Country Garden to some extent. More seriously, in the downturn of the industry, it is difficult for leading enterprises such as Country Garden to solve the liquidity pressure through financing.
Despite the difficulties, Country Garden is still actively fulfilling its corporate responsibilities. As a big industry, it holds more than 1 million properties to be delivered. It is reported that in 2022, Country Garden completed the delivery of 700,000 sets, ranking first in the industry. Country Garden is also brave in protecting the interests of owners.
The epidemic has repeatedly cast a shadow over the recovery of housing enterprises, and the tightening of macro policies has made it even worse. Under the superposition of these two unfavorable factors, even the top leading enterprises in the industry can’t escape the bad luck of a sharp decline in sales. The data shows that in the first half of 2022, Country Garden’s sales plummeted by nearly 30% year-on-year, and it shrank by more than 50% compared with 2021. This directly dragged down the overall performance of Country Garden.
In addition to the sharp contraction of sales, the fluctuation of RMB exchange rate has also brought some exchange losses to Country Garden. In addition, in the environment of the industry’s continuous downturn, Country Garden’s stock property will inevitably face certain pressure of value impairment, which will also have a negative impact on profit and loss. It can be said that the chronic diseases that plague the whole industry also afflict this A-share top 100 housing enterprises to varying degrees.
Super-large-scale Layout —— An Interpretation of Country Garden’s Loss
In the long run, the real estate industry is a cyclical industry. During the boom period, enterprises can easily fall into the strange circle of over-expansion. Once the industry falls into the cold winter, the tests faced by enterprises are far beyond the norm. Country Garden’s expected heavy losses are precisely the dilemma that an industry giant has encountered under the dual pressure of expansion and financing.
If blind optimism during the period of rapid growth is one of the reasons leading to today’s dilemma, then rashly promising high return on investment has also laid a hidden danger for enterprises. Over the years, Country Garden has used its dominant position to promise generous returns in exchange for financial support. However, at the moment when the growth rate of the industry is slowing down, these commitments become difficult to achieve, which has an impact on the cash flow and credit of enterprises.
At this point, the profound reflection of Country Garden management is particularly valuable. They admit that they don’t know enough about cyclical changes, and the third-and fourth-tier cities are over-expanding and withdrawing in time. The whole industry has also fallen into an unprecedented dilemma-the tightening of land supply has led to soaring prices, support policies have stimulated overheating of the market, and vicious competition among developers has formed a vicious circle.
At present, China’s economy is facing a new round of reform. In this context, the real estate industry needs profound reflection and adjustment, and developers need to examine their own models. In the short term, self-help should be taken by improving efficiency and adjusting structure. In the long run, it is necessary to treat cyclical characteristics rationally and avoid excessive optimism. When the policy and market environment change, it is the way for housing enterprises to maintain long-term stability to remain cautious and resilient.
However, behind the financial report, we should also pay attention to the internal governance and risk management of enterprises. Over the years, Country Garden’s senior management has a low shareholding ratio, and the incentive and restraint mechanism is flawed. At the same time, enterprises rely too much on debt financing and fail to supervise project selection and cost control, which makes it difficult for a large number of projects in third-and fourth-tier cities to recover their costs. The deep-seated reasons of these problems are related to the imperfect checks and balances mechanism of corporate governance.
At the moment when the downward pressure on the real economy is increasing, not only Country Garden, but also many highly leveraged enterprises are facing the test of credit risk. From this point of view, behind the dilemma is the problem of excessive debt leverage and insufficient risk supervision in the whole society. In the future, not only enterprises themselves need to reflect and adjust, but also it is urgent to guard against systemic risks at the macro level.
The dilemma of Country Garden is not only a case of an enterprise, but also reflects the characteristics of an era. In the face of changes, developers and the whole society should remain sober, prudent and resilient. Only by deep reflection can we create a way out.
The transformation of the real estate industry continues. In the short term, the market environment may still be difficult to completely reverse. But in the long run, the growth of human settlement demand is an inevitable trend. Grasping the new direction and conforming to the new trend, housing enterprises still have broad development space. Only by continuous innovation and Excellence can we create a new situation in the changing situation.
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According to relevant reports, Country Garden has recently faced some short-term liquidity problems, including the pressure of repaying debts and paying coupons. However, in the long run, the real estate market in China is facing deflation, and the operating environment of housing enterprises is becoming increasingly severe. Whether Country Garden can successfully resolve the current predicament remains to be seen.
Country Garden has a heavy position in low-tier cities, which has a great impact on its performance in the cold winter of the industry. It actively disposes of its assets to pay its debts, showing its sense of survival. At present, there are still many questions about whether Country Garden can successfully control all kinds of uncertainties and achieve a smooth transition.
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