Country Garden Troubles Threaten to Cause Mayhem for Chinese Property Firms and Banks

Country Garden Holdings Co., teetering on the brink of default, will be the center of attention during a busy reporting week for Chinese property developers and banks as Asia’s earnings season approaches its final leg.

(Bloomberg) — Country Garden Holdings Co., teetering on the brink of default, will be the center of attention during a busy reporting week for Chinese property developers and banks as Asia’s earnings season approaches its final leg. 

Previously one of the nation’s biggest builder, the company missed dollar bond interest payments earlier this month and needs to pay within a 30-day grace period, leaving investors guessing when exactly its default deadline will be. 

The crisis has pushed its notes deeper into distress and weighed on China’s broader financial markets. The impact threatens to be worse than when peer China Evergrande Group defaulted as it has four times as many projects. 

Evergrande posted a 33 billion yuan ($4.5 billion) loss in the first half and finally resumed trading after 17 months, with shares slumping as much as 87%. Its creditors will vote on the offshore-debt overhaul proposal Monday, in what would be one of the country’s biggest restructurings ever.

China rolled out further mortgage easing policies on Friday, in the latest move to bolster its residential property market in an attempt to support economic growth. Developers Sunac China Holdings Ltd. and China Vanke Co. will also announce results this week.

Major Chinese banks including Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. may be dragged down by the property slump and the worsening liquidity crunch surrounding shadow bank Zhongzhi Enterprise Group Co..

Highlights to look out for: 

Monday: BYD’s (1211 HK) final numbers are due after preliminary results showed first-half net income tripled thanks to cost controls and a drop in raw material prices. Its scale and supply chain could keep profitability steady amid an EV price war. Vehicle rollouts and battery-capacity expansion should underpin its long-term revenue growth as China pushes for electrification, BI said. BYD will benefit from accelerated consolidation, leading to increased market share in 2024 and 2025, Citi’s Jeff Chung wrote. July deliveries rose to a record, with Chinese EV firms overall seeing rising sales.

  • Fortescue Metals (FMG AU) revenue was probably dragged down by lower iron ore prices, with rising costs squeezing margins, according to BI. The firm earlier forecast iron ore shipments for the full year of as much as 197 million tons. The iron ore market faces a “clear bearish demand shock” if China orders provinces to impose steel-production cuts in the second half, Goldman Sachs said. Cost control will be in focus in its full-year earnings as capital spending will probably remain at elevated levels going forward, which may reduce balance-sheet flexibility and push down dividends, BI said.

Tuesday: Xiaomi (1810 HK) may disappoint with a 10% dip in the second-quarter sales, missing consensus expectations, BI said. That was likely driven by prolonged smartphone destocking and weak demand in China. Estimates show the smartphone business remains the biggest drag with lower shipment volumes and selling prices, the latter due to heavy discounts during China’s annual 618 shopping festival. Rising smart-EV development expenses may also weigh on earnings, while its internet services business maintained healthy margins. 

  • Nio (NIO US) could see second-quarter revenue and vehicles sold at the lowest since 2021, estimates show. EV deliveries during the quarter fell 24% sequentially, causing sluggish plant utilization rates to wipe out any margin boost from lower battery costs, BI said. Coming quarters look optimistic as deliveries crossed 20,000 units for the first time in July.
  • AgBank (1288 HK) may struggle to increase earnings in the second half and into early 2024, BI said.

Wednesday: Country Garden (2007 HK) said earlier this month that it expects a first-half loss of as much as 55 billion yuan. It may struggle to offload unsold properties for cash, despite having more inventory than Evergrande had at the onset of its 2021 liquidity crisis. Waning sentiment in China’s low-tier cities may dissuade strategic investors and home buyers, said BI. Some bondholders are demanding full repayment of a local bond after the firm proposed a three-year extension for a yuan-denominated note, casting uncertainty over its proposal to delay repayment to avoid what would be a maiden bond default. 

  • China Vanke (2202 HK) and Sunac China (1918 HK) were also impacted by the poor housing-market sentiment. Sunac earlier warned it would post a first-half loss of up to 16 billion yuan, promptly turning it into a penny stock. Vanke’s liquidity stress probably persisted, as its contracted-sales decline might deepen after a 9% year-on-year drop in the first seven months of 2023, BI said.
  • ICBC’s (1398 HK) gloomy margin and fee prospects threaten to suppress growth in the second half and early 2024. Bank of China’s (3988 HK) offshore strength may offset domestic margin woes, with growth remaining modest in the mid-single digits this year, BI said.
  • Maybank (MAY MK) may face pressure from rising deposits competition and slow loan growth, BI said. Malaysia’s biggest bank plans as much as 4.5 billion ringgit ($969 million) in capital spending in the next three-to-five years, mainly to upgrade digital infrastructure, according to its CEO. Maybank has pledged to funnel money into green loans as the nation scales up investments in renewable energy.

 

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–With assistance from Shwetha Sunil, Ryotaro Nakamaru and Nicholas Takahashi.

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