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06 Nov 2023
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Tan Kin Lian - Investment Journey
Can Country Garden ride through this difficult period?
Country Garden is the biggest property developer in China. They were not as highly leveraged as Evergrande, which is the next largest developer. Evergrande collapsed in December 2021.
On 18 October 2023, Country Garden failed to pay the interest on a US dollar bond. The bond holders appointed a legal firm to discuss with CG on restructuring its debt. On 26 October, the CDS panel declared that CG had defaulted on its debts.
The stock price of CG was HK$10 in May 2021, before the China government took the steps to restrict credit to the property sector. This caused Evergrande to collapse in December. The other property stocks declined. CG dropped to a low of $0.65 on 26 October (i.e. a drop of 93.5%)
Some investors expected the China government to provide financing for CG to avoid a default. CG has 1,000 projects all over China. A default would be a catastrophe to the millions of home buyers and to the economy.
The financing did not happen. The foreign bond holders did not act to take legal action against CG for the default. Two weeks had passed. There were no further news.
The stock price had since recovered to $0.76. It appears that the bond holders might agree to restructure their bonds and allow more time for CG to pay the interest.
CG is basically sound. The asset value is $4.12 per share, compared to a market price of $0.76. The discount is 82%.
The China government had introduce measures to stimulate the property market by making it easier for buyers to get bank loans. However, this will take some time, maybe a year or so, for the public to gain confidence. When the market recovers, CG should be able to get cash flow to meet its bond payments.
A large part of the debt of CG is from the domestic banks. They are not exerting pressure on CG at this time. They will probably wait for the property market to recover. It appears that the foreign bond holders may agree to restructure their bonds.
I have a big investment in CG. It is showing a large loss at this time. I am holding the stock and will wait for its recovery. My target is $2 per share, or 3 times of the current price.
Tan Kin Lian
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