Country Garden shares drop 15% on $360 million discount on stock sale

Shares of one of China’s biggest real estate groups, Country Garden, fell 15% after the company announced a heavily reduced $360 million capital raise, in the latest sign of financial problems. liquidity hitting the country’s real estate sector.

The Hong Kong-listed developer said it would price the new shares at HK$3.25 each, nearly 13% below Tuesday’s closing price. The decline in the share price erased about 13 billion Hong Kong dollars ($1.7 billion) from the group’s market capitalization in morning trading.

Country Garden has not defaulted on its debt and its leverage is lower than other Chinese developers struggling with high debt levels, analysts noted. But although the Guangdong-based group said it would use the funds to pay down debt, the discounted share placement scared off investors.

The sale comes as scrutiny of China’s property sector has intensified in recent weeks. Tens of thousands of homebuyers have threatened to stop paying their mortgages to protest month-long construction delays by cash-strapped businesses.

Chen Long, a partner at Beijing-based consultancy Plenum, said the equity placement rattled investor sentiment at a tense time for the market. The country’s property developers face a $13 billion wall of foreign currency obligation payments due in the second half of this year.

But Chen said Country Garden should not be seen as “another Evergrande”, China’s most indebted property developer with more than $300 billion in debt. “He’s one of the few that didn’t fail. . . It’s a big difference,” he said.

The Hang Seng Mainland Properties Index, which tracks 10 of China’s largest Hong Kong-listed developers, fell 6% on Wednesday. Country Garden Services, the group’s residential property management services unit, and Longfor Group fell 19% and 7.5%, respectively.

Trading in the shares of several other index companies, including Evergrande, Shimao and Sunac, has been suspended in recent months following missed payments and a lack of financial disclosure.

Wednesday’s share price tumble ended a two-day winning streak after shares soared following a report that China’s State Council had passed a motion to create a real estate relief fund worth up to Rmb 300 billion ($44 billion) to support at least 12 indebted developers.

Analysts at S&P, the ratings agency, wrote in a research note that the mortgage payment boycott marked “a significant deterioration in China’s housing slowdown” that could reduce liquidity for struggling developers. The rating agency also warned of new defaults that could involve higher-rated entities.

Fitch placed Country Garden on negative watch last month on the pace of its recovery in contract sales and sales collection as well as rising debt levels.

Its analysts warned at the time that the company had strong exposure – around two-thirds of its sales last year – to lower-tier cities, which are expected to face increased price pressure as the weak growth and fragile demand in China are weighing on sales.

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