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China’s Real Estate Giants Face Insolvency Amid $500 Billion Debt

Published 17/10/2023, 02:32 am

China's largest real estate developers, China Evergrande (HK:3333) and Country Garden, are grappling with insolvency as they collectively shoulder a $500 billion debt. The crisis, which began in 2021 when Evergrande defaulted, has severely impacted China's economy and shaken investor confidence.

Country Garden recently announced its inability to pay nearly $200 billion of debt, signaling a potential escalation of the crisis. Both companies are facing significant challenges, with Country Garden still having over 400,000 unfinished apartments that it sold. According to InvestingPro Data, Country Garden has a market capitalization of 216.51M USD and a P/E ratio of 9.55. The company's revenue growth over the last twelve months (LTM2024.Q2) was 5.05% and it had a gross profit margin of 48.14%.

The housing crisis has led to doubts about China's economic future and undermined faith in the Chinese Communist Party’s promise of a better economic future. The World Bank and the International Monetary Fund have subsequently downgraded China’s economic growth outlook.

The crisis has been exacerbated by a lack of consumer interest in buying real estate even during the Golden Week holiday, traditionally a period of high sales. This presents a significant challenge for China's political leadership as they attempt to shift economic growth away from real estate dependence. An InvestingPro Tip worth noting here is that Country Garden, despite being a prominent player in the Real Estate Management & Development industry, is trading at a low revenue valuation multiple.

Evergrande, founded by Xu Jiayin in 1996, played a significant role in China's housing boom. The company expanded into various sectors such as bottled water, pig farming, electric cars, and professional soccer. However, aggressive borrowing to fuel rapid expansion and the government's "three red lines" policy restricting real estate companies' ability to borrow from banks led Evergrande into financial crisis. InvestingPro Data shows that Evergrande's market cap is 2586.46M USD, but it has a negative P/E ratio of -0.32, indicating that it's not profitable. The company's revenue growth over the last twelve months (LTM2023.Q2) was 9.73%, but it suffered a gross profit margin of -1.74%.

The recent detention of Evergrande's founder, Xu Jiayin, on suspicion of "illegal crimes" raises further questions about the company's future. Despite assurances from the government that home buyers will not be casualties of the real estate market reckoning, completing the unfinished apartments promised by now insolvent developers is estimated to cost between $55 billion and $82 billion.

Economists, investors, and central banks worldwide are urging Beijing to stabilize the housing crisis. Yet, despite efforts by Chinese officials to stabilize falling real estate sales, these attempts have had minimal effect. As the broader economic outlook darkens, speculation about Beijing's next steps continues. Another InvestingPro Tip to consider is that Evergrande has been quickly burning through cash, and its stock generally trades with high price volatility. For more insights like these, check out InvestingPro's additional 3333 tips for Evergrande and 2007 tips for Country Garden here.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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