As the calendar turns to 2025, the once-stalwart real estate giant, Country Garden Holdings (2007.HK), which has been in a prolonged state of inactivity on the capital market for nine months due to suspension of trading, is beginning to make headlines againThese reports, however, uncover a harrowing tale of financial struggle and crippling losses.

On the evening of January 14, 2025, Country Garden released its annual financial statements for 2023 alongside mid-year results for 2024. The numbers were staggeringFollowing a turn from profit to loss in 2022, Country Garden reported a net loss of approximately 178.4 billion yuan for 2023, with an additional loss of 12.842 billion yuan in the first half of 2024. Furthermore, as of June 30, 2024, the company's total liabilities soared to around 1.14 trillion yuan, with interest-bearing debts estimated at about 250.15 billion yuan, a slight increase from the end of 2023.

There was a time when Country Garden basked in the glory of the real estate sector

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By 2013, its sales had already surpassed 100 billion yuan, consistently outpacing many of its competitors in subsequent yearsHowever, in 2023, the company exposed the severe challenges it faced, claiming this was the most significant difficulty since its inceptionToday, the priorities of the business revolve around debt resolution and ensuring property deliveries to anxious buyers.

On January 9, 2025, Country Garden unveiled a long-awaited plan to restructure its overseas debtsThe company's ambitions involve reducing its liabilities by up to 11.6 billion US dollars while extending the maturity of its debts by as long as 11.5 yearsInsiders have informed local media that numerous creditors have expressed willingness to support the company through these trying times, provided it swiftly completes its restructuringHowever, with Country Garden still navigating the tumult of delivering properties and stabilizing its balance sheet, predicting a timeline for when it will once again achieve profitability looks challenging.

Operating losses have become a glaring reality for the firm

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Following a failure to disclose its performance by the required deadline, the stock was suspended from trading beginning April 2, 2024. Now, with two financial reports finally completed, concerns surrounding Country Garden appear undiminished.

According to its reports, Country Garden saw its total revenue dip to approximately 401 billion yuan in 2023, which marks a decrease of 6.8% year-on-yearA substantial 97.6% of this revenue stemmed from real estate development, albeit down by 6.2% to about 391.25 billion yuan, with an average sales price per property delivered standing at around 7,431 yuan per square meterThe company achieved a contractual sales amount of approximately 174.3 billion yuan in 2023, with sales covering an area of about 21.7 million square meters.

In the report, the company attributed its sales struggles to ongoing declines in the Chinese real estate market

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Since April 2023, Country Garden's presale performance notably dwindled, without any signs of a significant rebound.

A deeper dive reveals that Country Garden invested heavily in third- and fourth-tier cities rather than focusing on larger metropolitan areasFrom 2018 to 2022, over 50% of its sales came from these lower-tier cities, while sales in first-tier markets never accounted for more than 10%. Statistical analyses from the China Index Academy indicate that between January and November 2024, the sales area for newly built homes in third- and fourth-tier representative cities fell more than that in first- and second-tier areas, marking a 25% year-on-year decline and cementing a sluggish market sentiment.

Reflecting on their operational strategies, company management acknowledged in an August 2023 announcement that they vastly underestimated the depth, severity, and persistence of market downturns and recognized their heavy investment focus on lower-tier cities as a miscalculation

The 2023 financial documentation included significant inventory impairment provisions, revealing that the net impairment for properties under construction and completed but unsold units reached approximately 82.35 billion yuan, contributing significantly to its lossesHowever, it was observed that the inventory impairment charges were considerably lower in the first half of 2024, reduced to about 2.7 billion yuan.

Those close to the company disclosed that most of the inventory impairments had now been accounted for, unless there are further dramatic declines in the market going forwardGiven the dynamic nature of fair value related to inventory based on market conditions, as external environments stabilize, some of these impairments may revertThe real estate industry's typical fluctuations in pricing and subsequent asset devaluation indeed necessitated substantial inventory impairments, reflecting Country Garden's historically prudent approach to financial management.

In the first half of 2024, Country Garden's revenues plummeted by 54.9% to 102.1 billion yuan, with net losses calculated at approximately 12.842 billion yuan

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Yet insiders hinted at improvements over 2023, as the anticipated losses for the entire 2024 year may narrow significantly.

Despite these operational challenges, the company remains intensely focused on debt management—an area that is a persistent source of concern for investors, with fears that Country Garden might collapse like its peer, EvergrandeFinancial disclosures indicated that as of June 30, 2024, the company's current liabilities were approximately 1.07 trillion yuan, with non-current liabilities around 66.055 billion yuan, translating to total liabilities of about 1.14 trillion yuan—substantially less than Evergrande's towering 2.4 trillion yuanHowever, the ongoing financial storm sees Country Garden juggling liabilities of around 147.29 billion yuan in default or cross-default situations.

Restoring a healthier balance sheet is crucial for Country Garden to escape its predicament

From August 2023 onward, the company engaged in serious debt restructuring efforts, successfully extending the due dates for nine domestic bills, thereby extending the maturity periods about three years for liabilities totaling approximately 15 billion yuanHowever, the company took longer to initiate its overseas debt management process, which led to apprehensions in the market.

By the end of 2023, defined overseas debts accrued by Country Garden hovered around 16.4 billion US dollars, dominated by the unpaid principal amount of existing bonds totalling approximately 10.3 billion US dollars, along with sundry loans comprising residual amounts from bank syndicates, shareholders, and other secured and unsecured debts.

Finally, on the evening of January 9, 2025, advancements were seen in the overseas debt restructuring discussion, as Country Garden disclosed its key terms in collaboration with a committee of seven banks representing the creditors

The proposed restructure introduces five economic options for creditors, including the potential conversion of debt into cash, which could effectively lead to significant deleveraging for the company.

It is highlighted that choosing the cash buyback option would result in creditors seeing their principal amounts slashed by at least 90%, whereby the longest options could extend debt maturities by an astonishing 11.5 yearsFurthermore, creditor sentiment seemed relatively positive, with many expressing interest in a pragmatic restructuring strategy that appears necessary given the market's ongoing adjustments.

However, differences remain on several key terms between Country Garden and certain creditorsAs of now, discussions regarding these restructuring proposals remain active but have not yet culminated in binding legal agreementsCountry Garden representatives have indicated that they are striving actively in talks to reach concrete arrangements with creditors.

Despite the hurdles, about 200,000 units remain to be delivered

As per financial disclosures, the company possessed approximately 74.1 billion yuan in net assets as of June 30, 2024, soundly above underwater statusWill this be adequate for the firm to rebalance its operations?

In their reports, Country Garden states that its continued operation hinges on the successful implementation of debt management measures, sales performance, construction timelines, asset liquidation and disposal, and the curtailing of operational expendituresBy the end of June 2024, Country Garden's development projects spanned across 31 provinces, covering 298 prefecture-level cities and encompassing 3,059 projects, with an untapped total asset value estimated at approximately 604.1 billion yuanWith respect to land reserves, engagement with governmental entities highlighted around 19 successful land acquisition agreements, with a cumulative cost of about 2.38 billion yuan witnessed, of which about 1.2 billion yuan has been realized within 2024.

The firm appears to redefine its asset management strategies

Since 2022, it has proactively offloaded assets, generating over 60 billion yuan through the discounted sale of vehicles, bulk assets, and hard-to-sell propertiesIn August 2023, it disposed of a 26.67% stake in a joint venture pertaining to the Guangzhou Asian Games Town project, yielding about 1.292 billion yuan, while a complete sell-off of shares in Changxin Technology brought about a sum of 2 billion yuan intended to secure project funds for imminent property delivery.

In line with increased efficiency and reduced costs, the company streamlined its regional operations once more in 2024 down to 14 operational segmentsRemarkably, Country Garden delivered over 380,000 homes throughout 2024, and in total, it has delivered around 1.7 million homes over the past three years.

Looking ahead, Country Garden states that it bears an obligation to deliver around 200,000 homes, pledging to leverage favorable governmental policies actively while engaging in securing resources for completion