Country Garden's High Default Risk Remains Amid Weak Sales and Heavy Debt Obligations

In our view, the property market in China will see a mild rebound in sales growth in the next few years following the revival of site visits and improvement in homebuyers’ sentiment. That said, we expect housing demand to be contained by slowing economic growth and the government's restrictions on developers’ leverage and housing price inflation. As market downturn persists, Country Garden Holdings, or CGH, should continue to post weak sales, which we think will negatively affect its operating cash flow. Also, CGH has seen deterioriation in balance sheet quality with a net gearing ratio of around 50%. As CGH has delayed bond interest and principal payments, we think the firm needs to further seek credit extension and financial support to ease liquidity pressure.