News Alert: Core earnings to fall 67-70%
- Profit warning indicates core earnings in 1H22 is excepted to range at Rmb4.5bn-5.0bn, which represents a y-o-y decline of 67-70%
- We believe the market has expected a decline in core earnings, but the indicated magnitude came in larger than expected
- Key performance determinant remains on its ability to refinance and presales performance
- TP and rating are currently under review.
Country Garden (2007 HK, under review) released a profit warning this morning, indicating that it expects core earnings in 1H22 to range at Rmb4.5-5.0bn, which would represent a 67-70% y-o-y drop from 1H22. This is mainly attributable to 1) decrease in recognized revenue led by a weak physical market and disruptions from COVID-19, 2) a decrease in recognized GPM; 3) impairment provisions on PUD, and 4) FX losses.
An anticipated decline at a wider the expected magnitude. The physical market has been weak since 2H21, with homebuyer sentiments in Tier 3 and 4 cities having taken the most hits as they generally face weaker economic fundamentals. ASP cuts has also been more severe. Additionally, a lot of lower tiered cities (esp. those around the YRD area) faced tough and long COVID-19 lockdown measures, thereby affected construction schedules as well. As such, it came as no surprise to us that the company will be recording a drop in core earnings for 1H22. Having said that, the magnitude of the earnings decline came in larger than expected.
Eyes on presales and refinancing. We believe the drop in earnings came in larger than expected and will likely be perceived as a negative to the market. Having said that, we believe the key concern shared among investors and the determinant on the company’s performance will remain on its capability to secure refinancing and presales performance. Rating and TP on the counter are currently under review.