As Evergrande faces liquidation, is Country Garden next?

Evergrande share price collapsed by over 20% on Monday in Hong Kong after a court in Hong Kong ordered the company to be liquidated. This ruling marks the downfall of one of the biggest real estate companies in the world.

Is Country Garden next?

The collapse of Evergrande was not hard to predict because of its substantial liabilities and softening real estate market in China. The next step in this process is that the company will now be managed by external administrators who will seek to sell assets to pay its creditors.

Evergrande’s collapse marks a major downfall of a company that has long dominated China’s real estate market. At its peak, it was a top-3 company based on projects, revenues, and even profits.

But Evergrande also had a mountain of debt and liabilities. In all, the company’s liabilities totaled over $333 billion, which is substantial. For one, it is more than half the $619 billion that Lehman Brothers had when it collapsed during the Global Financial Crisis.

Now, most investors are turning their attention to Country Garden, another giant real estate company that is on the verge of collapse. This explains why the company’s stock has plunged to $H0.70, down by over 94% from its highest point in 2020. The stock is slightly above its record low of $H0.61.

Country Garden is in a similar situation that Evergrande was in before its collapse. Its real estate sales have plunged while its losses have ballooned. Its most recent results showed that it made a $7 billion loss in the first half of the year. 

Country Garden also has a mountain of debt, which is estimated to be $200 billion. It has already defaulted on several bond payments recently.

Country Garden stock chart

What next for Country Garden?

Now, the question is whether Country Garden will also be liquidated in the coming months. I believe that a court will order the company to be wound up because of its huge debt, weak sales, and substantial losses. Besides, the company has already defaulted on its debt and has been downgraded by key ratings agencies like Moody’s and S&P Global.

A company in such a situation has several options. In most cases, it could sell assets in a bid to raise capital. In Country Garden’s situation, it has already sold one of its malls in a $420 million deal and used these funds to pay some of its debt. The challenge is that the outstanding debt is so high that asset sales may not be enough. 

The other option is where the Chinese government bails out the company. For now, Beijing has failed to do that. Instead, the government has intervened in the market by reducing borrowing costs and taxes. Beijing is also coming up with a list of systemically important companies.

Therefore there is a high likelihood that Country Garden will go through liquidation in the next few months or years.

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