Shares of Country Garden Holdings Co. are expected to drop 35% as liquidity concerns surrounding China’s private builders are unlikely to ease anytime soon, according to JPMorgan Chase & Co.
The Wall Street bank downgraded the Chinese property developer and its property management unit Country Garden Services Holdings Co. to underweight, according to a note on Sunday. It warned that government measures won’t stem the decline given the sector’s weakening sales, default risks and a slowdown in refinancing support from the authorities.
“Until confirmation of more government support, we believe liquidity concerns on privately-owned developers will linger,” analysts including Karl Chan wrote in the note. Country Garden’s shares slid the most in seven months on Monday while its dollar bonds are on track to log an unprecedented decline.
Concerns about Country Garden mirror the jitters surrounding China’s ailing property sector as signs mount that some developers may struggle to repay their borrowings. An asset sale plan by Dalian Wanda Group Co. has helped allay some worries although muted expectations for big-bang stimulus continue to weigh on the outlook.
JPMorgan’s latest price target for Country Garden — HK$0.9 — is the most bearish on the Street, according to data compiled by Bloomberg. Investors who followed its recommendation would have earned a 8.6% return over the past year. Country Garden’s stock has plunged over 50% since end-December and taken against last Friday’s close, the price target would represent a drop of another 35%.
Shares of the developer and its property management unit Country Garden Services slumped 8.7% and 18%, respectively, on Monday alongside a drop in the broader real estate sector. Its dollar notes also retreated, with a bond due April 2024 falling the most on record to 16 cents.
A gauge of China’s developer stocks declined 3.3%, the most in over a month.
JPMorgan’s call comes amid rising scrutiny over sell-side research in China, as Beijing attempts to counter negative sentiment in markets amid slowing growth. Goldman Sachs Group Inc.’s bearish report on Chinese banks drew a backlash from a major lender, as well as state media earlier this month.
Still, the JPMorgan analysts believe the builder is “working hard to avoid a public bond default,” and logically speaking, the government “should have the incentive to offer more refinancing support to Country Garden to prevent another high-profile default in the industry.”
“This is to avoid further confidence crisis on other privately-owned developers and lower the likelihood of even more unfinished buildings,” they wrote.
--With assistance from Alice Huang.
(Updates stock moves and bond prices)
