Country Garden Falls by Most in Two Years on Margin Squeeze

  • Shares drop 9.1 percent after firm reports full-year earnings
  • Gross profit margin falls to 20.2 percent from 26.1 percent

Country Garden Holdings Co. shares declined by the most in two years, after the developer reported declining margins in 2015 and losses from foreign exchange movements.

Shares of Country Garden dropped 9.1 percent to HK$3.20 in Hong Kong, the largest decrease since March 2014. Gross profit margin, a measure of profitability, declined 5.9 percentage points to 20.2 percent last year, according to data compiled by Bloomberg. That missed the average estimate of 23.7 percent by eight analysts surveyed by Bloomberg.

Almost half of the sales of Country Garden, majority-owned by Chinese billionaire Yang Huiyan, come from China’s third- and fourth-tier regions, where a glut of supply has led to a prolonged decline in home prices even as prices in top cities has soared. While the builder’s full-year sales of 113 billion yuan ($17.36 billion) beat estimates, the firm’s gross profit margin is “lower-than-expected,” Samson Man, a Hong Kong-based analyst at China Merchants Bank Co., said by phone.

Country Garden’s earnings were “overall disappointing,” based on a sharp decline in margins, lower dividend payout, and high gearing ratio, Citigroup Inc. analysts led by Hong Kong-based Marco Sze wrote in a note after the earning release. The adjusted gearing ratio, which is a measure of financial leverage, rose to about 88 percent from 62.2 percent a year earlier, despite Country Garden’s active fund-raising in the equity market, according to Citigroup.

Forex Loss

The builder’s net finance costs jumped sixfold to 1.29 billion yuan from 196 million yuan last year, partly due to an increase in foreign exchange losses, the developer said in its filing with the Hong Kong stock exchange. The depreciation of the Chinese currency against the dollar led to an increase in currency-related losses of approximately 942 million yuan, it said. Country Garden also redeemed some senior notes last year ahead of schedule, leading to a finance costs of 307 million yuan.

— With assistance by Emma Dong

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