Country Garden Services Holdings Co. Ltd., China’s largest residential property manager, anticipates a decrease in profit of up to 4.1 billion yuan ($576 million) this year due to impairments, indicating the prolonged debt crisis developers are facing is spilling over to their business partners.
Hong Kong-listed Country Garden Services said it will book an impairment provision of between 1.8 billion yuan and 2.3 billion yuan for the trade receivables due from related parties, according to a filing late Monday.
Without specification, Country Garden Services said related party customers, engaging in real estate development and related business, are under periodical liquidity pressures. The company has continued efforts with various measures for collecting trade receivables at its best efforts, is said.
Country Garden Services is also writing down between 1.4 billion yuan and 1.8 billion yuan on goodwill and other intangible assets, because some subsidiaries failed to meet expectations and some businesses are under adjustments. The payment cycles of some clients are getting longer, resulting in less-than-ideal cash flow, the company said.
Country Garden Services was previously the property management unit of Country Garden Holdings Co. Ltd., China’s biggest homebuilder. The unit was spun off from the developer in 2018 for an independent listing.
Currently, there is no shareholding relations between Country Garden Services and Country Garden. But both companies are controlled by Yang Huiyan, chair of Country Garden.
Property management companies separated from real estate companies often rely on affiliated developers as a significant source of revenues, including management and maintenance services for their projects.
As China’s property industry crisis stretches for over three years, property managers’ financials are also coming under mounting pressures. “If affiliated real estate companies face financial challenges and are unable to fulfill their financial commitments to property management firms, the likelihood of recovering the money is small,” said Dennis Huang, co-founder of Synergy Solution Management Group.
Country Garden’s financial woes were exposed in August when it failed to meet interest payments on two offshore U.S. dollar bonds. The company, which was China’s top developer in terms of sales for six consecutive years from 2017, formally logged its first default on dollar bonds in late October.
According to Country Garden Services’ half-year financial report, trade receivables from affiliated parties rose 32.9% year-on-year to 2.3 billion yuan as of June 30.
The impaired assets will lead to a reduction of the company’s net assets by 3.2 billion yuan to 4.1 billion yuan, Country Garden Services said in the Monday filing. It added that the provisions will not impact its cash flow.
In 2022, Country Garden Services booked 2.3 billion yuan in net profit. Profits for the first half of 2023 totaled 2.5 billion yuan.
Global rating agency Fitch Ratings in a Dec.12 report said Country Garden Services maintains a strong net cash position, but its funding access could be affected by the evolving situation of Country Garden. Fitch warned that most of Country Garden Services’ revenue from Country Garden will not be collected from the second half of 2023.
Country Garden Services’ shares plunged 11.56% in Hong Kong to close at HK$ 6.12 ($0.78) per share Tuesday.
Contact reporter Han Wei (weihan@caixin.com)
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