Compared to the raging dumpster
fire that was Evergrande, the rise and struggle of Country
Garden (碧桂園) has been more subtle. Like a whale, passing under a boat.
Its founder is extremely low-key. Nevertheless, Country Garden blow-torched its
way to be China's biggest real estate giant. Then in 2023, their fortunes reversed. In this
video, we talk about China’s Country Garden. ## Beginnings Yang Guoqiang (楊國強) was born in 1955 amidst poverty in Foshan City within
southern Guangdong province
. Until 1978, when Deng Xiaoping started opening
up the country Yang worked as a simple farmhand, plowing the fields. His biography
- which he has often repeated in interviews - claims that he did not
own a pair of shoes until he was 18. In 1978, his brother brought him onto a local
housing construction site. After that, Yang joined a government-owned construction company - the
Beijiao Economic Development Company of Shunde. Beijiao is a town in the district of Shunde,
which in turn sits w
ithin Foshan City, Guangdong Province. This agricultural town was
once the smallest of smallest backwaters. But today it hosts two of China's biggest companies
- Country Garden and the appliance maker Midea. Eventually, Yang and a group of investors
purchased the Economic Development Company during a restructuring. Yang became its general manager -
kind of like a CEO - and eventually its chairman. ## The Property Opportunity In 1988, China began a series of land reforms
(关于在全国城镇分期分批推行住房制度改革
的实施方案) that would forever change the country's real estate industry. The overarching goal of these reforms were
to encourage workers to buy and own their own homes. Some of the measures included
the privatization of public housing, the commercialization of housing, and
the development of a new housing sector. Yang - well-positioned as the head of a real
estate company - quickly recognized the huge opportunity that these reforms would create
in the private housing market. So in 1992, he merg
ed Beijiao with two other companies
to form a property development company. The next year 1993, the new
company started to develop a new community of high-end villas
in Beijiao Town. The project was named "Shunde Country Garden" or just
"Country Garden". It quickly struggled. ## Real Estate Development
In my previous video on Evergrande, I neglected to give a detailed overview of
how these real estate projects and their pre-sales work. I certainly at first had no
idea how they worked, espe
cially in Asia. In the early 1990s, the Chinese government
amended its laws to create the land sales system that is so famous today. Local governments
- unable to raise large sums of money for development - are allowed to sell plots of
land to real estate development companies. Now for the real estate development company buying
the rights to that land - via bidding, listings, or auction - they need to plan, design, and sell
a project for them to make their investment back. The project could
be one big building, a bunch of small buildings, or an entire
community with homes and all that. Real estate companies often
have large "land banks", which represents the parcels of land that the
company can develop down the line. Investors want to see companies with bigger land
banks in valuable or up-and-coming cities. No matter what the project is, it is going
to cost some money. So to fund the project, the real estate development company
sets up a sales office and pre-sells units to t
he public. 90% of
units in China are pre-sold. Once they pre-sell enough units, they
can start construction. Construction usually takes about 1-2 years.
If the company is reputable, then they are giving constant updates
about the progress of the construction. If all goes well, then buyers get their
homes. The real estate development company might continue to generate revenues
from these tenants through building management services like security
guards, maintenance, and what not. ## Succes
s Factors The real estate development
industry is incredibly competitive. You are building a very capital intensive thing,
which means you want to construct it quickly, sell it quickly, and get money back quickly.
The stakes are high. The business owners want their return on investment. The
customers want their homes. And so on. To increase their projects'
attractiveness to customers, large development companies build entire
communities - including schools, shops, hotels, entertainment, an
d the
like - with their own specialities. For instance, the giant Dalian Wanda builds
big commercial real estate projects like their Wanda Plazas. Wanda Plazas are
full multifunctional complexes with five star hotels, department stores,
office buildings, and movie theaters. This full integration allows the company
to capture more profits across the entire value chain - something that is
increasingly necessary as net profit margins on the actual real estate
development activity falls below
10%. ## The Country Garden Breakthrough
In line with this multi-functionality, we go back to Yang's first real
estate project, Country Garden. The first phase launched in 1993 and Yang
struggled to sell units for it amidst a difficult housing market. Two of his shareholder partners
in the project pull out. Desperate, Yang reaches out to a Xinhua reporter named Wang Zhigang
(碧桂園) for an article to promote his project. Wang went to the unfinished site, and
tells Yang that if Country Garden w
anted to distinguish itself from the competition, then
it can't just make "steel and concrete". Rather, it needed to make a whole life style that
its potential customers can aspire to. Yang was already mulling the idea
of building and running a small school as like an attached gym-type
amenity. But Wang's suggestion hit like lightning. Yang immediately hires
Wang to master-plan Country Garden. Country Garden goes all-in to produce not
only a high-class international private school but also
a five-star international club.
Aware of the growing importance of education, Wang positions this school as an absolute luxury. Thus in 1994, we have Guangdong Country Garden
School - a posh boarding school that goes from kindergarten to primary to junior high
to senior high school. Dump the kid in boarding school for 15 years and enjoy
the international club. I see the appeal. The school was also one of the
first schools in inland Guangdong to offer IB (International Baccalaureate) classe
s, and is located on a sprawling 200,000 square
meter green campus. It looks very nice. In order to secure a spot at this top-ranked
school, you need to pay $50,000 USD up front. The families of 3,000 children in the rising Guangdong
province signed up. And their deposits immediately solved Country Garden's cash shortfall, anchored
the community, and sparked the company's rise. The masterstroke established Wang's reputation as a marketing guru and he worked
for them for another three years.
## Rise and Rise Country Garden hit its stride
with this lifestyle concept. That is reflected in their advertising slogan
- "Giving you a five star home" (给你一个五星级的家). In 1995, Country Garden is the
first company in the Chinese real estate industry to introduce hotel-style
concierge, 24-hour security, maintenance, house keeping, and other such
services to a residential area. Country Garden quickly found appeal
with richer Hong Kongers looking for an investment or second home in a more affo
rdable
inland area of Guangdong. Some 30,000 buy in, and people nickname it the "Mini Hong Kong". In 1998, Country Garden moves out of its
native Shunde District and starts building their second massive project "Guangzhou
Country Garden". In only its first month of open pre-sales in 1999, Guangzhou Country
Garden sells an astounding 3,000 units. The 1997 Asian Financial Crisis
had caused many other real estate developers in the mainland to hold
back. But Yang boldly pushed forward, borrowi
ng large sums of money at crippling
rates in order to buy more advertising. And so they build multiple "Country Gardens" each year - including Phoenix City, which
sold like gangbusters, and more. They don't build outside of the Guangdong
province until 2006 when they debut Country Garden Changsha Venice City (长沙碧桂园威尼斯城) in
the Hunan Province. Opened in October 2006, it is a Venetian-style water city on an island
with hotels, schools, and business parks. Despite this, the company is not
int
erested in simply just sticking to luxury niches. Yang greatly admires
Walmart and its founder Sam Walton's "everyday low prices" motto. He wants to
expand and go big as fast as possible. ## How Country Garden Competes
Yang has explained his business strategy for Country Garden - which has echoes
of Walmart's - as the following: "Low-cost land, large-scale production, and fast sales". Let us go
through some of those one by one. Low-cost land. Walmart began its
conquest of the American retai
l market by targeting large suburban areas
and small towns where the land was cheap. Country Garden would later do the same thing,
pushing into China's second and third-tier cities which are not as well developed
as Shanghai or Beijing. For instance, Foshan City, where it all began
for them is a second tier city. And while the name of Guangzhou Country
Garden Phoenix City (碧桂园 凤凰城) refers to the Tier 1 City of Guangzhou, it is
actually located in the suburb of Zengcheng District (增城区) outs
ide of the main city. As a result, Country Garden's cost of land
acquisition for its projects is less than 10% of the total project budget. They
can pass those costs on to the customer. Second is "large-scale production". One of
Walmart's early differentiators was to build in-house logistics and distribution systems
to cut costs and offer the lowest prices. Country Garden decided to do something
similar to squeeze costs out of every part of their supply chain. Yang had
visited Xiaomi's Lei
Jun who told him to go achieve as much scale as possible. The
larger the scale, the greater the profits. For their 2001 project,
Country Garden Phoenix City, Country Garden not only constructed the
project, but also designed, planned, and managed it. They own their own factories
to produce the glass, brick and decoration. And lastly, "fast sales". Walmart wants to
make their cash back as fast as possible to minimize their financial risks. Same with
Country Garden. And it is their secret w
eapon. ## Speed Country Garden's competitors - Evergrande,
Sunac, and the such - also go into tier-2, tier-3 and tier-4 cities. They
also have their own factories. What makes Country Garden different
from those other guys is the brutal speed with which they produce
and develop projects. Typically, it takes a Chinese real estate company about
10 months to start getting cash back from its projects. This makes it difficult for them to
put more cash to the next project without debt. Country Ga
rden is not satisfied with
that. So they run what they call the "567 method" - 5 months after launch to get
the first sales, 6 months after launch to recover all their invested capital, and then 7
months after launch to start turning a profit. Other projects go even faster, running a
"4568 method" - 4 months after launch to sell the property; 5 months after
launch to collect the payments; 6 months after launch for positive cash flow; and
8 months to start reinvesting in other projects. For
Country Garden, there is no such thing
as a "fastest", only "faster". The company invested in methods to speed up the construction
process including automated mechanical production and casting. Not to mention close interactions
with the local government to speed up approvals. Even for the Chinese, this is crazy. You can
speed up sales. You can make employees go hard and work overtime. But you can't speed
up the construction process at the risk of causing quality defects and accidents.
And
accidents would later indeed happen. In a speech at the 2018 Boao Real Estate
Forum (博鳌论坛), Ronnie Chan (陳啟宗), chairman of the legendary Hong Kong real estate
developer Hang Lung Properties, called those running a "high turnover" model - perhaps
a subtle reference to Country Garden - lunatics. But Yang has pushed ahead - seeing
an opportunity to win China, and even the world. Privately,
Yang is said to have told his CFO: > "We acquire land at low cost, develop
rapidly, ensure proper facil
ities, and open at low prices... Such
speed is unachievable by others, such control is unattainable by others,
but I, Yang Guoqiang, can achieve it" ## A Madman We should talk about Yang. His outward persona is
that of an incredibly humble and low-key person. His autobiography which I just
recounted earlier has Yang as this poor, simple farmer who bumbled into fame
and fortune through luck and hard work. In the few interviews he gives,
he continually sticks to this story. He has called him
self the "stupidest man in
the world". In front of government officials, he is very low-key and self-effacing.
He often claims to be a dumb farmer who does not read often and does
not understand many things. And indeed, he is easy to underestimate. His
suits do not seem to fit him. He is balding, got a crooked smile, and is not an
attractive man by conventional measures. Unlike Evergrande's flamboyant founder and CEO,
Xu Jiayin, who debuted flashy EV companies, bought a soccer team, donate
d hundreds of
millions of dollars to charity and so on, Yang keeps it on the down-low. He too donates
to charity, but again does it very quietly. But in 2018, there was this interesting
book written by Country Garden's former CFO and executive director Wu Jianbin (吴建斌).
For 27 years, Wu worked at China Shipping - a stodgy old company that keeps debt at just 20% -
before joining Country Garden from 2014 to 2017. After leaving, Wu writes a book called "My
1000 Days at Country Garden" (我在碧桂园的
1000天). Country Garden immediately cracked down on
the book, and Wu subsequently issued a public statement saying that its plot was fiction.
So take what follows with a grain of salt. Anyway, the Yang in Wu's book looks
like a simple peasant on the outside; But on the inside he is a ruthless,
relentless, ultra fast-paced Reddit degen. He has an incredible appetite for risk.
As I mentioned, he dived into Hong Kong despite the 1997 Financial Crisis. The book
says that in 1995 he borrowed 20
million RMB just for advertising, earning just
10,000 RMB back in sales. A year later, he borrows 50 million RMB,
earning 100 million in sales. And he is a ferocious motivator of his
subordinates. Wu once suggested a warrant stock program so ordinary workers
can get stock in the company. Yang killed it on the spot, writing
that human nature is "selfish". Yang prefers extreme incentive alignment. In 2012, he allocated an unprecedented 20% of the whole
company's after-tax profits for its top
workers, giving nothing to everyone else. He told
his guys: "If you spend an extra RMB, 20 cents of that is yours, so calculate
every expenditure and be careful" Wu describes one remarkable Sept 2014 event where
Yang gave 200 million RMB or $28 million to just 37 regional presidents and project managers.
Country Garden does not practice egalitarianism. This extreme incentive alignment goes both ways
- stick and carrot. If the project manager opens the project within 3 months after launch,
they earn a 200,000 RMB bonus. 4 months, they get nothing. 5 months, they get
a fine. 7 months, they are fired. Remember. For other Chinese real estate companies, 10 months is average. 6 to 9
months is said to be really good. Later on, he would also implement
a project co-investment mechanism, allowing managers to make money directly
on Country Garden projects. This only poured more gasoline on the raging fires
inside these managers to push push push. All of these management systems are a
little nuts.
But Yang is relentless. The book has him saying: > "In the 1980s, some people likened me to
a tiger leading a flock of sheep ... Now, I am still a tiger, but leading a
group of tigers. Think about it, doesn't that make us invincible
and unbeatable in every battle?!" In a rare moment of self-reflection,
Yang says of himself: > "Frankly speaking, I am a person
who does not play by the rules, like a madman; think about it, I can
hire 400 PhDs. I've already hired 200, probably no
other company in the world does
this; under the current real estate environment, I can instruct to buy another 300 plots of
land, probably no one else in the country does; > The 'Achievement Sharing' ... (the
aforementioned project co-investment mechanism) that I decided to implement [is]
beyond others' imagination; the 'Forest City' I developed in Malaysia is something nobody would
dare to conceive... I am a madman! A fanatic!" Yang is indeed, a madman. ## Going Public
In 2007, soon after
their debut of Venice City, Country Garden goes public on
the Hong Kong Stock Exchange. In yet another unusual move, before the
IPO Yang Guoqiang gave almost all of his 70% share stake to his second daughter
Yang Huiyan - then just 25 years old. After graduating from Ohio
State University - why no Harvard? - she entered the company
in 2005 as a purchasing manager. Ar the time of the IPO, Country Garden had
a very complicated corporate structure. It is made of 41 separate on and
offshore
companies operating in four major business segments - hotels, real
estate management, real estate development, and a catch-all called "theme
parks/construction/decoration". On the first day of trading, the
stock price surged 35% making the second Yang daughter the richest
woman in China with a $9 billion fortune. Several other of Country Garden's
co-founders became billionaires as well. The IPO's publicity and its $1.9 billion
windfall marks a major change in pace and strategy for the comp
any. Prior to that, the
company largely built and marketed in its core market of Guangdong's Pearl River Delta. The
real estate mix however then began to change. The company added millions of square meters of
land, but only 17% of those acquisitions are in its former core Guangdong province. That
year, Country Garden adds 23 new projects, entering provinces like Heilongjiang,
Inner Mongolia, and Liaoning. ## The Financial Crisis Then came the 2008 Financial Crisis. Country Garden is hit har
d. They were going to buy
a stake in Hong Kong's dominant broadcaster - TVB studios - owned by Run Run Shaw. It would
have been an interesting diversification, but Yang lost the $1 billion loan needed
for the deal, and it fell through. Back on the mainland, the housing market
slows down. Country Garden's stock price falls about 90% from its Sept 2007 high of
$13 HKD to just $1 HKD in November 2008. Construction on many Country Garden sites
slows down. So the company announces a "Year of Qu
ality" (品质之年), where they
consult with buyers for feedback. They rebrand with a new logo, research
new types of apartment layouts ... sell about $300-500 million in high yield bonds no
big deal, and formulate a novel national strategy. Even with the pause, they still manage to
launch 14 new projects in 2009. In late 2008, China launches a massive fiscal stimulus that supercharges Chinese investment and real
estate prices across the whole country. Then in 2010, Country Garden appoints Mo
Bi
n (莫斌) as its new president and executive director. Mo Bin is an outsider - having worked
in a number of real estate companies. He organizes the company and begins hitting tier 3, 4, and
5 cities under his "Rolls Royce" strategy. The Rolls Royce strategy believes that
every city - no matter what tier - has a small group of prosperous or rising local
businessmen and corporate executives. Country Garden wants to build the best houses within
that local area and market to those guys. In 2011, t
hey launch the Country Garden·Shili Yintan (碧桂园·十里银滩) project in Guangdong.
Its opening sales of half a billion USD set a record for single-day sales
in Chinese real estate history. In 2013, Country Garden ramped up
sales again and hit 100 billion RMB ($14 billion USD) for the year.
Ladies and gentlemen, we are so back. ## Forest City The Yang in Wu's book mentioned
the madness of doing Forest City. In 2012, Country Garden paid some $330 million for
the rights to prime land in the Iskander
Malaysia area. It was the largest ever investment
by a Mainland Chinese company in Malaysia. Their first project there launched in 2013,
the Golden Bay Project in Johor Bahru, which sold over a billion dollars of sales and
made Country Garden the largest developer in the country. A second project, a Spanish villa
type thing called Diamond City, did well too. This led the way to their third and biggest
project - Forest City. Kicked off in 2014, Forest City spans over 1,300 hectares and
is
a complete integrated town capable of housing thousands of people, just
a few hundred yards from Singapore. Country Garden owns about 60% of the
project. It includes a sports stadium, golf hotel, marina hotel, and a golf course
designed by legendary golfer Jack Nicklaus. The project caused a great deal of controversy.
The company's fast moving style did not mesh well with the locals. Fishermen were not
consulted, and were taken aback when Land reclamation crews began dumping sand on
their
fishing grounds in January 2014. The project's eventual target market was also a problem. Forest City apartments targeted
middle and high class Chinese households overseas - "international buyers"
as Country Garden put it. Obviously, these locals are trying to move their money out of
the country, parking it overseas in real estate. So the project hit a bit of a snag at
the end of 2016. That year, $33 billion of Chinese money went into foreign real estate
and it was pissing everyone off. Not
only the Chinese government but also the governments
of those whose real estate was being bought. So the Chinese government made everyone
taking money out of the country sign a pledge not to use their $50,000 quota
to invest in real estate. Those who violated the pledge would be put on a
watchlist and lose several privileges. At the same time, the Malaysian government
changed administrations. The new president, 93 year old Mahathir Mohamad, said that he would not allow residential
visas f
or any foreign Forest City buyers. These two developments basically put
a stopper on Forest City's progress. Many Chinese nationals who put down money on
a deposit were left high and dry - which is unfortunate for them. But Forest City itself
is still around, is still building though nowhere near as fast, and has a few residents.
Like, so few you might call it a ghost town. Golf club apparently pretty popular. ## Accidents In 2017, Country Garden produced about half
a trillion RMB ($~78 bil
lion) in revenue. This made them China's
largest real estate company, and put them on 467th on the Fortune
Global 500 for the first time. Yang's side project - an education company
called Bright Scholar Education which runs Country Garden's various high-end schools -
also listed on the New York Stock Exchange, raising $160 million USD.
Things were looking good. At the end of the year, the company
had 1,468 projects in 768 counties or towns. Nearly 60% of those projects
were in third or fo
urth tier cities. Next year in 2018, they wanted to
double and get to a trillion RMB. But all that speed spread across all of
China took its toll, leading to accidents. In July 2018, a retaining wall and worker
dorm at the Country Garden Anhui Lu'an project collapsed due to stormy winds,
sending 16 people to the hospital. Six died. Chairman Yang apologized, saying that
he and his company would deeply reflect. The media furor diminished and things went
on. At the end of 2019, Country Garden
had 2,512 projects - about two thirds of those are in
third, fourth, fifth, and even sixth tier cities. ## The Three Lines As real estate prices rose and rose, the
Government took steps to restrain speculation. In late October 2017 at the 19th Party
Congress, President Xi Jinping said in a speech that housing should be "for
living, rather than speculation", setting off an extended government campaign
to cool prices and tamp down speculation. This drive hit its peak in late 2020
when the g
overnment passed their infamous Three Red Lines policy. Those three red
lines - more like danger zones - were: A percentage ceiling on the ratio
of liabilities to assets of 70%, excepting advances from contracted projects; The percentage of net debt
to equity cannot exceed 100%; And finally, a requirement to hold at least one dollar or RMB of cash for each
dollar borrowed in the short term; I mentioned these Three Red Lines
in the Evergrande video. The highly levered Evergrande needed cash
flow to
both build its properties and pay down the debt taken out to acquire its
land. But without cash, they can't finish properties. Without properties,
they can't get cash. Spiraling decline. Unlike Evergrande, Country Garden seemed okay.
In 2020, their net debt to equity was 56% and they had 1.7 RMB of cash for each RMB of short
term debt. In 2021, that would go to 2.15 times. Their asset-liability ratio was
80%, which was higher than the 70% red line. But they were working
on that. I
n 2021, the ratio was 78%. ## The Worst is Past? Very quickly however, Country
Garden realized that business in the real estate industry cannot go on as usual. Evergrande's crash would flood the market with
unfinished apartments, causing prices to spiral lower. This weakens confidence in the market,
making it harder for companies to raise money. To find growth, Country Garden began building
up many diversification initiatives. In 2019, they announced themselves to be a
"high tech comprehens
ive enterprise", and began investing in two pre-existing business
lines in agriculture and construction robotics. By the end of 2021, Guangdong
Bozhilin Robot unveiled their first medical and construction robots,
which Country Garden said would replace manual laborers and be safer and
more environmentally friendly. That same year, their agricultural division -
Country Garden Agriculture - announced that it will build a large-scale "unmanned" farm. To
be honest, many of these initiatives ar
e given more attention than their substance
warrants. Country Garden is nowhere near replacing its real estate revenue
streams with robot and farm revenues. Through 2022, Country Garden managed to produce
like as if normal despite a deteriorating real estate environment. The Chinese business
magazine Caixin reported that the company delivered 700,000 units in 2022 - more than
its competitors Evergrande and Vanke combined. ## Slowdown and Fall So if Country Garden was in a better
space fina
ncially than Evergrande, and they seemed to do so well
in 2022, what happened in 2023? On the whole 2022 ended strong, but things
really struggled through the second half of that year. Country Garden only completed so many
units thanks to help from local governments. So 2023 was a continuation of that,
with sales in every month lagging those in the previous year - down 65%
year over year for the first 9 months. The key point is that when things got soft, there was a flight to safety that be
nefited
the tier 1 cities like Beijing and Shanghai. But Country Garden had bet big on lower
tier cities - targeting residents in the growing white-collar class. Those areas
suffered some of the worst price decreases. Falling prices and bad sales - sales
fell 81% in the crucial September 2023 month - hurt the company's ability to build
houses and service debt. No matter how your assets and liabilities are, losing 60%
of sales will cause significant problems. In October 2023, the company de
faulted on some of its dollar-denominated bonds -
hurtling it into the global news sphere. Country Garden's financial instability is more
worrying from a policy perspective because it is building so many more units. Country Garden
delivered 400,000 units in the first 9 months of 2023, but the Japanese bank Nomura estimated
that there are a million units still in the works. There will be social unrest if those apartments
are not finished. So the company chose to use its limited cash flow for
paying workers to finish
real estate units rather than paying back bonds. I do feel like Country Garden will eventually
finish these homes. Governments are highly incentivized to see these units completed.
They might be worth 40% or 60% less now, but they are worth nothing if left incomplete. I do wonder, however, how willing those
buyers will be to continue paying their mortgages if those mortgages are underwater.
I am not familiar with Chinese debt laws, but I wonder if walking away like
what happened in the US is an option. In March 2023, Yang Guoqiang resigned
from Country Garden for age reasons. His second daughter Yang Huiyan takes
control. We know little about her, but the Yang Huiyan in Wu's book
is a close copy of her father. ## Conclusion Country Garden's original winning
business model was to find cheap land and build great things
on top of it - a la Walmart. In the end, that business model failed
them. Yang's ambitious expansion into the lower tier cities was a
great gamble.
This one might take the company down. Walmart also suffered from its attachment
to its early business model. In one of his last interviews, Charlie Munger
talks about how Costco took advantage of Walmart's resistance to going into
the rich suburbs and paying for good locations there. Country Garden fell into
a similar trap - paying more for sites in the tier-1 cities might have done
them some real good in these times. Country Garden might be on its way down,
but I believe t
hat the Chinese real estate industry isn’t going anywhere. In China, real
estate development is more than just building a simple roof over your head. It is an integrated
platform that incorporates 50-60 other industries. Real estate will remain a massive part of
the Chinese economy for a long time. And the government's recent moves to soften-ish its
prior regulations on debt and the like make it clear that a complete move away from
real estate would be a terrible mistake.
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