Date
20 September 2017
Property developer Guang Group had experienced tough times in the past, but the lessons haven't been learnt.
Property developer Guang Group had experienced tough times in the past, but the lessons haven't been learnt.

How a developer forgot his painful lesson from the past

It’s amazing how quickly things can change!

A month ago, Guang Group was still touting its success story to the media, painting a rosy picture about its prospects. And, now in just a few weeks, the mid-sized developer is in the news for all the wrong reasons — project delays, customer complaints and bankruptcy rumors.

Founder Guo Yao Ming should know very well how damaging a credit crunch and market collapse can be. He personally witnessed a number of property crises in the past two decades. But ambition again outweighed caution, a common problem among Chinese entrepreneurs. He was lucky last time. Can he manage another narrow escape now?

Following a round of austerity measures in 1993, Huizhou, a second-tier city not too far from Shenzhen and the home turf of Guang Group, was caught in a property meltdown with tons of unfinished projects. Guo began his property venture at that very moment, and successfully fished the bottom.

It was still a long struggle as Huizhou’s housing market took time to recover. In 2004, Guang had a big break as he launched a jumbo project at a time when few still dared to bid for large land parcels.

Guo told the National Business Daily that 2008 was one of his darkest moments when credit tightening and austerity measures hit again. Funding shortage was the top challenge. To turn projects into cash quickly, Guang Group slashed prices and in less than six months, the company was able to generate a few hundred million yuan.

Recalling this close shave, Guo said he learned it can be dangerous to push too hard, and that a healthy cash position is important. But has he really taken the lesson to heart?

Over-expansion in recent years has stretched Guang Group’s financial resources to the limit, planting the seed for the company’s current woes, Guangzhou Daily notes in a report. In recent years, Guang Group had been expanding rapidly in Shenzhen, Dongguan and Tianjin, putting mounting pressure on its cashflow.

The group used to be the biggest kid on the block in Huizhou, but years of market boom has led to several outside rivals coming into the city. The list includes top developers Vanke, China Resources Land and Country Garden.

Desperate to defend its sales lead, the Guang Group scaled up and increased the number of projects. Guo also pumped up the operation by venturing into other lower-tier cities and top metros like Shanghai and Shenzhen, and even sketching plans to start projects in overseas markets including South Korea and Malaysia.

Running a much bigger land bank is costly; keeping more projects going at the same time also demands lots of cash to pay constructors and suppliers. Guang Group was definitely taking more risks. 

Vacancies in Huizhou had been on the rise. But Guo rebuffed the negative views, calling it “normal” as many Huizhou homes are bought as vacation properties in view of their relatively low per-square-foot price and scenic environment. The city’s high property inventory was also raising eyebrows. Guo however stressed that he had the local knowledge and that he knows better what his customers want.

When sales were brisk, cashflow was less of a concern, but when they slowed, it spiraled into a crisis. Worse, Guang didn’t have enough money to finish his projects, with some still missing basic infrastructure such as lifts, water facility and gas pipelines. Customers complained, drawing media attention and further discouraging home buyers. Years of overbuilding in Huizhou after an influx of developers didn’t help.

What are Guang Group’s options now? The company said it is negotiating with all parties to speed up the construction work to get projects done. It said it has also secured bankers’ continued support.

Finding deep-pocketed partners could be another alternative. The Guangdong provincial government wants private capital to play a bigger role in state-owned companies, and before the bankruptcy rumor, Guo said he was talking to three to four SOEs for partnerships to tap their superior access to funds.

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RC

EJ Insight writer

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