Published on 12 Oct 2020.
RAM Ratings has reaffirmed the AA3(s)/stable rating of Country Garden Real Estate Sdn Bhd’s (CGRE) RM1.5 bil Islamic MTN Programme (2015/2035). This is underscored by our expectation that CGRE’s ultimate parent – China-based Country Garden Holdings Company Limited (Country Garden or the Group) – will maintain its solid market position in the decelerating Chinese property sector, as well as its strong debt coverage ratios.
The rating of the Islamic MTN reflects the unconditional and irrevocable corporate guarantees extended by Country Garden, Bright Start Group Limited and Top Favour Holdings Limited on a joint and several basis. 1Therefore, the rating mirrors the credit fundamentals of Country Garden (as the strongest obligor).
The rating reflects Country Garden’s position as China’s biggest residential property developer in both 2019 and 1H 2020, complemented by minimal project concentration, commendable geographical diversity and solid liquidity. Despite COVID-19-related disruptions in 1Q 2020, the Group’s contracted sales were lifted 3% y-o-y to RMB382.16 bil in 8M FY Dec 2020 (FY Dec 2019: +10%). This coincided with the recovery of China’s residential property sector, which expanded 4% in terms of value over the same period. Stronger economic growth and credit easing have been supporting the rebound in property sales. While the Group targets a 10% sales growth for the full year, we expect a more modest showing as better buying sentiment will be tempered by fresh government curbs.
Country Garden’s operating profit before depreciation, interest and tax (OPBDIT) ascended 26% in fiscal 2019, surpassing our estimated growth of 17%. That said, its OPBDIT shrank 16% y-o-y in 1H fiscal 2020 as the coronavirus pandemic had affected sales and property delivery. We expect Country Garden’s full-year OPBDIT to ebb 19%; while construction sites had returned to full capacity, the Group is unlikely to accelerate the pace of construction and fully compensate for the disruption caused by COVID-19. Nonetheless, the Group’s profitability is anticipated to normalise by next year.
As expected, Country Garden’s operating cashflow debt coverage (OCFDC) thinned further to 0.54 times last year (fiscal 2018: 0.81 times) amid hefty cash outlays to fund project construction and slower sales growth (which reduced advance sales receipts). These factors are expected to keep the Group’s OCFDC at around 0.4 times this year, albeit still strong and supportive of its rating.
On the other hand, the rating is moderated by the Group’s highly leveraged balance sheet due to past aggressive expansion of business and land bank. Country Garden’s debt load had eased to RMB342.65 bil as at end-June 2020 (end-December 2019: RMB370.51 bil) as it had reduced land purchases and used its cash reserves to pare down its debts. Its gross gearing ratio remained lofty at 1.46 times, although its sizeable cash pile kept its adjusted net gearing ratio at a moderate 0.6 times. Given its more prudent land-banking strategy, the Group’s debt level is expected to mostly stay flat.
The rating is also constrained by Country Garden’s exposure to the inherently cyclical property sector, as well as its focus on China’s more challenging Tier 3 and Tier 4 cities. That said, the Group is experienced in operating in such areas. The Chinese government’s move to relax restrictions on household registrations for lower-tier cities is anticipated to encourage migration to these cities, which will boost demand for housing, thereby benefiting developers like Country Garden in the longer run.
1 Bright Start Group Limited and Top Favour Holdings Limited are ultimately owned by Country Garden.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Country Garden Real Estate Sdn Bhd