Published on 21 Oct 2021.
RAM Ratings has reaffirmed the AA3(s)/Stable rating of Country Garden Real Estate Sdn Bhd’s (CGRE) RM1.5 bil Islamic Medium-Term Notes Programme (2015/2035).
The rating reflects unconditional and irrevocable corporate guarantees extended by CGRE’s ultimate parent – China-based Country Garden Holdings Company Limited (Country Garden or the Group) – and the latter’s subsidiaries, Bright Start Group Limited and Top Favour Holdings Limited. As the guarantees are provided on a joint and several basis, the rating mirrors the credit strength of Country Garden (as the strongest obligor).
The reaffirmation is premised on Country Garden’s better than expected credit metrics in FY Dec 2020 and 1H FY Dec 2021 and our view that the Group will be able to maintain its strong debt coverage despite the slowdown in the Chinese property market and tough market conditions. Country Garden’s position as China’s biggest residential property developer, minimal project concentration and commendable geographical diversity also support the rating.
The Chinese residential property sector stayed resilient as the pandemic was contained in China. The national sales value rose 10.8% y-o-y in 2020, increasing 24.5% in 8M 2021 to surpass pre-pandemic levels. Country Garden’s attributable contracted sales climbed a respective 3.3% and 0.3% in 2020 and 9M 2021, in line with our expectations. The government imposed various restrictive policies in the past year to cool the buoyant market, resulting in y-o-y dips in national sales and, likewise, the Group’s sales in recent months. The slower property sector and regulatory curbs are expected to cap the Group’s sales growth in 2021 and 2022 at mild single-digit rates.
Country Garden’s revenue dropped 5% to RMB462.86 bil last year due to pandemic-induced disruptions to construction and the delivery of properties. Its operating profit before depreciation, interest and tax (OPBDIT) fell 22% to RMB71.20 bil, underperforming our forecast by 4%. Newer projects were developed on more expensive land acquired in 2017/2018, while restrictive government policies kept a lid on developers’ profitability. The Group’s OPBDIT improved 5% in 1H FY Dec 2021 due to a low base effect. We expect OPBDIT growth to reach 16% this year before slowing to 8% next year on the back of modest sales growth.
Country Garden’s operating cashflow slipped 16% in fiscal 2020 due to disruptions from the pandemic and decelerating sales growth (2018: +31.3%, 2019: +10.0%, 2020: +3.3%). Operating cashflow debt coverage (OCFDC) narrowed from 0.54 times to 0.51 times but remains robust, outperforming our expectations. Country Garden retains a strong liquidity position. As at end-June 2021, RMB167.92 bil of unrestricted cash sufficiently covered RMB87.04 bil of short-term debt obligations.
The rating is moderated by the Group’s highly geared balance sheet. Although its debt level declined faster than anticipated to RMB324.95 bil as at end-June 2021 (end-December 2019: RMB370.51 bil), its gross gearing ratio of 1.17 times as of the same date is viewed to be still high. Coupled with large cash reserves, net gearing eased to 0.50 times. Any increase in future debt levels for land banking is expected to be contained by government regulations and the Group’s slower growth. Net gearing is projected to be moderate at 0.60 times in the next one to two years while OCFDC will remain at around 0.50 times as stronger profits offset any uptick in debts. Further constraining the rating is the Group’s focus on China’s more challenging Tier 3 and Tier 4 cities and its exposure to the sector’s cyclicality.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on Country Garden Real Estate Sdn Bhd