RAM Ratings has assigned a preliminary rating of AA3(s)/Stable to Country Garden Real Estate Sdn Bhd's (CGRE) proposed Islamic Medium-Term Notes (IMTN) Programme of RM1.5 billion. The issue rating reflects unconditional and irrevocable corporate guarantees extended by Country Garden Holdings Company Limited (Country Garden or the Group), Bright Start Group Limited and Top Favour Holdings Limited, on a joint and several basis. Based on the strongest-link approach, the issue rating reflects the credit linkage to Country Garden (as the strongest obligor) and the credit fundamentals of the Group.
Country Garden's credit strength is underpinned by its entrenched market position as one of the top 10 players in the vast Chinese property market. In 2014, the Group was the 6th largest player by contracted sales and is ranked 2nd by property space delivered. The rating also considers Country Garden's fairly diversified geographic footprint in China. Over the past 5 years, Country Garden has transitioned from a regional player based in Guangdong, to a national property developer. As at end-June 2015, Country Garden had operations in 26 provinces, municipalities and autonomous regions in China. The Group's sales mix has become less concentrated following its expansion efforts outside Guangdong. In 2014, sales generated in Guangdong made up just one third of its contracted sales (2009: 67% of sales). Meanwhile, Country Garden faces minimal project-concentration risk. Its largest project accounted for only about 4% of contracted sales in FY Dec 2014.
Through strong pre-sales proceeds, Country Garden has been able to generate robust operating cash flows. The Group's operating cashflow debt coverage (OCFDC) has ranged between 0.28 times and 0.46 times over the past 5 years - a level superior to that of similarly-rated peers. Chinese developers benefit from the country's pre-sales system, where buyers typically pay in full at the point of sale, which could be 1-2 years before the property is completed. In 1H FY Dec 2015, the Group's annualised OCFDC came in significantly lower at 0.09 times as new launches are mostly concentrated in 2H 2015. We expect much stronger cash flows in the second half (as has typically been the case in the last few years) to lift the Group's OCFDC to about 0.3 times in FY Dec 2015. Its OCFDC is anticipated to stay between 0.30 and 0.40 times over the next 2 years.
Country Garden's credit profile is, however, moderated by its fairly high leverage and consistently negative free cash flows. While the Group's expansion provides some business diversification, the rapid growth has weighed on its financial profile. Its gearing ratio had increased from 0.79 times as at end-December 2010 to 1.08 times as at end-December 2014. After considering its sizeable unrestricted cash pile and profits from pre-sales, the Group's adjusted net gearing ratio stood at 0.67 times as at end-December 2014. Its adjusted net gearing ratio edged up to 0.72 times as at end-June 2015 due to a lower unrestricted cash balance. We expect improved sales and cash flows in 2H FY 2015 to keep the Group's full-year adjusted ratio at a more comfortable level of 0.6 times, although still high relative to that of similarly-rated peers.
The rating also takes into account Country Garden's substantial exposure to lower-tier cities, in which the operating environment is generally more challenging. In 1H FY Dec 2015, tier-3 and tier-4 cities made up almost half of Country Garden's contracted sales - one of the highest proportion among the top 10 players. That said, we note the Group's proven sales track record and expertise in identifying suitable project locations. Over the longer term, Country Garden aims to gradually grow contributions from tier-1 and tier-2 cities to 50%-60% of revenue (1H FY Dec 2015: 50%). This exposes the Group to some degree of execution risk, given its limited operating track record in these segments.
As with other developers, Country Garden is exposed to the cyclicality of the property sector. Property sales in China dipped 7.8% in 2014, after years of strong double-digit growth. However, the market has shown signs of stabilising in 2015, driven by various supportive measures implemented since 2H 2014. The combination of a higher average residential-property price and stronger volumes had led to a 18.7% y-o-y jump in property sales in the first 8 months of 2015. We observe that key statistics have generally held up after the equity market's first major dip in mid-June 2015.
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© Press Release 2015
