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28 Jun | Thursday
RAM Ratings reaffirms Country Garden’s AA3(s) rating

RAM Ratings has reaffirmed the AA3(s)/Stable rating ofCountry Garden Real Estate Sdn Bhd (CGRE)’s IMTN Programme of RM1.5 billion in Nominal Value (2015/2035). This reflects our view that CGRE’s ultimate parent – China-based Country Garden Holdings Company Limited (Country Garden or the Group) – will maintain its strong property sales performance and solid cashflow generation despite China’s challenging operating environment. However, we expect the Group’s credit profile to remain constrained by an increasingly heavy debt load, given Country Garden’s aggressive land banking in line with the expansion in its sales performance and business scale. The rating of the IMTN reflects unconditional and irrevocable corporate guarantees extended by Country Garden, Bright Start Group Limited and Top Favour Holdings Limited on a joint and several basis. Therefore, the rating mirrors that of Country Garden (as the strongest obligor) and its credit fundamentals.

 Against the backdrop of a tighter regulatory environment across most major cities in China since 4Q 2016, the Chinese residential property market has turned softer and is expected to show a similar trend in 2H 2018. Nonetheless, Country Garden charted a sturdy business performance, retaining its pole position as the largest residential property developer by contracted sales in China. Having jumped 78% to RMB551 billion in 2017, the Group’s contracted sales grew a further 25% to RMB188 billion in 3M 2018. As at end-December 2017, the Group had projects in 220 Chinese cities (end-December 2016: 185 cities) as its property portfolio in China doubled to 1,456 projects, enlarging its geographical footprint while minimising concentration risk. Country Garden’s lofty advance property sales receipts lifted its operating cashflow debt coverage (OCFDC) to a very strong 1.65 times in fiscal 2017 (fiscal 2016: 1.28 times). In view of the Group’s rapid cash collection and robust year-to-date sales up to March 2018, its OCFDC is envisaged to stay above 1.00 time in fiscal 2018.

While its sales performance has been resilient thus far, Country Garden’s land acquisitions remain aggressive – leaping 152% to RMB319 billion in fiscal 2017 and exceeding its previous projection – as the Group replenished its inventory amid the growth in sales. As a result, its total debt increased to RMB215 billion as at end-December 2017 (end-December 2016: RMB136 billion). Alleviated by better than expected cashflow generation, the Group’s adjusted net gearing – including pre-sales profit yet to be recognised and excluding restricted cash ­– stayed at a moderate 0.53 times as at the same date. Under our stressed scenario, we expect this ratio to clock in higher for fiscal 2018, given Country Garden’s growing appetite for land banking. Going forward, we remain cautious of the Group’s aggressive risk appetite, particularly in terms of land acquisition and total debt.We will closely monitor Country Garden’s financial metrics, as the rating may come under pressure if its land banking exceeds expectations while sales collection decelerates substantially.

Compared to other top property players in China, Country Garden is still substantially exposed to Tier 3 and 4 cities. While this makes it susceptible to the generally more challenging operating environment in these cities, the Group has proven experience in navigating these markets by strategically selecting suitable project locations to meet local demands. Similar to other developers, Country Garden is exposed to the cyclicality of the property sector. Following several waves of tighter policies across many major cities since late-2016, deceleration has been observed in total industry sales growth and property prices.  

Analytical contact
Thong Mun Wai
(603) 7628 1022
munwai@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

 

Date of release: 28 June 2018
 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

 
Published by RAM Rating Services Berhad
ÓCopyright 2018 by RAM Rating Services Berhad

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