RAM Ratings has revised to stable from negative the outlook on the AA3(s) rating of Country Garden Real Estate Sdn Bhd’s IMTN Programme of RM1.5 billion in Nominal Value (2015/2035) while reaffirming the rating. The revision of the outloo

Published on 11 Jul 2017.

RAM Ratings has revised to stable from negative the outlook on the AA3(s) rating of Country Garden Real Estate Sdn Bhd’s IMTN Programme of RM1.5 billion in Nominal Value (2015/2035) while reaffirming the rating. The revision of the outlook reflects the improvement in the credit metrics of its ultimate parent – China-based Country Garden Holdings Company Limited (Country Garden or the Group) – and our expectation that these metrics will be sustained on the back of a strong property sales and solid cashflow generation. While we believe the overall Chinese property market will continue to soften in the near term, the Group’s sales performance is envisaged to remain sturdy, supporting its robust debt coverage and leverage profile.

In FY Dec 2016, Country Garden’s sales more than doubled from the previous corresponding period to RMB309 billion as the Group scaled up property launches. From being the third-largest property developer by total sales in 2016, Country Garden has moved to first place in 2017, with its sales increasing three-fold to RMB204 billion in the first 4 months of the year. As at end-December 2016, the Group had expanded its presence to 185 cities in China from 147 cities a year earlier, enlarging its geographical footprint while minimising concentration risk.

Lifted by lofty advance property sales receipts, Country Garden’s operating cashflow debt cover (OCFDC) rebounded strongly in fiscal 2016 to a 5-year high of 1.28 times, after underperforming in fiscal 2015 at 0.24 times. Likewise, the Group’s adjusted net gearing – which is adjusted for pre-sales profit yet to be recognised and excludes restricted cash – improved to 0.49 times as at end-December 2016 (end-December 2015: 0.92 times). We envisage Country Garden’s OCFDC and adjusted net gearing ratio to stay above 1.0 times and below 0.7 times for the next 2 years, respectively.

However, Country Garden’s total debt inflated to RMB136 billion, which had resulted from persistently aggressive land acquisitions that had exceeded our expectations in the past 2 years. This could render the Group less flexible to withstand changes in market conditions, particularly amid the softening property market. Looking ahead, Country Garden has indicated plans for a slight increase in land purchases in the next 2 years. While its leverage is expected to stay manageable under this scenario, we remain cautious in view of the Group's tendency to deviate from its stated plans due to changing market conditions, as exhibited in the past few years.

As with other developers, Country Garden is exposed to the cyclicality of the Chinese property sector. Since late-2016, the Chinese government has continuously introduced cooling measures to prevent the property market from overheating, particularly in Tier 1 and 2 cities where the Group had aggressively expanded sales in 2016. Elsewhere, by project location, Country Garden remains substantially exposed to Tier 3 and 4 cities. While this makes it vulnerable to the generally weaker operating environment in these cities, Country Garden has proven experience in navigating these markets and strategically selects suitable project locations.

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.

Analytical contact
Wang Wai Wah
(603) 7628 1110
waiwah@ram.com.my

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