Fitch: Country Garden Bullish On Growth; Adds Land Aggressively
Country Garden's total contracted sales (includes contracted sales from the company and its subsidiaries, as well as its joint ventures and associates) of CNY125.1bn and land acquisition rate of 40.9% for the six months to June 2016 were at historic highs. The company's land acquisition rate, as measured by the ratio of land premium paid to attributable contracted sales, for 1H16 was up from 31.1% in 2015 and 17.15% in 2014. Its land replenishing ratio, as measured by attributable gross floor area (GFA) acquired to attributable contracted sales GFA, of 2.8x for 1H16 and 1.8x in 2015 were up sharply from 1x in 2014.
Country Garden acquired around 43.85 million square metres (sqm) of attributable GFA for about CNY72.83bn in total in 1H16. This is 14% more than its full-year land acquisitions in 2015, which amounted to 38.21 million sqm of attributable GFA at total cost of CNY55.95bn.
The sharp increase in acquisitions signals Country Garden's bullish outlook for the Chinese property market for the next 12-24 months. Over 70% of the land acquired in 1H16 is in the Pearl River Delta (PRD) and Yangtze River Delta (YRD), which should provide healthy profit margins. Country Garden continued to solidify its market leadership in Guangzhou, with 42% of value of land acquired in the southern province. Jiangsu and Zhejiang provinces and Shanghai city together accounted for 26% of land acquired and Guangxi and Anhui provinces around 4.4-5% each.
The sharply higher contracted sales in 1H16 will translate to cash inflow of CNY105.1bn, which will be used together with an increase in net debt to support Country Garden's large land bank acquisitions. Contracted sales of CNY125.1bn in 1H16 are 89% of its total contracted sales of CNY140.2bn for full-year 2015. The company raised its 2016 total contracted sales target by 31% to CNY220bn from the original target of CNY168bn. Country Garden has around CNY907.8bn of saleable resources for 2H16 onwards, of which 24% are aimed at customers in Shenzhen, Guangzhou, Shanghai and Beijing.
Country Garden's leverage rose to around 45% at end-1H16 from around 40% at end-2015. Fitch expects net debt to stay around CNY70bn-95bn in 2016 and leverage to remain at 40%-45% as the company continues to add to its land bank. In addition, its operating cash flow will remain negative or marginally neutral. The strong contracted sales pushed the churn rate, as measured by total debt to contracted sales, to 1.4x at end-June 2016 from 1.1x in end-2015.
Country Garden's EBITDA margins stabilised at around 14.8% in June 2016 from a historical low of 13.8% in December 2015. Fitch expects the EBITDA margin to continue to improve to 15%-16% for full-year 2016 due to recognition of contracted sales with wider margins and rising average selling prices.