Fitch Rates Country Garden's Proposed USD Senior Notes 'BB+(EXP)
Country Garden's ratings are supported by cash inflow from annual contracted sales of over CNY100bn, strong financial flexibility with low interest cost, and a track record of strong execution. Moving into the higher-tier cities is a positive development in Country Garden's progression towards becoming a nationwide homebuilder. However, this process may take another one to two years to reach fruition if the company continues on its current trajectory.
KEY RATING DRIVERS
Ongoing Land Bank Adjustment: Fitch believes Country Garden will continue to reposition its land bank in the next 12 to 24 months. The repositioning in 2015 was to boost the contribution from products targeted at Tier 1 and 2 cities; 52% of the CNY140bn contracted sales came from products targeting these cities. The newly acquired CNY56bn land bank in 2015 is also targeting Tier 1 and 2 cities, of which 67% were in Tier 1 and 2 cities and 75% were targeting these cities.
Aggressive Expansion Pressures Leverage: Fitch expects net debt to rise to CNY70bn-95bn in
2016 with the adjustment of the land bank. The total land premium of CNY56bn (CNY43bn on an attributable basis) was far beyond its budget of CNY20bn at the start of 2015. This resulted
In rising leverage (as measured by net debt/adjusted inventory) to 40%, from 36% in 2014. Higher end-2015 gross debt has also lowered its churn - as measured by contracted sales to total debt - to 1.1x from 2.0x in 2014. This is less of an issue, since the higher available cash of CNY36.2bn at end-2015 (from CNY18.7bn at end-2014) will reduce pressure on the higher debt.
Gradual Recovery in Margins: Fitch expects the EBITDA margin to improve to 16% in 2016 from 14% in 2015 with recognition of wider-margin contracted sales. The 2015 EBITDA margin was at its historical low, as the company recognised lower-margin products such as high-rise residential apartments. The thinner margin is also reflected in its lower recognised average selling price (ASP) of CNY6,194 per square metre (sq m) compared with the average recognised ASP of CNY6,611 in 2013 and 2014, as well as average contracted sales ASP of CNY6,658 between 2013 and 2015.
However, Fitch believes the improvement in EBITDA margin will be due to recognition of the wider-margin contracted sales. The EBITDA margin improvement after 2016 will be gradual due to recognition of wider-margin contracted sales and continued de-stocking of low-margin products. Successful product repositioning will be a positive development - given the better margins, churn and liquidity of the products targeting at Tier 1 and 2 cities.
Financial Control Remains Intact: Fitch believes Country Garden continues to exercise reasonable control of its financial profile even as its land acquisition exceeded its initial budget by a factor of 2.8x. It has demonstrated a financial record of improving funding flexibility and falling interest costs, where the average borrowing cost decreased to 6.2% in 2015 from 7.6% in 2014.
Corporate Action Potential: Country Garden has stated its share buyback plans, and has made
Two acquisitions of auxiliary businesses related to homebuilding. Fitch expects the company will continue to make bolt-on acquisitions to strengthen these auxiliary businesses.
Fitch's key assumptions within our rating case include:
- Contracted sales by gross floor area to increase by 5% over 2016-2017;
- Average selling price for contracted sales to increase by 8% over 2016-2017;
- EBITDA margin of 2016 improves to 16%-17% and to 20%-23% in 2017;
- Total land cost around CNY35bn-45bn in 2016-2017;
- Net debt including perpetuals to be around CNY70bn-95bn in 2016.
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- Sustaining trend of neutral or positive cash flow from operating activities;
- Maintaining the ratio of net debt to adjusted inventory below 35% on a sustained basis (2015: 40.3%);
- Maintaining the ratio of contracted sales to gross debt above 1.5x on a sustained basis (2015: 1.12x)
Negative: Developments that may individually or collectively, lead to negative rating action
- EBITDA margin below 20% on a sustained basis (2015: 13.9%);
- Maintaining the ratio of net debt to adjusted inventory above 45% on a sustained basis (2015: 40.3%);
- Maintaining the ratio of contracted sales to gross debt below 1.2x on a sustained basis (2015: 1.12x)