Hong Kong, August 30, 2019 -- Moody's Investors Service has today revised the ratings outlook on Country
Garden Holdings Company Limited to positive from stable.
At the same time, Moody's has affirmed the Ba1 corporate family
rating and Ba2 senior unsecured rating.
RATINGS RATIONALE
"The change in outlook to positive reflects our expectation that
Country Garden's credit metrics over the next 12-18 months
will improve to levels that are strong for its current rating level,"
says Josephine Ho, a Moody's Vice President and Senior Analyst.
"In addition, the change in outlook reflects our expectation
that Country Garden's strong execution capability and prudent financial
management will help it weather the challenging conditions in China's
property industry," adds Ho, who is also Moody's
Lead Analyst for Country Garden.
Moody's expects Country Garden's leverage -- as measured
by revenue/adjusted debt -- will improve to 105%-110%
over the next 12-18 months from 97% in 2018, supported
by healthy revenue growth following strong contracted sales in 2017 and
2018.
At the same time, stable profit margins should keep its interest
coverage -- as measured by EBIT/interest -- above 5.0x
in the next 12-18 month, compared to 4.9x at the end
of 2018.
Country Garden reported a 5% decline in contracted sales in the
first seven months of 2018, after robust 31% and 61%
year-over-year growth in 2018 in 2017, respectively.
Nevertheless, Moody's expects Country Garden to deliver contracted
sales growth of 5% over the next 12-18 months, backed
by the company's sufficient salable resources -- including
attributable salable resources of RMB1.8 trillion as of the end
of June 2019, a scheduled project launch, and a track record
of strong sales execution.
In addition, Moody's expects Country Garden will continue
to benefit from the ongoing urbanization in China, which will support
demand for the company's products in lower-tier cities over
the next 1-2 years.
China's property industry has experienced challenging operating
conditions in recent months, including tightening credit conditions
and slowing sales growth, which will negatively impact the smaller
and financially weaker developers. However, Moody's
expects that Country Garden will benefit from the industry consolidation,
given its strong market position and access to funding.
Country Garden's Ba1 CFR reflects its strong sales execution through
the property cycles, good geographic coverage, and status
as one of the largest developers in China in terms of contracted sales.
The CFR also reflects the company's established track record in
suburban property development in the country.
On the other hand, the rating is constrained by the company's
low profit margins and large exposure to lower tier cities, where
demand has been volatile.
Country Garden's liquidity position is good. The company's cash/short-term
debt was at 195% as of June 2019, largely unchanged from
191% at the end of 2018.
Moody's expects the company will maintain good liquidity through
proactive liquidity management, and that it will retain its good
access to various funding channels, including onshore bonds,
offshore syndicated loans and capital market instruments.
Country Garden's senior unsecured bond rating is one notch lower
than it would otherwise be because of the risk of structural subordination.
This risk reflects the fact that the majority of claims are at operating
subsidiaries and have priority over claims at the holding company in a
bankruptcy scenario. In addition, the holding company lacks
significant mitigating factors for structural subordination. As
a result, the expected recovery rate for claims at the holding company
will be lower.
In terms of environmental, social and governance (ESG), Moody's
has considered the concentrated ownership by Country Garden's key shareholder,
Ms. YANG Huiyan, who held a total 57.2% stake
in the company at 30 June 2019. Such risk is partly mitigated by
the presence of five independent non-executive directors out of
a total 14 board of directors, and the presence of other internal
governance structures and standards, as required under the Corporate
Governance Code for companies listed on the Hong Kong Stock Exchange.
Related party transactions have been low relative to its sales at around
3%, and dividend payouts have been moderate at below 40%
over the last five years.
Country Garden's ratings could be upgraded if it (1) maintains sustainable
sales growth and profit margins while demonstrating strong financial discipline;
(2) maintains a strong liquidity profile, such that cash/short-term
debt exceeds 150%-200%; and (3) improves its
credit metrics, such that adjusted EBIT/interest coverage rises
above 5.0x and revenue/adjusted debt exceeds 100%-110%
on a sustained basis.
A rating downgrade is unlikely given the positive outlook.
However, Moody's could revise the outlook to stable if (1)
the company becomes less financially prudent in pursuit of business growth;
(2) its sales and liquidity positions weaken, such that its cash/short-term
debt falls below 125%; (3) its gross profit margins weaken
below 20%; (4) its debt leverage deteriorates, with
revenue/adjusted debt falling below 100%; or (5) its interest
coverage weakens, such that its EBIT coverage of interest drops
below 3.5x-4.0x on a sustained basis.
The principal methodology used in these ratings was Homebuilding And Property
Development Industry published in January 2018. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
Country Garden Holdings Company Limited, founded in 1992 and listed
on the Hong Kong Stock Exchange, is a leading Chinese integrated
property developer. As of 30 June 2019, the company's land
bank by attributable gross floor area (GFA) in China, including
that of joint ventures (JVs) and associates, was 263.1 million
square meters (sqm). Its revenue was RMB202 billion ($28
billion) in H1 2019. In addition, as of December 2018,
the company owned and operated 50 hotels, with a total of around
15,000 rooms. The hotels are mainly located in Guangdong
Province and Anhui Province, and complement the company's township
development projects.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
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same series, category/class of debt, security or pursuant
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Josephine Ho
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Franco Leung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
