Hong Kong, September 20, 2022 -- Moody's Investors Service has downgraded Country Garden Holdings Company Limited's corporate family rating (CFR) and senior unsecured rating to Ba2 from Ba1.
The rating outlook remains negative.
"The downgrades reflect Country Garden's weaker-than-expected contracted sales performance and our expectation that the company's financial metrics and liquidity buffer will weaken further in the next 12-18 months, driven by its shrinking contracted sales and margins amid difficult market conditions. The company's high exposure to low-tier cities will also weigh on its operating challenges due to the weaker economies and housing demand there," says Kaven Tsang, a Moody's Senior Vice President.
"The negative outlook reflects the company's constrained funding access to long-term capital as well as shrinking operations and profit margins, which would continue to pressure its liquidity and credit metrics over the next 12-18 months," adds Tsang.
RATINGS RATIONALE
Moody's has revised downward its forecast for Country Garden's attributable contracted sales to RMB330 billion-RMB360 billion.
In addition, Moody's projects the company's gross profit margin (excluding impairment loss) will range 12.5%-13% for 2022 and 2023, down from its previous estimation of around 15%.
The revised projection reflects Moody's expectation that Country Garden's high exposure to low-tier cities and the weakened housing demand in China (A1 stable) would further pressure its sales performance and profitability over the next 12-18 months.
Consequently, the company's EBIT/interest coverage will weaken to around 3.0x in the next 12-18 months from 3.7x in the 12 months that ended June 2022. Its projected financial profile is more in line with the Ba2 rating when compared with its rated Chinese property peers.
The company's EBIT/interest dropped sharply to 3.7x in the 12 months that ended June 2022 from 4.7x in 2021 due to a material decline in revenue and profit margin in the first half of 2022. Moody's estimates that the company's gross margin (excluding impairment loss) dropped to around 13% in H1 2022 from 18% in 2021.
The company's attributable contracted sales also fell 40% to RMB244 billion in the first eight months of 2022 from RMB403 billion in the same period a year earlier. The weak performance was due to the weak property market and disruptions caused by coronavirus outbreak in China during the period.
Country Garden's liquidity remains adequate, albeit weakening. As of the end of June 2022, it had unrestricted cash of RMB123 billion, which could cover 1.7x of the company's current debt of RMB73 billion. The company's cash, together with its operating cash flow and net proceeds from its share placement in July, will fully cover its maturing debts and dividend payments in the next 12-18 months.
Moody's expects the company to continue to use internal resources to repay debt, thereby reducing its liquidity buffer and limiting its financial flexibility over time, given its constrained access to long-term funding from capital markets.
Country Garden recently issued RMB1.5 billion of medium-term notes under the Chinese government's support. While the completion of the issuance will provide the company with additional liquidity, it has yet to restore consistent access to long-term bond funding.
Country Garden's Ba2 CFR reflects the company's strong brand name, sizable land bank and track record of developing mass-market residential properties in China. These strengths are counterbalanced by the company's large exposure to low-tier cities, modest credit metrics and weakened access to funding.
Country Garden's Ba2 senior unsecured bond rating is not affected by the subordination to claims at the operating company level. This is because despite its status as a holding company with most claims at the operating subsidiaries, creditors of Country Garden benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries with high geographic diversification. Such diversification mitigates structural subordination risk.
In terms of environmental, social and governance (ESG) factors, Moody's has considered Country Garden's concentrated ownership by its key shareholder, Yang Huiyan, who held a 61.25% stake in the company as of the end of December 2021. The agency has also considered the presence of five independent nonexecutive directors on the company's 13-member board, and the presence of other internal governance structures and standards as required by the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely in the near term, given the negative outlook.
However, Moody's could revise Country Garden's rating outlook to stable if the company strengthens its access to long-term funding, improves sales, and maintains stable financial metrics and good liquidity through the downcycle.
Credit metrics supportive of its existing rating include gross margin above 15% and EBIT/interest above 2.75x-3.0x, all on a sustained basis.
However, Moody's could downgrade the ratings if the company's liquidity, funding access, contracted sales and financial metrics weaken further in the next 6-12 months.
Credit metrics that could lead to a downgrade include EBIT/interest falling below 2.75x or gross margin declining under 12%.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.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 the end of 2021, the company had an attributable land bank with a gross floor area of 233.3 million square meters spanning 1,425 cities in China.
REGULATORY DISCLOSURES
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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.
Kaven Tsang
Senior Vice President
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
