Chinese real estate developer Country Garden refocuses on stable development despite a 90% gain in net profit for H1 2018

HONG KONG,Aug. 31,2018 -- Country Garden Holdings Company Limited ("Country Garden") (stock code: 2007.HK) announced its interim financial results for 2018 on August 21. As of June 30,the real estate developer,together with its joint ventures and associates,booked 412.49 billion yuan (approx. US$60.294 billion as per today's USD/CNY rate) in contracted sales representing 43.89 million square meters of floor space,a year on year increase of 42.8% and 36.1%,respectively. For the six months,Country Garden topped the industry in terms of these two core indicators.

Country Garden’s Interim Results Conference 2018

Country Garden maintained steady growth during the reporting period. For the six months,the company achieved revenue of131.89 billion yuan,up 69.7% year on year. Gross profit stood atapprox. 34.97 billion yuan,up 104.6% year on year,while net profit clocked in at 16.32 billion yuan,up 94.9 % year on year. Profit attributable to shareholders climbed to12.94 billion yuan,an increase of 72.5% year on year. Basic net profit attributable to shareholders jumped 80.2% year on year to 12.95 billion yuan. EPS was 60.03 cents,up 71.8% year on year. The board of directors declared an interim dividend of18.52 cents,significantly up 77.4% from a year earlier. Total interim dividends represented 31.0% of underlying net profit.

As an industry leader,Country Garden's full-year net profit for 2017 soared 110% year on year. A more than 90% gain in net profit for H1 2018 was due to two main factors: 1. The company's contracted sales generated in the past two years,which more than doubled,have entered a carry-forward period; 2. As a blue-chip company,Country Garden has continued to optimize the management structure,control costs and increase revenues,which collectively led to a significant enhancement in quality of themanagement,both in terms of talent and results.

As for future development,Chairman Yeung Kwok Keung said in a letter to investors: "We are reviewing our management system. For the development over the next 100 years,we would rather slow down our expansion andtake the time to dramatically improve the overall quality of our management."

President Mo Bin said during the press conference that Country Garden will focus on a new roadmap concerning enhancement in the quality of everything the company does coupled with a more moderated rate of expansion. The roadmap means the company,previously one that has grown amazingly quickly,will move into a stage where it maintains a stable and healthy course of development,putting efficiency and quality first rather than the previous breakneck pace of development.

Steady improvement in operation performance

Thanks to a booming market and an optimized corporate structure,Country Garden has experienced explosive growth since 2016. The developer reported contracted sales of 308.8 billion yuan in 2016,up 120% year on year,followed by a jump to 550.8 billion yuan in 2017,a further 78% gain. The company continued to maintain industry leadership by recording contracted sales of 412.49 billion yuan for the first half of this year.

Continued growth in contracted sales paved the way for the company's revenue gains. Country Garden booked operating revenue of 226.9 billion yuan in 2017,up 48% year on year. For H1 2018,revenue grew 69.7% year on year to 131.89 billion yuan,while gross profit surged 104.6% year on year to 34.97 billion yuan. Net profit jumped 94.9% year on year to 16.32 billion yuan.

As of June 30,Country Garden booked advanced proceeds received from customers of 469.494 billion yuan,and trade and other receivables of 351.186 billion yuan,resulting in over 700 billion yuan worth of properties sold but where the revenue has not been recognized from the contracts' carry-forward,creating the foundation that assures the company's revenue growth over the next two to three years. Revenue from sales of property that has been developed remained the largest contributor to the company's H1 revenue. Combined revenue from contracts' carry-forward totaled 126.885 billion yuan for the first half,up 70.4 % year on year and representing 96.2% of total revenue.

Notably,Country Garden recorded encouraging profitability and income thanks to improvements in internal operation and cost control. Both gross and net profit margins kept rising through 2016 and 2017 with the figures standing at 26.5% and 12.4% for the first half of 2018,respectively.

Increases in profit margins were attributable to the developer's efforts at cost control. The efforts focused on projects and capital via reduction in land acquisition expenses,integrated development and standardized management as well as efficient use of capital,resulting in the ability to maintain low borrowing costs for years.

The developer's sales and administration fees continued to drop each year between 2013 and 2018,despite the company's increasing market share. For the first half,sales and administration fees accounted for only 2.4% of contracted sales,down 0.2 percentage point year on year. Strict control in sales and administration fees demonstrated the success of the developer's management style.

Positive net operating cash flow for the third consecutive year

In addition to significant improvements in the corporate footprint and operating results,the developer maintained healthy financial positions in the first half.

Completed sales brought in a cash influx of 336.02 billion yuan in the first half,up 52.4% year on year,representing a conversion rate of contract sales to cash of 81.46%,higher than the industry average. Thanks to a significant growth in cash collection from property sales,the company posted positive net operating cash flow for the third consecutive year ended June 30.

Cash reserves are always viewed as the most important financial indicator by firms engaged in the capital-intensive real estate industry,including Country Garden. However,most real estate developers have struggled with tight cash flow due to fast expansion in the past decade. They were hobbled by negative operating net cash flow and became heavily reliant on external financing for capital adequacy. Only a few firms with strong operation competence such as Vanke,PolyReal Estate Group,Country Garden,and Longfor Properties have managed to maintain capital adequacy internally for years.

Positive net cash flow is one indicator of Country Garden's strong internal control competence. CFO Wu Bijun said in public previously that Country Garden has adopted an enterprise-wide vertical finance management approach,with each and every monetary transaction being fully traceable,greatly improving the security and efficiency of the use of capital.

Since 2013 when the company embarked on a massive expansion,Country Garden has made financial stability and a secure cash flow two of its top priorities,backed by two self-imposed accounting rules: 1. Net loan ratio never exceeding 70%. 2. Balance of available cash which is at least 10% of total assets. The two "rules" have helped Country Garden maintain a sound financial structure despite the breakneck pace of the recent expansion.

A positive operating cash flow led to Country Garden's lower dependence on external financing,demonstrating that the fast-growing developer has consistently complied with sound capital management principles and kept capital risk well under control.

For the first half of 2018,the developer recorded net cash inflows from financing activities of 63.08 billion yuan and net cash outflows from investment activities of 6.97 billion yuan. As of June 30,the company's cash reserves stood at 209.91 billion yuan,representing 15% of total assets. It also had as a back-up 281.39 billion yuan in unused bank facilities.

A spokesperson for Country Garden said that with a corporate mandate of maintaining a good stockpile of cash at all times,the company is always well positioned to seek out worthwhile projects and be able to jump on promising opportunities supported by a strong cash position even during the new lower-paced course of development.

The developer acquired 530 new projects for a consideration of 224.2 billion yuan in the first half with GFA for future development of 84.78 million square meters. GFA for future development attributable to the company amounted to 60.08 million square meters for a consideration of 143.4 billion yuan. Average land price came in at 2,387 yuan per square meter.

As of June 30,the group had land reserves with a GFA of 364 million square meters. Country Garden counted 1,991 projects in mainland China either having been completed or in the process of being completed as of June 30,located in 261 prefecture-levelcities across 30 provinces,autonomous regions and self-governing municipalities,covering 1,051 districts and counties,assuring the company a plentiful inventory of properties to develop over the next few years.

Country Garden has kept its net loan ratio under 70% for 11 consecutive years

Achieving a balance between rapid expansion and steady growth is an inevitable challenge that Country Garden has been facing as a result of significant increases in scale and profitability. Country Garden chairman Yeung Kwok Keung has said on several occasions that it is his aim to always do better in all aspects of the business and that the company needs to make a leap in terms of performance in other aspects besides scale.

"As a leading Chinese property developer with the most complete industry chain in the industry,Country Garden's mission is to deliver on our promise to society by being the best in each step of the management process," said Mr. Yeung in a letter to the investors regarding the company's interim financial results for 2018.

Country Garden has kept that promise. The company has been operating consistently in terms of financial results. During the first half of this year,the developer has managed to keep its leverage and financing costs at low levels,despite the more restrictive policies around financing put in place by the Chinese government to curb the frothiness of the housing market and the significant increase in financing costs facing most Chinese property developers. As of June 30,2018,the company's net loan ratio stood at 59.0% and its weighted average borrowing cost ratio was 5.81%.

Notably,Country Garden has kept its net loan ratio under 70% for 11 years in a row,earning the company a competitive edge over its competitors and demonstrating the company's sound financial footing. According to data from the property research unit of CRIC,the weighted average net loan ratio of the major Chinese listed property developers (A,H and other shares) rose to 91.09% in 2017,up 16.19 percentage points from 2016.

As of June 30,Country Garden's interest-bearing liabilities totaled 293.921 billion yuan (approx. US$42.9 billion),including bank loans and other borrowings,preferred notes,corporate bonds and convertible bonds. In particular,first-half short-term (due within one year) and long-term liabilities stood at a very manageable 108.104 billion yuan (approx. US$15.7 billion),accounting for 36.78% of all liabilities,far lower than the available cash balance of 209.91 billion yuan (approx. US$30.6 billion). Other long-term liabilities made up the remaining 63.22%. Country Garden's debt structure that is mainly composed of long-term liabilities is in line with the company's property development roadmap. In addition,the company is under mild pressure to repay short-term liabilities.

Given the positive cash flow from operating activities and the decision to focus on the enhancement of the quality of the operations while steadying the pace of expansion,Country Garden plans to rein in investments in order to reduce pressure from financing.

Chinese property developers have been facing increases in both US dollar debt and the risks associated with the exchange rate volatility caused by the recent appreciation of the US dollar. This has become a hot topic in the market. Country Garden's US dollar debt is currently some 53.7 billion yuan (approx. US$7.8 billion),accounting for 18% of the developer's total debt. A spokesperson for Country Garden said that the company has taken a series of hedging measures to reduce the risks associated with exchange rate fluctuation.

Since the beginning of this year,Country Garden has garnered the attention of investors in the capital market and received positive ratings from several Chinese securities firms. The developer has recently moved up by 114 places to the 353rd position on Fortune's list of the World's Top 500,and is one of the Chinese companies that has taken the biggest leap forward on the list.

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