Country Garden earns "buy" rating from several firms for its high-quality growth

HONG KONG,Oct. 23,2018 -- Several investment firms recently released their research reports,upgrading Country Garden's (2007.HK) investment rating to "buy" for its potential profit growth in the future.

Last week,China Merchants Securities upgraded the real estate developer's investment rating from "neutral" to "buy",and has continued to maintain the rating. On the same day,Citigroup released its report,pointing out that Country Garden demonstrated a stronger recovery capability than expected,maintaining its "buy" rating with a target price of HK$18.33 (approx. US$2.34),despite the recent decline.

Leading international bank J.P.Morgan delivered a similar message in its recent report,saying that they expect Country Garden to accelerate its sales growth and maintain a stable financial scenario during the fourth quarter. In the bank's report,the real estate developer is also foreseen as continuing to maintain a good cash position and a steady growth in profit. The bank rated Country Garden as "overweight," and set the target price at HK$22.5 (approx. US$2.87).

The stock closed at HK$8.32 (approx. US$1.06) on October 19,up 2.88 percent.

Sales growth and sustainable profit growth foreseen

According to the announcement released by Country Garden,sales climbed to 415.58 billion yuan (approx. US$59.9 billion) representing 44.06 million square meters for the first 9 months of this year,a year-over-year increase of 38.4 percent and 27.8 percent,respectively. As of the end of the first half of the year,the real estate developer had maintained its leading position in total land reserve value and area.

Several investment firms were positive in their comments. J.P.Morgan said in its report that Country Garden has unbilled sales of 710 billion (approx. US$102 billion) for the first half,225 billion yuan (approx. US$32.5 billion) of which is on track to close in the second half,and most of the remaining to close next year. These to date unbilled items are not included in the new contracted sales of the second half.

In addition,J.P. Morgan revealed that the real estate developer has inventory valued at 242 billion yuan (approx. US$34.9 billion) that will come on the market during the fourth quarter. With the assumption that 60 percent of the inventory will be sold during the 4th quarter,the developer expects to see an increase of 64 percent and 42 percent in sales for the fourth quarter and the whole year,respectively. Profits are expected to continue to climb at a stable rate.

China Merchants Securities said in its report that Country Garden has abundant land reserves and solid finances and is well positioned to achieve sustainable profit growth. Although adjustments in the policies guiding the removal and replacement of shanty towns have had a serious effect on real estate sales in third- and fourth-tier cities,only 2 percent of Country Garden's sales for 2017 were affected by the policy. During the first 9 months of 2018,the rate of conversion of inventory into sales in third- and fourth-tier cities remained higher than that of first- and second-tier cities. The policy has had a very limited impact on sales.

Citigroup said,Country Garden "recovered better than expected. The developer plans to invest 80 billion yuan (approx. US$11.5 billion) in the robotics sector over the next five years. The deployment of robots in the construction process can reduce overall costs of putting up a building by at least 10 percent and improve building safety as well as the quality of the final product."

Strong financing capacity and lower-than-peers net loan ratio

As the regulatory environment for the real estate sector in China continues to evolve,and financing rules for the industry are further tightened,the pressure on property developers to have a strong capital reserve is mounting. Wang Sheng,an analyst at Shenwan Hongyuan Securities,said the differences in financing capability between developers would determine who will survive given the declining sales growth across the industry.

Industry data shows that in the first half of 2018,the average net debt ratio among 170 real estate developers that were surveyed stood at about 92.56 percent,up 4.04 percentage points from the beginning of the year. The overall average financing cost of 60 of the leading firms had risen to 6.33 percent from 6.03 percent as of the end of 2017.

For the same period,Country Garden's net gearing ratio held at 59.0 percent,having remained below the warning line of 70 percent for 11 consecutive years. In addition,loan costs are also significantly lower than the industry average.

Good cash management skills have assured an abundant cash flow. As of June 30,Country Garden had achieved positive net operating cash flow for the third consecutive year,with an available cash balance of 209.91 billion yuan (approx. US$30.7 billion) and unused credit lines from banks amounting to 281.39 billion yuan (approx. US$41.1 billion).

On September 19th,Country Garden successfully issued US$975 million in two-year senior notes which were oversubscribed by a ratio of 2.2:1 on the very first day,representing the largest issuance of Chinese real estate bonds since May of this year. Among the bonds being issued,the 5.3-year series were those bearing the longest maturity among all real estate-related bonds issued since February of this year.

At Investor Open Day held on October 11,Wu Bijun,Country Garden's chief financial officer and vice president,said that the company currently has access to a wide range of financing options,ample cash as well as a healthy operating margin and net borrowing level. With the trust and support of financial institutions and sufficient funding,the company is confident that it can create more value for investors. "The dividend to shareholders will not be reduced." said Wu.

Repurchase demonstrates confidence marked by good profitability

In addition,Country Garden has bought back shares at many intervals. Country Garden repurchased 10 million shares (0.04622 percent of issued share capital) at a range of HK$8-HK$8.18 each on October 16 totalling HK$81.0996 million. The company bought back 96.85 million of its own shares on the stock exchange since the beginning of the year,representing 0.4455 percent of the issued share capital.

Industry analysts noted that real estate stocks suffered an overall decline since the beginning of the year,demonstrated by Shenwan's real estate industry index having halved since the end of January. As an industry leader,Country Garden actively repurchased shares,indicating that the company believes its share price is undervalued.

Multiple share buybacks are a testament to the company's strong cash position and confidence in the future. Under the premise that the efficient deployment of capital will continue,Country Garden expects to witness good profitability while the return for the shareholder will to continue to increase.