China’s biggest builder is on Bond Express

Table 1: Bond Information

Company Introduction

Country Garden is China’s largest real estate developer (in terms of contracted sales). It mainly engages in property development and investment, construction and agriculture. The group was founded by the current chairman, Yeung Kwok Keung, in 1992 and listed on HKEX in 2007 (Stock Code: 2007.HK). Its current market capitalization is around HKD 161.1 billion.

Business and Credit highlights

In 2021, Country Garden recorded property attributable contracted sales of RMB 558.0 billion, which is a slight decrease of 2.1% YoY – a decline rate similar to its peers’. However, in December 2021 where the industry experienced a downturn, the group recorded property attributable contracted sales of RMB 22.6 billion, a significant increase of 76.1% YoY.

In the first half of last year, the group’s total revenue increased significantly by 27.0% YoY to RMB 234.9 billion. In addition, its core net profit to shareholders was RMB 15.2 billion, an increase of 4.2% YoY. Despite a decrease in gross margin to below 20% (the first half of 2021: 19.7%), the group stated that the property projects which are already sold but yet to be recognized in terms of revenues could have a gross margin of 20% to 25%. As such, its gross margin is expected to improve gradually.

According to the three red lines requirements, the group belongs to the “yellow light” level, failing to meet only one red line (adjusted liabilities to assets ratio).

As of end June 2021, the group’s total debt decreased 3.7% to RMB 333.4 billion, with a decreasing net gearing ratio of 50.0%, which is lower than its peers (peers’ median: 67%). Its non-restricted and non-regulatory cash to short-term debt was 1.25 times. These indicators imply that its short-term liquidity is fairly decent, with a fairly good leverage level.

Table 2: The main credit indicators of Country Garden

The Group has a Higher Refinancing Ability than its Peers and Proactively Repurchased the Longer-term Bond

Under the sell-off in Chinese real estate bonds, most non-SOE backed developers were unable to refinance through onshore and offshore bonds.

It was reported that last week the Group could not issue a USD 300 million convertible bond due to insufficient demand, causing the bond price to plunge. However, the situation took a sharp turn this week, as market confidence has improved after the news about loosening controls on pre-sales proceeds. As a result, Country Garden announced that they are going to issue a HKD 3.9 billion convertible bond on 21 January, which should significantly relieve investor’s concern on the group’s weakening refinancing ability.

Also, the group continuously and actively seeks new financing sources, including applying the issuing bonds on the inter-bank market and the issuance of asset-backed security products. In December, the group successfully issued an onshore bond of RMB 1 billion and two asset-backed security products of RMB 284 million and RMB 520 million, with coupon rates of 6.3%, 5.5% and 5.3% respectively. Thus, the group still has a higher refinancing ability than its peers.

On 17 January, Country Garden announced that it repurchased two bonds due in July 2022 and April 2026, with a principal amount of USD 5 million each. The group rather chose to repurchase its longer-term bond due in 2026 because of the lower prices its longer-term bonds are trading at and its management’s confidence in its short-term cash flow.

Off-balance Sheet Debt Risk is Much Lower than its Peers’

Currently, markets are concerned about off-balance sheet debt. How this typically works is that debt is hidden with project subsidiaries through joint ventures (JVs) and associates.

Compared to other developers of a similar size, the group has a lower off-balance sheet debt risk, and better metrics (Table 3). Country Garden has higher contracted liabilities to attributable contracted sales of 84%, lowest proportion of its minority interests to total equity and lowest difference between consolidated ratios, all indicating that the group should have less off-balance sheet items and debt.

Apart from that, its return on JVs and associates is the highest in comparison with others, confirming that the group has put less projects and debts into the JVs and associates level that should have been consolidated in the financial statement.

Table 3: Comparison between Large Developers

Country Garden’s 2024 USD Bond is Now Available on Bond Express

Country Garden is one of the few non-SOE backed Chinese developers which are still rated investment-grade at the moment, thanks to its strong solvency, resilient contracted sales record, decent debt structure and stronger refinancing ability.

The recent sell-off in Chinese real estate bonds provide a good opportunity for investors to buy its bonds. We have introduced COGARD 6.500% 08APR2024 CORP (USD) to Bond Express for investors to enter at a lower cost.

The current yield of the bond is around 10.2%. Compared to the previous yields (3% to 5%) in the past, it is more attractive now – something that investors can consider paying attention to.

Related Risk

Country Garden’s sales is the top in the industry, and the group relies heavily on property sales and its high turnover model. If the group has any funding gap due to plummeting property sales, its peers might not be able to acquire its massive asset portfolios.

Referencing Shimao Group, the group might be required to deposit higher regulatory pre-sales proceeds proportion into the project subsidiaries. This would increase the liquidity risk on the cash restricted on the project level, which cannot be used as repayment of debts.

In addition, the group’s main assets are its onshore land bank, and the group does not have the ownership of its property management company (Country Garden Services). If the group falls into a liquidity crisis, it cannot liquidate its property management companies or Hong Kong properties to obtain capital and liquidity like what other developers did.

Its bonds are now offering yields of over 7%. Based on such rates, we believe that it might be difficult for the group to issue bonds in the public market at a lower rate. As such, its refinancing risk is higher than before. With the higher refinancing risk, the rating agencies, Moody’s and Fitch, might downgrade the group to non-investment grade rating. It might lead to forced selling from bond funds which can only hold investment-grade bonds. Its bond price might therefore be more volatile. 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in COGARD 6.500% 08Apr2024 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.