September 30, 2016 / 8:31 AM / a year ago

Fitch Rates Country Garden's USD Senior Notes Final 'BB+'

(The following statement was released by the rating agency) HONG KONG, September 30 (Fitch) Fitch Ratings has assigned Country Garden Holdings Co. Ltd.'s (BB+/Stable) USD650m 4.75% senior notes due 2023 a final rating 'BB+' . The notes are rated at the same level as Country Garden's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 19 September 2016. Country Garden's ratings are supported by cash inflow from annual contracted sales of over CNY100bn, strong financial flexibility with low interest cost, and a track record of strong execution. Moving into the higher-tier cities is a positive development in Country Garden's progression towards becoming a nationwide homebuilder. However, this process may take another one to two years to reach fruition if the company continues on its current trajectory. KEY RATING DRIVERS Ongoing Land Bank Adjustment: Fitch believes Country Garden will continue to reposition its land bank in the next 12 to 24 months. The repositioning in 2015 was to boost the contribution from products targeted at Tier 1 and 2 cities; 52% of the CNY140bn contracted sales came from products targeting these cities. Out of the CNY56bn of land acquired in 2015, 67% is in Tier 1 and 2 cities and 75% is aimed at residents of these cities. Aggressive Expansion Pressures Leverage: Fitch expects net debt to rise to CNY70bn-95bn in 2016 with the expansion of the land bank. The total land premium of CNY56bn (CNY43bn on an attributable basis) was far beyond its budget of CNY20bn at the start of 2015. This resulted in leverage (as measured by net debt/adjusted inventory) rising to 40% from 36% in 2014. Higher end-2015 gross debt has also lowered its churn - as measured by contracted sales to total debt - to 1.1x from 2.0x in 2014. This is less of an issue, since the higher available cash of CNY36.2bn at end-2015 (from CNY18.7bn at end-2014) will reduce pressure from higher debt. Gradual Recovery in Margins: Fitch expects the EBITDA margin to improve to 16% in 2016 from 14% in 2015 with recognition of wider-margin contracted sales. The 2015 EBITDA margin was at its historical low, as the company recognised lower-margin products, such as high-rise residential apartments, and recognised average selling price (ASP) fell to CNY6,194 per square metre (sq m) compared with the average recognised ASP of CNY6,611 in 2013 and 2014, as well as average contracted sales ASP of CNY6,658 in 2013-2015. However, Fitch believes EBITDA margin will improve after 2016 due to recognition of the wider-margin contracted sales and continued de-stocking of low-margin products. Successful product repositioning will be a positive development - given the better margins, churn and liquidity of the products targeting at Tier 1 and 2 cities. Financial Control Remains Intact: Fitch believes Country Garden continues to exercise reasonable control of its financial profile even as its land acquisition exceeded its initial budget by a factor of 2.8x. It has demonstrated a financial record of improving funding flexibility and falling interest costs, where the average borrowing cost decreased to 6.2% in 2015 from 7.6% in 2014. Corporate Action Potential: Country Garden has stated its share buyback plans, and has made two acquisitions of auxiliary businesses related to homebuilding. Fitch expects the company will continue to make bolt-on acquisitions to strengthen these auxiliary businesses. KEY ASSUMPTIONS Fitch's key assumptions within our rating case include: - Contracted sales by gross floor area to increase by 5% over 2016-2017; - Average selling price for contracted sales to increase by 8% over 2016-2017; - EBITDA margin improves to 16%-17% in 2016 and to 20%-23% in 2017; - Total land cost around CNY35bn-45bn in 2016-2017; - Net debt including perpetuals to be around CNY70bn-95bn in 2016. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - Sustaining trend of neutral or positive cash flow from operating activities - Maintaining the ratio of net debt to adjusted inventory below 35% on a sustained basis (2015: 40.3%) - Maintaining the ratio of contracted sales to gross debt above 1.5x on a sustained basis (2015: 1.12x) Negative: Developments that may individually or collectively, lead to negative rating action include: - EBITDA margin below 20% on a sustained basis (2015: 13.9%) - Maintaining the ratio of net debt to adjusted inventory above 45% on a sustained basis - Maintaining the ratio of contracted sales to gross debt below 1.2x on a sustained basis Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Fiona Zhang Associate Director +852 2263 9909 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 21 March 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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