To The Moon

$COUNTRY GARDEN(02007)$ 

Country Garden recorded CNY 357.5bn of attributable contracted sales in 2022 (-35.9% y/y), slightly outperforming the average sector decline of 54.4% y/y. However, in Q1-2023, the company attained CNY 71.9bn (-27.6% y/y) of attributable contracted sales, underperforming the top 100 developers’ Q1-2023 contracted sales growth of 3.1% y/y, according to China Real Estate Information Corp (CRIC). In 2022, revenue decreased 7% y/y to CNY 430.4bn, while gross profit was down 64.6% to CNY 32.9bn. Gross margin fell to 7.6% from 17.7% in 2021. EBITDA (excluding capitalised interest) decreased 79% y/y to CNY 13.2bn, while EBITDA margin (excluding capitalised interest) was 3.1% (versus 12% in 2021). Net profit attributable to shareholders declined by 123% y/y to CNY -6.1 bn. Going forward, we expect the company to continue to prioritise delivery at the expense of margins and profit to ensure delivery of pre-sold homes and to maintain high cash collection from new home sales.

Total cash declined by 0.3% h/h to CNY 147.6bn as of end-December, of which CNY 40bn was categorised as regulated presales proceeds in escrow accounts. Unrestricted cash + regulated presales proceeds / ST debt + trade payables (%) improved to 43% from 38.5%. The (short-term debt + trade payables)/(total debt + trade payables) ratio deteriorated to 61.2% in December versus 55.6% in June 2022, despite a 22.6% h/h decline in trade payables to CNY 191.6bn, as short-term debt increased to CNY 93.8bn as of December 2022 from CNY 73bn in June 2022. Leverage – as measured by net debt/adjusted inventory – decreased to 46.8% in December (according to our estimates, as the amount due to JVs and associates is not disclosed in the preliminary results) from 52.8% as of June 2022 due to a 7.7% h/h decline in total debt to CNY 271.7bn and a fall in JV debt guarantees to CNY 24.2bn from CNY 34.7bn in June 2022.

In H2-2022, the company raised CNY 2.5bn of China Bond Insurance Corp Ltd (CBICL)-backed bonds and CNY 1bn of onshore bonds without CBICL guarantee (on 9 December 2022), repurchased a notional CNY 1bn of onshore bonds, obtained CNY 4.3bn of shareholder loans, raised CNY 1.9bn of offshore syndicated loans and CNY 9.9bn of offshore equity, resulting in CNY 18.6bn of net incremental financing. In addition, it obtained c.CNY 260bn of credit lines during the last two months of 2022. This has been reflected in its bond price performance, whereby the bonds rallied 24-35 points in Q4-2022.

Outlook for 2023

Given Country Garden’s weaker-than-average contracted sales in Q1-2023, we lower our 2023 contracted sales expectation to -15% y/y (versus -5% y/y earlier) and expect the cash collection rate for the next 12 months to be 90% (vs 93% in 2022). Management plans to increase the upper-tier city landbank to 50% in terms of value from the current c.40% in the next three to five years. We think there is a need for the company to make this transition more quickly than the timeline indicated in order to reinvigorate contracted sales; however, its ability to do so may be limited