Fitch Ratings has assigned a 'BBB-' rating to Country Garden Holdings Company Limited's (BBB-/Stable) proposed US dollar senior notes.
The proposed notes are rated at the same level as Country Garden's senior unsecured rating because they will constitute its direct and senior unsecured obligations.
Country Garden's ratings are supported by its strong business profile and healthy financial profile. The company has a diversified land bank that allows it to achieve consistent contracted sales. Its leverage - measured by net debt/adjusted inventory, including joint-venture (JV) adjustments and guarantees provided to JVs and associates - was at around 28% in 2019.
Country Garden's ratings are constrained by its volatile cash flow from operations (CFO), although this remained positive in 2019. Country Garden has a sufficient land bank to support its contracted sales and has demonstrated a track record in responding to changing market conditions, such as adjusting its city-tier mix, which supports a sustainable financial profile.
KEY RATING DRIVERS
Leverage Manageable: Fitch expects leverage to remain at 30%-35% in the medium term. It was at around 28% in 2019 and 27% in 2018. Country Garden's high-churn strategy should generate consistent cash collection that is sufficient to fund land banking and construction activity without increasing leverage significantly.
Diversified Land Bank: Country Garden's strong business profile is evident in its land bank, which is diversified across high- and low-tier cities. Country Garden has adapted well to market changes and its land bank and product range remains well-diversified, which helps sustain stable sales through business cycles.
Controlled Contracted Sales: Country Garden's attributable contracted sales increased by about 10% to CNY552 billion in 2019, with an average selling price of CNY8,854 a square metre. However, growth was lower than a year earlier due to a high contracted sales base during 2018. Fitch believes the company is responding to changing market conditions and maintaining the safety and quality of its construction.
Volatile Cash Flow: We expect Country Garden to have sufficient resources to maintain positive CFO if it carries out its plan to control contracted sales growth, which will also help fund investments in other businesses, such as its robotics segment. CFO reached CNY31.8 billion in 2018 and CNY17.1 billion in 2019. We assess CFO by netting off investments in JVs and associates, which have been positive except in 1H18. Significant deviation from the company's intention to moderate its homebuilding operation may pressure leverage.
Lower Profitability than Peers: Fitch expects Country Garden's EBITDA margin to remain low due to its high-churn business model. The margin, after adding back capitalised interest, was stable at around 23% in 2019 (2018: 22%), but was at the lower end of that of investment-grade peers. However, this was mitigated by low funding costs and minimal land-appreciation tax due to low margins.
DERIVATION SUMMARY
Country Garden has higher contracted sales and EBITDA than Longfor Group Holdings Limited (BBB/Stable) and Shimao Property Holdings Limited (BBB-/Stable). This is offset by its lower EBITDA margin and recurring EBITDA/interest coverage. Country Garden's leverage, measured by net debt/adjusted inventory, was around 28% in 2019, and we expect it to remain at 30%-35%, comparable with that of its two peers.
Longfor has consistently generated positive CFO to support the build-up of its strong investment-property portfolio. Fitch estimates that Longfor's recurring EBITDA/interest cover reached 0.7x in 2019, among the highest for China's 10-largest homebuilders. This makes Longfor's debt-servicing capacity more predictable and explains the one-notch difference between the two companies.
China Vanke Co., Ltd. (BBB+/Stable) maintains leverage below 20%, which justifies a two-notch rating difference with Country Garden. Poly Developments and Holdings Group Co., Ltd.'s (BBB+/Stable; Standalone Credit Profile: bbb) leverage of above 55% is the highest among peers in the 'BBB' rating category, but the company relies less on working capital than peers, and we estimate its leverage, after working-capital adjustment, to be similar or lower than that of peers. The one-notch difference between Poly's Standalone Credit Profile and Country Garden's rating reflects Poly's higher margin and larger recurring EBITDA interest cover.
COUNTRY GARDEN HOLDINGS COMPANY LIMITED 
