We expect Country Garden's sales to remain healthy over the next six to 12 months. The company's business model targets owner-occupiers in suburban areas of first- and second-tier cities, such as Guangzhou, and some third- and fourth-tier cities, such as Huizhou. The latest tightening of government policy has affected these locations less than prime locations in first-tier cities. Country Garden's contract sales met its own 2011 budget of Chinese renminbi (RMB) 43 billion, 31% more than a year ago. We view the company's sales execution ability as satisfactory, given the tough market conditions during the year. More than 87% of Country Garden's sales were from areas that didn't have government restrictions on property purchases.
We expect Country Garden's revenue to grow 10%-20% each year due to the company's competitive products. EBITDA margins are likely to remain between 28% and 30% in the next one to two years. Country Garden's profitability has improved and stabilized since bottoming in late 2009, when the company initially expanded to new markets outside Guangdong with a low price and high cost.
Country Garden's financial performance in 2012 is likely to remain sensitive to profit margin fluctuations, due to the company's low-margin, high-volume business model. The profit margin could be tested because selling prices have been declining in the past two quarters. Country Garden's financial performance in 2011 was supportive for our rating on the company. Revenue grew 34% to RMB34.75 billion, EBITDA interest coverage was about 4x, and the debt-to-EBITDA ratio was 3x. We expect the financial ratios to be comparable in 2012 as a big proportion of 2012's revenue was presold in the previous one to two years.
Liquidity
Country Garden's liquidity is "adequate," as defined in our criteria. We believe the company has adequate sources of liquidity to cover its needs in the next 12 months even if EBITDA moderately declines. Our assessment of Country Garden's liquidity profile incorporates the following expectations and assumptions:
-- The company's sources of liquidity, including cash and available banking facilities, will exceed its uses by 1.2x or more over the next six to 12 months.
-- Its net liquidity sources will remain positive even if EBITDA declines more than 15%.
-- The financial covenants of Country Garden's bank facility in Hong Kong have sufficient headroom.
-- The company can absorb low-probability high-impact shocks because of its good conversion of EBITDA to discretionary cash flow.
-- Country Garden's liquidity sources include a cash balance of more than RMB12.39 billion, of which RMB7.74 billion was unrestricted at the end of December 2011.
Our liquidity calculation does not take into account Country Garden's bank facilities of RMB12 billion in China due to their uncommitted nature. Nevertheless, we note that these facilities provide financial flexibility.
In our view, Country Garden has above-average banking relationships in China compared to its peers'. Nevertheless, the company has limited access to the banking market in Hong Kong. We expect contracted sales to provide RMB35 billion-RMB40 billion cash flows in 2012; hotel and rental incomes are likely to be less material over the period. In our view, these cash sources are sufficient to cover Country Garden's uses of liquidity--mainly construction, land costs, and taxes, and selling, general, and administrative expenses.
Outlook
The stable outlook reflects our expectation that Country Garden's sales are likely to remain resilient in the next six to 12 months despite a deepening market correction in China. We estimate the company's contract sales at RMB35 billion-RMB40 billion and expect a moderate growth in total borrowings. The company's own sales target for 2012 is RMB43 billion. We anticipate that Country Garden will maintain adequate liquidity while pursuing growth.
We may lower the rating if Country Garden's sales or margins are materially weaker than we expect or its debt-funded expansion is more aggressive than we anticipate. An EBITDA interest coverage of less than 3x, a debt-to-EBITDA ratio more than 5x, or EBITDA margins materially weaker than 25% for a sustainable period would indicate such weakness. In addition, we could downgrade the company if its liquidity becomes "less than adequate," it makes a major shift in its business model, or it introduces aggressive shareholder-capital-return initiatives.
We may raise the rating if Country Garden's significant financial risk profile further improves due to strong sales, good profitability, and well-managed leverage, such that the company maintains an adjusted ratio of total debt to EBITDA of less than 3.0x and EBITDA interest coverage of more than 5.0x on a sustained basis.
Related Criteria And Research
-- Country Garden Holdings Co. Ltd., Sept. 28, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
SOURCE Reuters
