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Morningstar | Country Garden's Interim Results in Line, Slower Growth Likely With More Focus on Quality Over Speed

Country Garden reported interim 2018 results with core profit attributable to shareholders of CNY 13 billion, up 80% year on year. The earnings accounted for 45% of our full-year estimate of CNY 29 billion. The company declared an interim dividend of CNY 0.1852 per share, up 77% year on year. The payout amounted to 31% of the core earnings, in line with historical past. We maintain our fair value estimate of HKD 14, and the no-moat rating for Country Garden.

Revenue and gross profit totaled CNY 132 billion and CNY 35 billion, up 70% and 105%, respectively, year on year. Gross margin jumped to 27% from 22% seen a year ago, reflecting the strong property market over the past two years, especially in lower tier cities. Revenue and gross profit accounted for 39% and 43% of our full-year estimate. The company also continued to see strong contract sales growth during the period, albeit at a slower rate compared with 2017. Contracted sales for the period totaled CNY 412 billion, up 43% year on year. The growth was mostly driven by a higher amount of floor space sold, as ASP was only up 5% from a year ago.

Given the enlarged scale of operation, the company was very active in land banking. It acquired 85 million square meters of land for CNY 224 billion, roughly the same as that seen during 2017. Area under construction increased to 163 million sqm out of a landbank of 364 million sqm. In comparison, at the end of 2017, area under construction totaled 120 million sqm out of a landbank of 282 million sqm.

The larger amount of capital expenditure pushed net gearing higher to 59%, compared with 57% at year-end. However, this is after a share placement of 460 million shares raising CNY 6.4 billion in January this year. We had expected the gearing to decline to a more sustainable level.

The company also spent HKD 728 million buying back 55 million shares or 0.22% of the shares outstanding during the period. (Additional buybacks of 107 million shares will not be canceled but used under its employee incentive plan.)

Going forward, we expect strong earnings growth for the full year given the sold but not booked amount of CNY 469 billion, more than projected revenue for 2018. But contract sales should moderate in coming years after the growth of 120% and 70% during the previous two years. While the company had stated earlier that it will aim for CNY 800 billion for the year, an increase of 45%, with the recent construction accident and the company's intention to "downshift to a lower gear," we project a slower pace of contract sales in the second half. The chairman of the company will also focus more on the property development business by chairing the safety committee, signaling a renewed focus on quality over speed.