EUR 850.00 For Business Accounts Only

Morningstar | Slower Growth Ahead, Balance Sheet Should Strengthen

Country Garden achieved attributable contract sales of CNY 502 billion for the year, up 31% year on year. The increase was mostly due to higher GFA sold. The company changed the presentation of contract sales data from total to attributable during the second half of 2018. Total contact sales were likely lower than the company’s earlier goal of CNY 800 billion for the year. With a “downshift to a lower gear," and a renewed focus on quality over speed, the result was not surprising. We maintain our fair value estimate of HKD 14, and the no-moat rating for Country Garden.

For the full year, we expect the company to maintain the 26% gross margin seen during first half 2018, and perhaps the first half of 2019. Beyond that, we expect the margin to decline, reflecting the weakening physical market starting in late 2018, especially in lower tier cities. The company has targeted single-digit sales growth in 2019. Correspondingly, landbank acquisitions have slowed during the second half of 2018, and we expect that to continue during the first half of 2019.

Management guided steady net gearing, or around 60% seen during interim. Considering the still strong overall contract sales seen during 2018, and slower land bank acquisitions, we expect gearing to decline over the next year or so. As part of focus of quality over speed, the company has reported to be shifting staff performance metric to cash collection over contract sales.