EUR 850.00 For Business Accounts Only

Morningstar | Strong Country Garden Contract Sales Year to Date, but Likely to Slow During 2H

Country Garden's shares dropped more than 6% after a construction accident at one of the company's project sites in Anhui last Friday. Rain and wind caused the collapse of a workers' dormitory, resulting in six deaths and 12 injuries. The company announced that it has suspended all construction activities pending an investigation of the accident. The immediate impact will be a delay in the company's construction process across all projects. Regardless of the length of delay, we believe the publicity fallout will likely force the company to de-emphasis its fast asset turn model, which has been underpinning its recent fast pace of growth. We expect the company to slow down its operational pace, resulting in slower revenue booking and contract sales during the second half of the year. At this point, we believe the strong contract sales achieved to date are likely to be offset by the negative fallout of the construction accident as well as the widely reported slowing of funds from Pledged Supplementary Lending program for shantytown redevelopment projects. We maintain our fair value estimate of HKD 14 and our no-moat rating for the company.

For the first half of the year, the company achieved contract sales of CNY 412 billion, 43% higher than the same period a year ago, mostly driven by an increase in sales volume. The company did not set a contract sales target at the beginning of the year, but recently stated that it will aim for CNY 800 billion for the year after strong sales. This is higher than our projection of an increase of 30% to 35%. The company's landbank turnover has dropped to from 5.5 years to 4.5 years over the past three years. It was also reported in the media that the company's staff compensation is explicitly tied to certain landbank turnover metrics. In our model, we had projected a more sustainable landbank turnover rate of 5.2 to 5.5 years. In light of the recent events, we believe the slower pace is more reasonable.

Balance sheet strength is not an issue given the share placement of 460 million shares raising CNY 6.4 billion in January this year. Net gearing should remain at sustainable levels over the next two years, despite the management target of land acquisitions of CNY 400 billion in 2018. The company also conducted share buybacks starting in late June, totaling 160 million shares. The company stated that it will cancel 50 million shares acquired or 0.22% of shares outstanding. The remaining shares would be used under its employee incentive plan.