EUR 850.00 For Business Accounts Only

Morningstar | Country Garden Holdings' Results a Beat on Faster Booking, Growth to Moderate Ahead

Country Garden reported full-year 2018 results with core profit attributable to shareholders of CNY 34 billion, up 38% year on year. The earnings are 7% higher than our estimate due to higher top line. The company declared full-year dividend of CNY 0.4884 per share, up 38% year on year, Revenue and gross profit totaled HKD 379 billion and HKD billion, up 67% and 74%, respectively, year on year. Gross margin reached 27%, slightly higher from a year ago. The higher top line was attributed to faster booking as well as larger proportion attributable to joint ventures. We expect growth to slow as the company shifts to a slower speed to focus on quality. We adjusted our booking assumption and rolled our model forward. We raise our fair value estimate to HKD 15 from HKD 14 and maintain our no-moat rating for Country Garden.

The outperformance was mainly driven by higher than expected top line. Revenue was 14% above our estimate, partially due to higher proportion of minority interest as the company utilized joint ventures extensively during the year. This was evident as minority interest’s share of earnings accounted for nearly 30% of the total compared with less than 10% in prior years.

The company also switched the presentation of contract sales from aggregate to attributable in the middle of the year. For full-year 2018, attributable contract sales totaled 502 billion and GFA of 54 million square meters, up 31% and 23%, respectively. The pace has moderated after rapid sales growth of near 80% and 120% for 2017 and 2016, respectively. Land banking activities also have slowed. The company acquired attributable GFA of 86 million square meters in 2018 with land premium of CNY 191 billion, with the bulk occurring during the first half. Compared with 2017, when it acquired attributable GFA of 101 million sqm in land for CNY 327 billion. The company is likely to see single-digit growth in contract sales in 2019 and beyond.

Net gearing dropped to below 50% from 60% seen during interim. This was as expected given the still strong pace of sales during the second half of the year, and the company’s strategy of shifting to a lower gear with scaled back land banking activities and a strong focus on cash collection. The company stated that its cash collection ratio reached 91% of the attributable sales.

The dividend accounted for 31% of the core earnings, in line with the payout ratio a year ago. We expect the balance sheet to strengthen further. The slower growth, along with the recently issued convertible bond (with a conversion price of near HKD 13 potentially equating to 3% of the shares outstanding) will likely cap the share price in the near term.