Financial safety is everything
- Country Garden’s 1H22 results were disappointing as core profit plunged 68% yoy due to sharp GPM contraction and a 31% yoy decline in revenue.
- Management said China’s property market is weaker than expected and CG will implement very prudent approaches to maintain its financial health.
- We believe CG’s end-Jun cash balance of Rmb123bn should be sufficient to repay its debts and construction capex for the next 15 months.
- Reiterate Add, on attractive valuation, with a lower NAV-based TP of HK$3.8.
1H22 core net profit plunged nearly 70% yoy
Country Garden’s (CG) 1H22 results were disappointing with core net profit plunging 68% yoy to Rmb4.9bn, largely in line with its profit alert earlier, due to 1) a 31% yoy decline in revenue as less projects were delivered, 2) sharp contraction in GPM, and 3) reduced contribution from JV projects. It did not declare any interim dividend (1H21: Rmb0.21 per share) as a way to preserve more cash amid market uncertainties.
GPM sharply contracted to historic low of only 10%
1H22 GPM came in at 10.6%, down a significant 9.1% pts from 19.7% in 1H21– -2.3% pts from the Rmb3.7bn provision for its projects and -6.8% pts from lower property selling prices and high land costs of the projects recognised in 1H22. Management guided that its GPM will remain weak ahead; we project 14-15% GPM in FY23-FY24F, assuming no further provisions.
Financial health is the top priority
Given the highly uncertain outlook of China’s property market, management stressed that financial safety rather than scale is its top priority and CG will be very conservative when buying land and strictly control its expenses, minimising unnecessary new start construction and investments. CG generated positive cash flow of Rmb5bn in 1H22 and management aims to meet three red lines requirement in the next 12 months.
Manageable debt repayment for FY22 & FY23
Management said CG’s debt repayment pressure is manageable for the next 12-15 months. It has total debts of Rmb8bn due in the remainder of this year, Rmb4bn each for onshore and offshore. For 2023, it has US$625m US$ bonds and four onshore debts amounting to c.Rmb8bn. Its unrestricted cash balance of Rmb123bn in 1H22 should be sufficient to repay these debts as well as construction capex and bank loans, in our view.
Maintain Add on cheap valuation
We cut our FY22-24F EPS by 42-51% on the back of lower GPM assumptions and lower contracted sales targets. We also cut our NAV estimate by 34% to HK$9.5. As a result of NAV cut and a wider discount of 60% (previous: 40%) to factor in higher sector risks, our TP falls 52% to HK%3.8; still implies c.53% upside. Maintain Add. Key risks to our call include weaker-than-expected sales in the next 12 months, especially in smaller cities where we estimate close to 40% of CG’s projects are located. Key re-rating catalyst: unexpected central government stepping in to save small cities’ property markets.