S&P lowers Country Garden's rating, wary of Forest City project

STANDARD & Poor's Rating Services has downgraded the long-term corporate credit rating of China property developer Country Garden Holdings Co Ltd on the back of its deteriorating margins and leverage, and has expressed reservations about its ambitious Forest City project in Iskandar Malaysia.

The developer's rating and outstanding senior unsecured notes were lowered from BB+ to BB on Thursday.

S&P's credit analyst Brian Huang said: "We downgraded Country Garden because of its deteriorating margins and leverage. In 2015, the margin compression was greater than we expected, and leverage notably weakened because of aggressive land acquisitions."

In a statement, S&P said the developer's leverage was unlikely to recover to the levels previously anticipated, given that its land acquisition has continued unabated even as the company maintains a high level of saleable resources.

Country Garden's debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio has weakened from 3.6x in 2014 to 5.8x. Its margins are significantly thinner from the recognition of a large portion of sales in 2014, when discounts were dangled before a slow market.

Last year, the company acquired land with a gross floor area of 38 million sq m for 56 billion renminbi (S$11.7 billion), nearly three times more than its 20 billion renminbi budget.

Some of the land was in overseas markets; like other Chinese developers, Country Garden had turned to overseas markets as demand in China soured.

In 2013, it had launched a thundering 9,000 residential units in Danga Bay in southern Johor, in a market more accustomed to phased sales of 200 to 300 units at a time. (Johor's population is about 3.55 million).

In any event, its Forest City Development - planned for man-made islands near the Second Link off Tuas - dwarves everything else. A mind-boggling 700,000 residential units are being planned for, not including other segments, on four reclaimed islands of 1,386 ha.

The islands are to be developed over 20 years at an estimated cost of RM175 billion (S$58.4 billion), said masterplanner Country Gardens Pacific View Sdn Bhd (CGPV), which is a 60:40 joint venture between Country Gardens and Esplanade Danga88.

Esplanade Danga88 is owned by state agency Kumpulan Prasarana Rakyat Johor and the state monarch Sultan Ibrahim Iskandar.

In 2013, Chinese developer Guangzhou R&F reportedly offered the monarch RM4.5 billion for 116 acres of prime land in south Johor.

But the Forest City deal is less clear, and details are still sketchy.

In an interview with radio station BFM this week, CGPV executive director Othman Yusof indicated that Country Garden would be responsible for funding, while the state would take care of promotions, approvals and incentives. (Already, CGPV has managed to obtain multiple tax incentives including duty-free zone status for Forest City. Also, it is eligible for exemption from foreign-equity restrictions.)

Moving at breakneck speed, CGPV expects to offer 700 units for sale soon under the first phase, and to complete a shopping mall by year-end.

S&P, expressing its caution about Forest City, said: "We believe the sales target is somewhat ambitious, given that this is a new large-scale project and targets primarily mainland overseas buyers. In 2016, the company plans to launch at least 30 billion renminbi in saleable resources for this project."

To acquire land this year, S&P said its base-case forecast for Country Garden's cash payments is 60 to 65 billion renminbi (including 20 billion renminbi in unpaid land premiums from 2015).

But it pointed out that, as its land bank had swelled by almost 50 per cent last year, the company's follow-on construction capital expenditure is expected to increase this year, pushing total borrowings up by 13 to 18 per cent to between 125 and 130 billion renminbi by year's end.

While its sales target of 168 billion renminbi looks attainable - it had achieved 140 billion renminbi last year - "the high capital expenditure for construction and land acquisitions will largely temper the fast sales growth and moderately improving margins".

S&P noted the potential for upgrade was limited over the next 12 months.

btworld@sph.com.sg