Cogard 4.75% 09/28/23 (Cogard)

Credit Note Real Estate ▪ Global

COGARD 4.75% 09/28/23 (COGARD)

High Yield Debt (USD) Marc Tan / 65 6202 1195 / [email protected] Company Background: Country garden is China’s largest real Weaker operating cash flows but sales outlook is positive estate developer with contracted property sales of RMB with stable average selling prices. Land acquisitions to slow 550.8 bn in 2017. The company is listed on the main board of as company focuses on stability. While the group’s cash the Hong Kong Stock Exchange and has projects covering 768 collection remains strong with cash from property sales counties/towns, 220 cities and 30 provinces in Mainland growing 52% YoY to RMB 336.02 bn, operating cash flows as % China at the end of 2017, making them the largest of property sales dropped to ~1% dragged by higher residential property developer in the world with a market construction payments and taxes. cap of 31 billion USD. Figure 1: Operating Cash Flows Credit Considerations: (RMB bn) 2016 2017 1H17 1H18 Property Sales 284.08 500.33 220.52 336.02 Cash inflow from other segments 3.77 5.58 2.31 8.76 Diversification efforts continues with stronger 1H18. The Construction payments ‐85.15 ‐112.39 (47.62) (90.71) Land acquisition ‐126.58 ‐318.68 (135.22) (196.38) group’s profits increased 72.5% YoY to RMB 12.9bn, driven Interest paid ‐6.12 ‐10.8 (3.89) (7.44) Salary payments ‐11.65 ‐20.41 (9.04) (15.97) by higher margins and an increase in the average selling Taxes ‐17.49 ‐25.7 (12.07) (32.40) price. ASP of property delivered rose to RMB 8,846 per sqm Others 0.4 6.15 1.43 1.29 Net cash generated from operating activities 41.26 24.08 16.42 3.17 from RMB 6,900 per sqm in 1H17. Momentum on contracted CFO % of Property Sales 14.52% 4.81% 7.45% 0.94% sales continued, increasing by 42.8% to RMB 412.5bn with Source: Company Data, KGI Research contracted gross floor area of 43.89 mn sqm. Efforts to diversify geographical continued with sales outside Sales outlook however, remains positive with locked‐in Guangdong Province making up 76% of 1H2018 contracted presales estimated at RMB 783bn, according to the latest sales as compared to 70% in FY2017. contracted sales ASP of 9,171 RMB/sqm. Going forward, we expect CG’s credit outlook to remain well‐supported given Rising debt levels but manageable at current levels. For an estimated saleable resource of RMB 750bn and land bank 1H18, the group reported net gearing ratio of 59% from 56.9% reserve that’s estimated to be worth RMB 1,402 bn. as at the end of 2017 but current capital structure remains manageable in our view, with EBITDA/Interest Coverage of Figure 1: Attributed Contracted Sales (RMB/sqm) 4.0x, Net Debt/EBITDA of 1.4x and undrawn bank facilities that totaled RMB 281.39bn. Operating cash flows also remained positive with RMB 3.17bn as of 1H18.

Figure 1: EBITDA/Interest Coverage

Source: Company Data, KGI Research

While Country Garden’s topped its competitors in contracted Source: Company Data, KGI Research sales and land acquisition spending for 2018, management has guided for more prudence with its land acquisitions and Figure 1: Net Debt/EBITDA more selective expansion plans.

Figure 3: Country Garden Topped Sales and Land Acquisitions in 2018 Company Contracted Sales (RMB Bn) Land Acquisition Spending (RMB Bn) Country Garden Holdings 728.69 314.95 China Vanke 606.92 268.66 Sunac China Holdings 460 203.31 Poly Real Estate Group 405 183.48 China Resources Land 210.6 126.24 Source: CRIC, Mingtiandi.com, KGI Research

Source: Company Data, KGI Research

March 8, 2019 KGI Securities (Singapore) Pte. Ltd.

COGARD 4.75% 09/28/23 Singapore

Credit Recommendations: In our view, we believe the Not part of our defensive portfolio reccomendation. This company’s shift in focus from breakneck growth to a bond is non investment grade and is not part of our moderated rate of expansion will be credit positive for its defensive portfolio. Currently, COGARD’s 2023 is rated Ba2 corporate bonds. (Moody’s), BB+ (S&P), BBB‐ (Fitch).

Country garden is one of the few developers in China which Subordination Risk ‐ The 2023 is a senior note with first has managed to maintain capital adequacy and positive priority lien but the debt was issued out of Country Garden’s operating cash flows in the past few years. Since 2013, the Holding Company while the majority of the group’s claims group’s balance sheet has remained strong without are at its operating subsidaries. As a result, recovery value exceeding its self‐imposed targets of for bondholders could be lower in a bankruptcy scenario.

1. Net Loan Ratio <70% Figure 3: Country Garden Corporate Structure and Subsidiary Guarantors 2. Available Cash (At Least 10% of total assets)

Figure 3: Country Garden’s Net Gearing Ratio

Source: Company Data, KGI Research

Source: Company Data, KGI Research Call Dates – Prior to 28 September 2020, the company may As of June 30 2018, the group’s net gearing ratio and redeem the notes at a redemption price equal to 100% of weighted average borrowing cost ratio stood at 59% and the principal amount of the Notes plus the applicable 5.81% respectively. In contrast, the weighted average net premium as of, and accrued and unpaid interest, if any. loan ratio of major Chinese listed property developers rose to 91% in 2017 from 74.9% in 2016, according to data from After 28 September 2020, the bond is callable at the China Real Estate Information Corp (CRIC). following price and dates.

For high‐yield debt investors, we recommend an exposure  28 September 2020 (102.375) to COGARD’s 2023 which is currently trading at 93.6 with a  28 September 2021 (101.1875) YTW of 6.3% and duration of 4. In comparison with its peers,  28 September 2022 and thereafter (100.00) we expect to COGARD 2023 to trade closer to its state‐ owned peers (POLYRE +179bps & CHIOLI +124 bps) with credit spreads ~350bps given the scale of its business and strong balance sheet.

Credit spreads have tightened from ~650bps In Oct 2018 to 380bps today. Pending a significant slowdown in the Chinese real estate market or further equity reduction in key stakeholders like Ping An, we expect credit spreads to continue tightening.

Figure 3: Relative Valuation Among Peer Group

Source: Bloomberg, KGI Research

March 8, 2019 KGI Securities (Singapore) Pte. Ltd. 2

COGARD 4.75% 09/28/23 Singapore

Financials FYE 31 December INCOME STATEMENT (RMB mn) 2016A 2017A 1H18 Revenue 153,087.0 226,899.8 131,894.0 Operating Profit 22,124.2 43,598.2 26,886.0 EBITDA 22,901.4 44,422.7 27,404.0 Interest Expense 6,876.8 11,040.6 8,852.0 Profit Before Tax 21,390.6 46,522.0 26,857.0 Net Profit 13,663.2 28,751.8 16,319.0

BALANCE SHEET and CASH FLOW (RMB mn) 2016A 2017A 1H18 Cash and Bank Deposits 84,646.9 137,083.9 196,427.0 Net Debt 39,706.0 66,362.9 84,000.0 Shareholders Equity 81,615.2 116,611.9 142,447.0 Total Assets 591,571.6 1,049,669.3 1,403,043.0 CFO 41,262.8 24,083.6 3,167.0 Capex (PPE) (1,907.0) (3,301.4) (2,033.0) Investment in JVs (0.7) (9,853.3) (5,222.0) Payments for Financial Assets (6,133.1) (18,389.0) (4,014.0) Free Cash Flow (Acquisition Adjusted) 39,354.8 (822.4) (16,450.0)

KEY RATIOS 2016A 2017A 1H18 EBITDA Margin (%) 15.0 19.6 20.8 Net Margin (%) 8.9 12.7 12.4 Net Debt to EBITDA (x) 1.7 1.5 3.1 Net Debt to Equity (x) 0.49 0.57 0.59 Net Debt to Total Assets (x) 0.1 0.1 0.1 EBITDA to Interest (x) 3.3 4.0 3.1 Source: Company Data, KGI Research

March 8, 2019 KGI Securities (Singapore) Pte. Ltd. 3

COGARD 4.75% 09/28/23 Singapore

KGI’s Ratings Rating Definition KGI Securities Research’s recommendations are based on an Absolute Return rating system.

BUY >10% total return over the next 12 months

HOLD ‐10% to +10% total return over the next 12 months

SELL <‐10% total return over the next 12 months

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March 8, 2019 KGI Securities (Singapore) Pte. Ltd. 4