Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Author l Orange
If the overall fundamentals of the real estate market had not improved this year, the life of the "cosmic real estate company" Country Garden (02007·HK) would not have been too easy.
Recently, the real estate market has been positive. Country Garden has also been selected as a demonstration real estate company and successfully issued a corporate bond of 500 million yuan. The interest rate is very low, only 4.5% of the face value, and it has attracted many institutions such as state-owned banks, joint-stock banks and securities companies to participate .
The successful issuance of bonds by Country Garden this time has also been interpreted as a signal of market recovery. However, under the background of not speculating on housing and housing, the market may not be able to return to the golden period of the property market before 2018.
At the same time, the cold winter of the property market will expose naked swimmers one by one, and Country Garden is no exception even as a "top student".
Earnings quality continues to decline
On May 6, Country Garden disclosed the contracted sales amount in April 2022, which was approximately 22.64 billion yuan, a year-on-year decrease of 57.1%. In the first four months of this year, the company achieved equity sales of 121.87 billion yuan, a year-on-year decrease of 36.65%.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Country Garden official announcement
And this kind of sales weakness has already appeared last year. According to its 2021 annual report, Country Garden achieved equity sales of 558 billion yuan for the whole year, ranking first in the country, but the year-on-year sales growth rate fell by 2.22%. Performance slipped.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Country Garden 2021 Annual Report
Reflected in terms of performance, Country Garden’s annual revenue was 523.064 billion, a year-on-year increase of 13%, but the profit performance was not good. The net profit attributable to the parent was 26.797 billion yuan, a year-on-year negative growth of 23.49%, which was a further decline compared with the growth rate of this indicator in 2020.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
The key to the negative growth of Country Garden's annual profit indicators, in addition to the overall property market environment, may lie in its land bank layout strategy.
Unlike most real estate companies, Country Garden's business strategy does not revolve around the first- and second-tier property markets, but mainly focuses on third- and fourth-tier cities.
Country Garden was established in Foshan, Guangdong in 1992. By 2017, it ranked 467th in the Fortune Global 500 for the first time, and has entered the Fortune Global 500 for many years.
Throughout the development process, Country Garden has always been based on third- and fourth-tier cities. In 2014, third- and fourth-tier cities contributed 50% of sales. Focusing on the third and fourth tiers also allowed Country Garden to fully enjoy the dividends of the third and fourth tier property market shed reform around 2015. Coupled with the high turnover model and the previous low-cost land acquisition boost, Country Garden directly achieved a take-off in performance.
Since then, the sales contributed by third- and fourth-tier cities have continued to rise, reaching 58% in 2017 and further jumping to 64% in 2018. By 2021, the third- and fourth-tier sales will still reach 68% despite the decline in the growth rate.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Country Garden 2021 Annual Report
Relying on the previous market dividends of the third- and fourth-tier real estate markets, Country Garden has eaten the most complete crab, and maximized the residual value of real estate in third- and fourth-tier cities, helping itself to win the title of "Universal Real Estate Enterprise". You must know that in 2015 Country Garden's annual revenue was only 113.22 billion yuan.
But this double-edged sword is also lowering the quality of Country Garden's earnings.
After 2017, with the completion of the housing reform in the real estate market, the market dividends belonging to the third- and fourth-tier real estate markets quickly dissipated, accompanied by a further decrease in the liquidity of the real estate market, and a continuous decline in the average sales price, resulting in the profitability of real estate companies in the third- and fourth-tier real estate markets. keep going lower.
In 2020, Country Garden's net profit attributable to its parent has experienced negative growth again since 2015. During the same period, the gross profit rate fell by 4.26 percentage points to 21.8%, and the net profit rate dropped to 11.69%.
By 2021, Country Garden's gross profit margin will drop again by 4.06 percentage points to 17.74%, falling directly below 20%, and the net profit margin will drop to single digits in the same period to 7.84%, a year-on-year decline of 3.85 percentage points.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
However, after experiencing negative growth in net profit attributable to the mother in 2020, Country Garden has also begun to focus on first- and second-tier cities.
In 2021, although sales in first- and second-tier cities accounted for only 32%, from the perspective of its volume, Country Garden’s equity sales in first- and second-tier cities alone will reach 178.56 billion yuan. Some first-tier real estate companies have high annual sales.
It’s just that the development of the first and second tiers at this time will inevitably face pressures such as greater costs and entry barriers, as well as long selling cycles.
From the perspective of Country Garden's cost structure in 2021, the annual sales cost reached 430.282 billion, a year-on-year increase of 19%, while the year-on-year growth rate of this indicator in 2020 was only 0.75%.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
From this, it is not difficult to understand Country Garden's continued decline in the quality of earnings.
It is difficult to relieve the debt pressure even if the shares are actually debts
In addition to poor profit quality, like most real estate companies, debt pressure is also a "thunder" that Country Garden cannot avoid. It's just that leading real estate companies have a huge body, which makes Country Garden slightly more credible in the financing market.
It’s just that with the lessons learned from other real estate companies, Country Garden’s credibility is also weakening.
In early April, Fitch, one of the three major international rating agencies, downgraded Country Garden's credit rating from "stable" to "negative", affirmed the rating as "BBB-", and confirmed Country Garden's senior unsecured rating and the status of its outstanding notes. Also rated "BBB-"!
The reason given by Fitch is that on the one hand, the operating performance has continued to decline since the third quarter of 2021, and on the other hand, it believes that Country Garden’s leverage ratio is higher than that of most investment-grade real estate companies.
Judging from the three red lines, as of the end of 2021, Country Garden's asset-liability ratio after deducting only advance receipts is greater than the required upper limit of 70%, and it is currently in the "yellow gear".
The performance of the three red lines is not bad, but from the perspective of its overall assets and liabilities, Country Garden’s liabilities in 2015 were only 272.616 billion yuan, but in 2021 it has reached 1.65 trillion yuan, an increase of 505%. The asset-liability ratio in 2021 is 84.57%. It is also at the top of the industry.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
In the overall debt structure, as a representative of high-turnover real estate companies, Country Garden's extreme thirst for funds has brought its total current liabilities to 138 million yuan, accounting for 84% of the total liabilities.
Among them, short-term loans were 64.382 billion yuan, operating liabilities (accounts receivable and bills) reached 558.874 billion yuan, and other current liabilities were 715.608 billion yuan.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
Coupled with the high turnover and the capital required for the layout of the first and second tiers, the huge Country Garden also hides greater cash flow pressure. Moreover, due to the continuous reduction of leverage in the past two years, Country Garden's cash and cash equivalents will also have a net outflow of 81.684 billion yuan and 20.091 billion yuan for two consecutive years from 2020 to 2021.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
However, despite the huge short-term debt pressure, Country Garden still achieves three red lines and yellow gears, which may be inseparable from the increasing minority shareholders' equity year by year.
In 2014, Country Garden's minority shareholders' equity was only 5.756 billion yuan, and by 2021 it had increased to 101.891 billion yuan, accounting for 9% of all shareholders' equity and increasing from 9% to 34%.
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
However, during the same period, Country Garden's net profit attributable to minority shareholders did not grow at the same rate. On the contrary, in the years from 2019 to 2021, when minority shareholders' equity grew the fastest, its net profit attributable to minority shareholders dropped from 21.652 billion yuan to 14.185 billion yuan. .
Successfully issued 500 million yuan of corporate bonds. Is Country Garden, which is supported by capital, stable?
Image source: Oriental Fortune
Minority shareholders' equity continued to increase significantly, but the corresponding net profit did not increase but decreased. It seems that Country Garden is also whitewashing its performance with clear shares and real debt.
However, judging from the recent property market environment, the real estate industry seems to be ushering in a small "lifting of the ban" after regulation. This may be a good thing for Country Garden, but the leverage and cash flow pressure facing Country Garden are still urgently needed. solve the core problem.
Disclaimer: This article is only for knowledge sharing, just to convey more information! This article does not constitute any investment advice, and anyone who makes investment decisions based on it does so at their own risk.