Country Garden Reports Doubling of Stock Price and Sales for 2016

Journalists attending the conference were quick to draw the conclusion that Country Garden was very much on its way to achieving sales exceeding 100 billion yuan (approx. US$14.5 billion) by the end of the first quarter, and to finish the year with the right to call itself China's real estate sector leader. Nevertheless, the company's annual sales target in mainland China this year announced at the conference was only 400 billion yuan (approx. US$58 billion).

"We don't expect to be number one, but we will try our best to do better." Country Garden chairman Yang Guoqiang clarified, as he explained that he feels he has a true sense of what is reasonably possible and what is not. He added that there are many variables in the market and he doesn't know the full circumstances of the company's rivals. The company will do the utmost to assure the best possible future for itself and its investors, and continue to learn from its great peers, all of whom he highly respects.

Country Garden has solid financial performance and expects to see amazing results in the future

Country Garden CEO Mo Bin gave a presentation at the conference. He explained how the company had achieved growth in both scale and profits. The real estate developer booked 153.1 billion yuan (approx. US$22.2 billion) in revenue for 2016, up 35 per cent year on year, and 11.5 billion yuan (approx. US$1.67 billion) in net profit attributable to shareholders, up 24 per cent from the previous year. In addition, the company delivered strong cash flow management and sell-through rate, reporting completed sales of 284.08 billion yuan (approx. US$41.3 billion), indicating a successful conversion rate of contract sales moving to completion of 92 per cent and sell-through rate of 73.7 per cent, the last number up nearly 20 percentage points compared to the previous year.

Country Garden vice president Cheng Guangyu explained that the improvements in results were mainly attributable to two factors: the health and stability of the market and the company's marketing efforts in 2015 and 2016, including arranging inspection tours for potential buyers during China's major holidays, especially over the extended Chinese New Year holiday.

However, when compared to the entire industry, Country Garden recorded slower growth in terms of gross profit margin. Commenting on this, CFO Wu Bijun said that most number of completed homes delivered to buyers last year was sold between 2013 and 2014. Due to the sluggishness of the market at that time, the company's gross profit margin didn't achieve the expected growth. "We expect there to be a different story to tell as we move through 2017 and into 2018, as homes sold in 2016 enter settlement."

Commenting on the growth in Country Garden's contracted sales, J.P. Morgan analyst Ryan Li said, at variance with the situation of growth in contracted sales in 2013, this time the company was able to achieve improved sales numbers in an environment of stable selling prices in 2016, assuring an improved margin. Especially in 2015, the company's new buildings in China's first- and second-tier cities sold out at a steady clip and quickly, benefiting in a big way from the rebound in the market. 

Another factor that played a role in the improved outlook for Country Garden is that the firm increased the land investment demands during the reporting period, which led to a larger scale of financing. The strong selling ability coupled with strict management of the cash flow both served to further optimize the firm's capital structure.

Completed sales during 2016 brought in a cash influx of 284.1 billion yuan (approx. US$41.3 billion), representing a conversion rate of contract sales to cash of 92 per cent. Net operating cash flow stood at 41.5 billion yuan (approx. US$6.03 billion). The net loan ratio decreased 11.3 percentage points to 48.7 per cent, while the weighted average borrowing cost decreased 54 basis points year on year, to 5.66 per cent. The firm reduced foreign exchange losses by 1.41 billion yuan (approx. US$205 million) through hedging and retiring debt by paying off all perpetual bonds with a higher than the going interest rate during the year, reflecting the optimized capital structure.

Further expansion across China, performing well in all aspects 

Country Garden is now ranked top three among China's best ten property developers in terms of sales, elevating the company to the status as one of the country's premium property brands. The high ranking has no bearing on the developer's ongoing commitment to building affordable and high-quality housing for modest families. The average contract selling price rose to 8,242 yuan (approx. US$1,195) per square meter during the reporting period nevertheless maintained its position as the least expensive among the best ten Chinese property developers.

"I am always optimistic about the future of China in view of the government's new urbanization plan that is being implemented, and believe that the plan will provide additional benefits in the long term," said Country Garden chairman Yang Guoqiang at the conference. "We aggressively expanded our footprint in third, fourth and fifth-tier Chinese cities several years ago when many of our peers were pessimistic about the future of these cities' housing markets. With the progressive increase in China's GDP driven by the country's reform and opening-up policy, and the acceleration of its urbanization and modernization process, I believe that we now have hit our stride and expect to live even better lives."

Besides being a leading property developer in China's third- and fourth-tier cities, Country Garden has also strengthened its land acquisition strategy in the first and second-tier cities over the past few years. According to the financial results, the developer spent 64 per cent of its land acquisition budget (excluding any acquisitions related to minority shareholders) on buying land in first- and second-tier cities in 2016, with the remaining 36 per cent spent in third- and fourth-tier cities.

Country Garden counted 728 projects either having been completed or in the process of being completed as of the end of 2016, of which 722 are located in China and nearly two thirds of them located outside of the developer's home province of Guangdong. This is in addition to four projects in Malaysia, one in Australia and one in Indonesia. In 2016, Country Garden further expanded its presence across China, with projects started in cities at all tier levels, by leveraging the benefits of the country's accelerated urbanization process, consolidating its growth from a local Guangdong province-based builder into one of the top three Chinese property developers. At the same time, the developer is benefiting from China's "One Belt, One Road" initiative which fosters connectivity and cooperation between China and the rest of Eurasia, by identifying and acting on opportunities offered in the profitable housing markets in the countries targeted by the initiative.

US$21.8 billion budget for land acquisitions to boost expected growth

As for land reserves, Country Garden moved aggressively in 2016 by acquiring 413 plots of land lots with an anticipated 87.52 million square meters of gross floor area once structures have been built on the land, assuring a continuous roll out of new construction and sales. Country Garden executives disclosed that the company will continue to acquire land in 2017. The company foresees 360 billion yuan (approx. US$52.4 billion) in sales coming to completion during the year, and using 150 billion yuan (approx. US$21.8 billion) of those proceeds in new land acquisitions to support the full-year sales targets.

It is considered that Country Garden attributed a big portion of the success of the last few years to the efforts it has placed in attracting top talent through the offering of attractive incentives and implementation of a partnership scheme and a future leadership program.

As of December 31, 2016, the partnership scheme had been made a component of 583 property projects, responsible for aggregate contracted sales of 261.2 billion yuan (approx. US$38 billion). The average net profit margin on the contracted sales at projects under the partnership scheme is running at about 12 per cent, with positive net cash flow anticipated 8.4 months following the start of the project. Yield on the private capital invested in the projects is 78 per cent. All of the performance indicators are at record levels of the company.

Since the launch of its future leadership program targeting at PhDs all over the world in 2013, as of March 14, 2017, Country Garden had brought on board 450 executives with PhDs, with plans to increase the number to over 1,000 by the end of 2018. Roughly one out of five of the executives holding PhDs move into a senior role as regional president, regional vice president or project manager within two to three years, contributing to a large degree in the company's ability to have pushed the annual sales figure past the 300 billion yuan (approx. US$43.6 billion) mark.

Country Garden's strong growths received an enthusiastic response from investors. The stock price on March 22 was up 108 per cent compared to the close on December 31, 2015, outperforming the HangSengIndex 9.8-fold. Market value has reached HK$140.9 billion (approx. US$18.1 billion).

SOURCE Country Garden Holdings