Country Garden Earnings to Recover, but Growth Outlook Is Weak

No-moat-rated Country Garden Holdings 02007, or CGH, posted a net loss in 2022 for the first time since its listing in 2007, albeit in line with its profit warning. Revenue also saw a 17.7% year-on-year slump due to delivery disruption and tempered inventory clearance in 2022. While management is optimistic that top line growth will recover with a pickup in housing demand, we think the sales drop in 2021-22 will weigh on revenue booking over the next few years. Excluding one-off impairment and foreign exchange loss, CGH’s core net profit remained positive at CNY 2.6 billion, despite a pronounced dip from 2021 levels. Although CGH has ramped up projects in Tier 1 and Tier 2 cities to lift margins, we expect the improvement to be gradual given stiff competition for limited landbank. We also foresee that inventory turnover of CGH will be slower than state-owned peers given heavier exposure to lower-tier cities. As such, we trim our fair value estimate to HKD 2.80 from HKD 5.10 on lower margins and higher inventory days assumptions through 2027. Our revised valuation still implies a 23% upside to HKD 2.28 close price as of March 30, 2023, and we believe stable dividend yield will resume with the turnaround in CGH’s profitability.

Contracted sales of CGH downsized sharply by 36% year on year in 2022 and the momentum persisted in the first two months of 2023. That said, we expect a modest rebound for the rest of 2023 as CGH makes progress on land acquisition. Management aims to lift the asset mix of higher-tier cities to 50% in the long run from the current 40%. As land parcels in core area of Tier 1 and Tier 2 cities remain difficult to access, we anticipate that CGH will focus on the suburban areas of higher-tier cities for near-term landbank replenishment. For unsold properties, we believe CGH will step up marketing initiatives and coupled with spillover demand, this should lead to a reduction of around 100 days for inventory turnover in 2023.