Country Garden struggles as net profit dips 5.5pc

PUBLISHED : Monday, 31 August, 2009, 12:00am
UPDATED : Monday, 31 August, 2009, 12:00am

The recovery in the mainland property market has left Country Garden Holdings behind, and the developer is struggling to shift its strategy to regain momentum and profit margin.

Country Garden, which specialises in large-scale residential developments in Guangdong, reported a 5.48 per cent drop in first-half underlying profit to 1.38 billion yuan (HK$1.57 billion) because of a deteriorating property market.

The average selling price fell 38 per cent year on year to 4,973 yuan per square metre, resulting in a 20.7 percentage point decline in gross profit margin to 31.8 per cent. The net profit margin retreated to 15 per cent from 19.6 per cent a year earlier.

President and executive director Cui Jianbo blamed the decline on a change in product mix, saying contributions from higher-margin townhouses had declined while contributions from less profitable apartments increased.

However, analysts believe another important factor is that the company is losing its pricing power outside its hometown.

David Ng Ka-chun, head of regional property research at Royal Bank of Scotland, believes the low average selling price of Country Garden's suburban projects and its weak brand recognition outside Guangdong will weigh on growth in coming years.

The contracted average selling price achieved in the first half, when market sentiment had improved significantly, was about 4,600 yuan per square metre. This was even lower than the recognised average selling price of 4,973 yuan per square metre recorded in the first half. And that was for units sold last year when the market was still in the doldrums.

Meanwhile, Country Garden's business model of focusing on large-scale, suburban projects is under significant challenge, particularly since the economy is far from fully recovered.

'We believe that the low-to-mid end, suburban products of Country Garden might not be the key beneficiaries of the recent property market recovery,' said a Citi Investment Research report.

It noted that Country Garden achieved contracted sales of about 78.8 billion yuan in the first half, up 6.5 per cent year on year. This is far less than the 50 to 600 per cent growth achieved by its peers.

'With such a large land bank of over 40 million square metres, the relatively slow contracted sales of Country Garden highlighted a key issue with the business model - large land bank, low asset turnover - which should lead to a wider discount to net asset value for the stock,' the report said. Citi gave the stock a 'sell' rating with a target price of HK$1.55, the lowest among analysts covering the company.

Macquarie also forecast that average selling prices would stay low despite the economic recovery. Hence Country Garden's gross profit margin is likely to stay low - about 25 to 30 per cent this year. Macquarie kept its underperform rating and cut its target price to HK$2.40.

Still, some analysts are less bearish, believing a strategy change under way will help change the situation.

Lee Wee Liat, an analyst at Nomura International, said Country Garden had embarked on a few tactical changes in light of the varying sales conditions.

He believes the company is now adopting a 'return to Guangdong' strategy, since it had bought 2.01 million sq metres of new land in Guangdong province by the end of June, while it is making few acquisitions elsewhere.

This was a smart move since the company could leverage on its brand name and quality control better in the province than in new markets, Mr Lee said.

Morgan Stanley, which set a target price of HK$4.50, believed Country Garden would take time to build up its branding and pricing power.