Country Garden Results Below Expectations on Margin Miss, Albeit Investor Concerns Likely Overdone

We see Country Garden’s full-year results below expectations on a margin miss, albeit investor concerns on liquidity stress is likely overdone. On results, revenue of CNY 523 billion was in line, albeit gross margin was below expectations at 17.7% as margins did not reach the bottom the year before and earnings fell 23% year on year. There was not much clarity from management on margin compression, although our sense from management takeaways was that the pressure of selling from competing projects did affect original project underwriting and continued to compress margins. A final dividend of CNY 0.1012 per share, adding to the total annual dividend of CNY 0.311 per share translates into a payout ratio of 26.2%, a drop from 31% a year before. We lower near-term gross margins for the next two years before a gradual recovery, and lower our fair value estimate to HKD 9.60 from HKD 10.50 per share. Nonetheless, we expect Country Garden to be one of the better-positioned private-sector real estate developers to come out ahead in a consolidating industry. The relaxation of lending policies to the sector signals that the worst of the conditions of the past nine months may be ending and a positive policy narrative may support the share price in the near term.