Country Garden Holdings - Lagging peers

Compared with other major developers’ strong contracted sales performance in the first four months of 2009, Country Garden is behind the curve. From January to April, it reported contracted sales of RMB4.7bn, up only 15% y-y representing only 24.7% of its full-year FY09 year sales target of RMB19bn. During the same period, ASP saw a slight decline, an indication that Country Garden was trying to address the situation by moderately cutting prices, in our view. We believe the slow sales growth is due to the company’s large project distribution in suburban areas of Tier-2 and Tier-3 cities, where demand remains cool. Yet, we could see a possible pick-up in sales in 2H09F and 2010F, as residential prices in urban areas rise, prompting suburban projects to look like relatively good value.

We assume ASP of RMB4,667/sq m in FY10F, taking into account our expectation of a 5% increase in CG’s prices in 2009F and a 10% increase in 2010F. We also assume volume would increase in FY10F, as we look for record transaction volume nationwide. We expect Country Garden to record contracted sales of RMB20.61bn, RMB26.21bn and RMB28.07bn for FY09F, FY10F and FY11F, respectively.

The rationale for our assumption that developers will actively acquire land this year is that land prices are 30-50% lower than in 2007. However, Country Garden’s land is in suburban areas of Tier-2 and Tier-3 cities, where land values have been more stable in the past three years. In addition, Country Garden’s landbank stands at 44.7mn sq m and so it has no need to acquire landbank this year, on our reading. Its recent acquisition of a 98,000 sq m plot was insignificant in terms of size relative to previous acquisitions and probably relates to attaining synergies with existing developments.

We maintain our price target of HK$4.34, which is based on DCF (a 14.4% discount rate). We expect the company to witness property price increases of 5% in FY09F and 10% in FY10F, below our sector forecast since the company lacks pricing power.

Risks. Arguably the biggest risk to our price target for Country Garden is if prices in suburban areas of Tier-2 and Tier-3 cities disappoint in the next one or two years. This could squeeze margins, given the company’s hefty exposure in those areas.

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