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02007 COUNTRY GARDEN
RTNominal up0.485 +0.005 (+1.042%)
Research Report

03/02/2020 17:38

Developers' credit standing unaffected by health emergency

[ET Net News Agency, 3 February 2020] Chinese authorities have ordered or recommended
the closure of property sales centers in at least 20 large cities, as part of measures to
address the coronavirus outbreak.
S&P Global Ratings does not immediately expect the health emergency to materially affect
Chinese developers' credit standing, but the credit rating agency believes weaker property
firms may encounter liquidity crunches if the crisis lasts beyond several months.
The outbreak will hit the Chinese economy, albeit by a level not quantifiable at this
point. It will also knock back home buying demand, at least while the outbreak stays at
crisis levels. The coronavirus crisis may last months, using the SARS episode--which
lasted around six months--as a reference.
Many municipal and even provincial governments, wary of the risks for cross-infection
from large gatherings, have halted operations at property sales centers. Authorities have
banned or discouraged developers from large group activities, including promotional
events, lottery drawings, and closing ceremonies.
S&P believes national residential sales are at risk of a contraction given its original
growth forecast was just above flat (0%-5%) for 2020.
Prior to the outbreak, some developers announced sales targets for 2020 that were
10%-20% higher than last year's. This is already much tamer than the roughly 20%-50%
growth targets set in prior years. The outbreak will only make sector sales volumes more
precarious.
For now, the impact is largely recoverable, given January and February are traditionally
low periods for home sales--both months together made up around 8% of national annual
sales in the past three years. But if a large impact continues into the second or third
quarter, where most sales activity happens, the picture could be much more serious.
Developers are coming up with other channels to compensate for the measures, including
strengthening online sales and allowing buyers to tour new homes using computer-simulated
means. However, given home sales are still heavily reliant on-site visits, virtual or
at-distance sales tactics may not completely replace onsite sales.
Apart from sales, the pace of construction may also slow, delaying deliveries and
increasing costs, ultimately hitting revenue recognition.
Companies with a larger project exposure to Wuhan city and Hubei province will likely be
hit the most. Given the spread of the virus and the measures taken elsewhere, the issue
will most likely not stay regional.
Some developers are also mall landlords and have started to offer rent relief to tenants
to compensate for the drop in pedestrian traffic. S&P believes that these actions, along
with cash donations exceeding RMB1 billion (US$144 million), offered as an aid to those
hit by the outbreak, will boost their social image and improve the groups' environmental,
social, and governance standing. With the sums being insignificant relative to their
scale, the burden from these actions are not expected to be material.
Developers issued US$16.5 billion in offshore notes in January (a monthly record), a
year-on-year increase of over 50%. The debt lowered some issuers' funding costs and did
much to extend maturity profiles with tenors issued significantly longer than in the past
several years. More importantly, many issuers have built capital and refinancing buffer at
a crucial time.
Nevertheless, lower-rated groups are vulnerable to a downturn. None of the companies S&P
identifies as having poor liquidity has heavy exposure to Wuhan--the center of the
coronavirus outbreak--or to the province of Hubei generally. However, these companies
would be challenged if the coronavirus severely crimped sales for just several months.
In addition, weak developers that rely on asset disposals to deal with maturing debt may
find it difficult to close deals as most potential buyers may take a step back.
Many developers count on steady cash flow as a liquidity lifeline. As such, for the
property firms at least, the key issue of the coronavirus crisis will not be its
intensity, but its longevity. (KL)

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