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Evergrande debt crisis will not have a major impact on Country Garden, say analysts

KUALA LUMPUR (Sept 25): The Evergrande Real Estate Group debt problem will not have a major impact on “the financial health and operations” of Country Garden Holdings Co Ltd in Malaysia, a number of analysts “monitoring the situation” told The Edge Malaysia this week.

A head of research at a local investment bank told the weekly that any impact “will be short term in nature and only affect the appetite of the Mainland Chinese for properties, and not the health of the financial system itself”.

“From early September, when the Evergrande issue came out, the sentiment of buyers from China and Hong Kong has been affected. Since they are less likely to buy properties in China and Hong Kong, they are also less likely to buy overseas properties,” said the head of research added.

“However, projects that have already been partly sold should not have an issue. Any sentiments affected should be short term,” he added.

There are fears that from the debt crisis at Evergrande will have a “contagion effect” on Country Garden but a “former official” at Country Garden told The Edge that “unlike Evergrande, the group is much more conservative”.

“From the onset, when we planned Forest City, we set out that we would only reclaim the land when there was sufficient demand for it. The whole approval site is much bigger than what has been reclaimed so far, and the project horizon is very long.

“Therefore, from the start, we knew that we would go through economic cycles and change of policies,” said the former official.

Country Garden is the developer of the mega Forest City project in Johor --  a joint venture with Kumpulan Prasarana Rakyat Johor Sdn Bhd and the Sultan of Johor Sultan Ibrahim Sultan Iskandar through Esplanade Danga 88 Sdn Bhd.

It involves a 30-year planned development area of 30 sq km and the developers have “the right for land reclamation development of four islands with an area of about 20.05 sq km”.

“When the oversupply of high-rise and high-end residential units in Johor became apparent, the group pivoted towards developing properties to create industries in Forest City, as it was quite clear that it wouldn’t be sustainable to only focus on residential properties,” the weekly reported the former official saying.

RAM Ratings analyst Karin Koh is of the view that Country Garden is one of the major and financially stronger developers.

“The rating of its Malaysian subsidiary, which reflects the credit profile of Country Garden, remains intact at AA3(s)/stable,” said Koh. Country Garden also has financing facilities with local banks to fund its projects in Malaysia.

As for the issue of the net gearing ratio, the former official at Country Garden revealed that the group “had always taken prudent measures such as limiting its net gearing ratio to just 70%” despite the Chinese goverment allowing up to 100%, “to ensure that the group is never caught in a liquidity crunch”.

“Evergrande has always been one of the more aggressive players. Its risk profile has always been extreme. There was a mounting debt mismatch, and when the Chinese regulations changed, it got caught,” said the former official.

The Evergrande “meltdown” will have an effect on investors’ confidence in the China’s real estate market as well as its financial system as a lot of the banks there are exposed to the group, added the former official.

“If there is a default by Evergrande, it will affect China’s property market.”

Read the full report in this week’s The Edge Malaysia

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