On 12 December, Fitch confirmed Country Garden Services Holdings Limited ("Country Garden Services"), 06098HK) has a long-term IDR of "BB+" and remains on Negative Rating Watch (RWN). At the same time, Fitch withdrew the rating.
Whereas, Fitch considers Country Garden Services' sister company Country Garden Holdings Company Limited ("Country Garden", 02007HK) liquidity pressures have increased, and RWN reflects potential risks in Country Garden's liquidity, working capital management and its financial policies. Country Garden Services' "BB+" IDR is based on its leading market position and robust asset-light business model for sustainable operating and free cash flow generation, as well as its solid net cash position.
Fitch has opted to withdraw Country Garden's service rating for commercial reasons.
Key rating drivers.
The operational impact is uncertain: Credit pressure on Country Garden may hinder the growth of Country Garden's services as sales and project delivery may slow. Fitch believes that the brand reputation of Country Garden Services may be affected. Although the likelihood of existing customers switching property management companies is low, the pace of new third-party contracts for Country Garden Services may slow down, which will weaken its medium-term profitability. This is due to the fact that the profitability of new contracts is generally higher than that of existing contracts, which have limited room for adjustment and continue to face upward cost pressure.
Increased working capital: The number of days of accounts receivable turnover has increased from about 60 days in 2019 to more than 150 days (annualized) in the first half of 2023. Based on the expectation of an increase in receivables from Country Garden and an extension in the days of receivables turnover for Country Garden Services' urban services business to local** businesses, Fitch estimates working capital outflows of CNY3.0-3.5 billion in 2023. Fitch expects the majority of Country Garden's revenue to be difficult to recover from the second half of 2023. Payments (including payments from related parties and third parties) are deferred more than expected by Fitch or may result in a weakening of CGS's working capital position and free cash flow.
The same majority shareholder and chairman of the board of directors: Ms. Yang Huiyan effectively controls Country Garden Services3612% of the voting rights, and is also the majority shareholder and chairman of the board of directors of Country Garden. Against the backdrop of Country Garden's recent liquidity difficulties, any material changes in financial policies, including a significant increase in dividends or other cash outflows, will adversely affect the Company in view of the shareholding structure of Country Garden Services.
Weakened ability to obtain net cash and financing: Country Garden Services has maintained a solid net cash position, with net cash of RMB10.7 billion as of the first half of 2023. The Company's external financing needs are low due to the high cash flow visibility of its main businesses and the Company's lack of plans for large-scale acquisitions. Fitch believes that Country Garden's access to finance may be impacted by the ongoing evolution of Country Garden's financial woes, but the company's relatively stable operating cash flow may continue to support its financial flexibility. Country Garden Services stated that the impact of the above factors on its bank financing channels is limited at present, and the company has not provided any financial support (such as pledge guarantees) to Country Garden.
Solid market positionCountry Garden Services is likely to maintain its leading market position, although Fitch expects growth to slow down. As of the end of the first half of 2023, the property management area served by Country Garden was 91.6 billion square meters, ranking first in China.
Summary of Rating Derivation.
The diminishing brand reputation and pricing power of Country Garden Services and the potential for deterioration in its financial flexibility led to its partnership with Newmark Group, Inc., a leading provider of commercial real estate services in the United States(newmark, bbb- stable). Both companies are leaders in their respective fields and their businesses are concentrated in their respective business regions.
Country Garden Services' RWN reflects the potential risk of changes in its liquidity, working capital position and financial policies, which could result in a negative FCF.
Key Rating Assumptions.
Not applicable in view of the revocation of the rating.
Rating sensitivity.
Not applicable in view of the revocation of the rating.
Liquidity and debt structure.
Strong liquidity: As of the end of the first half of 2023, CGS had RMB12.5 billion of available cash and cash equivalents, sufficient to cover RMB900 million of short-term borrowings or RMB1.8 billion of total borrowings. Country Garden Services has no capital market debt.
Issuer Profile.
Country Garden Services is a leading residential property management service provider in China. The company was founded in 1992 as a subsidiary of Country Garden, and was spun off and listed independently in June 2018.