TEXT-Fitch Rates China Aoyuan 'B+'; Proposed Notes 'B+(EXP)'
(The following was released by the rating agency)
HONG KONG, November 08 (Fitch) Fitch Ratings has assigned China Aoyuan Property Group Limited (Aoyuan) a Long-Term Issuer Default Rating of 'B+'. The Outlook is Stable.
Fitch has also assigned Aoyuan a senior unsecured debt rating of 'B+' and its proposed USD senior unsecured bonds an expected rating of 'B+(EXP)'.
The notes are rated at the same level as Aoyuan's rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. Aoyuan's ratings reflect its small size and limited geographical diversification relative to companies in the 'BB' rating category as well as its high asset turnover and low financial leverage.
Over 50% of contracted sales in the first eight months of 2012 were from the Guangdong province where competition remains intense. The scale of the company's projects is also small relative to other large scale developers, affecting its flexibility to phase out sales. These limitations partly explain the company's lower margins at around 18% relative to peers. Despite the weak property market in China since mid-2011, Aoyuan achieved LTM contracted sales/gross debt of 1.07x at end-H112. Fitch believes the fast turnover, together with its focus on first-time home buyers, speeds up cash collection and helps the company ride out the difficult environment in the Chinese residential property market.
In addition, the company has also relied on commercial development to boost sales during the downturn in residential property, with the former accounting for around half of contracted sales in H112. Aoyuan's leverage, as measured by net debt/adjusted inventory, was low at 6% at end-H112, and Fitch expects the ratio will remain healthy at around 30%, even after increasing debt to launch new projects. This is the main driver of the Stable Outlook.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include: - A significant decrease in 2013 contracted sales compared with 2012 contracted sales of CNY5bn or in contracted sales/total debt below 1.0x on a sustainable basis. - EBITDA margin in 2013 falling to below 15% - Net debt/adjusted net inventory trending to 40% in a sustainable basis. - Deviating from the current strategy of fast churn-out and high cash flow turnover business model
Positive: Future developments that may, individually or collectively, lead to positive rating action include: -Successful execution of expansion strategy for the next two to three years, where business scale increases substantially, such that contracted sales increase to over CNY15bn per annum with improving profitability where EBITDA margin increases to over 25% on a sustained basis
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