(The following statement was released by the rating agency)
Feb 19 - Fitch Ratings has assigned China Overseas Land & Investment Ltd (COLI) a Long Term Issuer Default Rating (IDR) of 'BBB+' with Stable Outlook and a senior unsecured debt rating of 'BBB+'.
The ratings reflect COLI's 28-year track record in the Chinese homebuilding sector, displaying resilience through several industry downturns, high profitability relative to peers', and high funding diversity.
COLI has been one of the largest homebuilders in China since it started operations in 1984. It has consistently generated high profit margins - an EBITDA margin of 37.3% in H112 - reflecting its premium prices and effective cost management. Its nationwide presence with a top-three market position in 11 major cities as well as a focus on first-time homebuyers and upgraders support its strong brand.
COLI's low funding costs are underpinned by its access to the offshore bond and loan markets and by its state-owned enterprise status which aids access to domestic bank funding. Its low funding costs and strong profitability have enabled COLI consistently to generate the highest funds from operations (FFO) among Chinese homebuilders (over HKD12bn in 2011), despite not having the highest contracted sales or the largest land bank.
The company has also demonstrated the ability to manage its working capital during downturns, particularly by limiting new land bank purchases. It generated positive free cash flows even during the last two industry downturns in 2001-2003 and 2009 and delivered resilient performance in 2011 and 2012 despite tightened regulatory measures.
COLI's low leverage, as measured by net debt/adjusted inventory of 25% in H112, supports the ratings. Increased debt to fund land bank acquisition following the 2009 downturn resulted in lower contracted sales/gross debt of around 1.4x in 2011 and 2012. However, Fitch expects this to rise above 1.5x as the company increases its sales. The Stable Outlook reflects Fitch's expectation that COLI will maintain these financial metrics to support the current ratings.
The ratings are constrained by the industry's cyclicality and high regulatory risks in China. Home purchases are highly sensitive to economic cycles and the Chinese government continues to intervene in this market to curb excessive price increases.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Unfavourable changes to China's regulation or economy leading to a decline in contracted sales
- Decline in EBITDA margin to below 25%
- Deterioration in net debt/adjusted inventory to above 30% over a sustained period
- Contracted sales/ total debt remaining below 1.5x over a sustained period
- Significant change from its current focus on first-time homebuyers and upgraders
Positive: Positive rating action is not expected over the next 12 to 18 months due to high cyclicality as well as high regulatory risks in the Chinese property sector.