Fitch Rates Poly Real Estate at 'BBB+'; Outlook Stable

Thu Jun 13, 2013 11:14pm EDT

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, June 13 (Fitch) Fitch Ratings has assigned Poly Real Estate Group Company Limited (Poly) a Long-Term Issuer Default Rating (IDR) of 'BBB+' with Stable Outlook and a senior unsecured rating of 'BBB+'. Poly is one of the largest homebuilders in China. Fitch has also assigned Poly's proposed senior unsecured USD notes an expected 'BBB+(EXP)' rating. The notes to be issued by Poly Real Estate Finance Ltd. are to be unconditionally and irrevocably guaranteed by Hengli (Hong Kong) Real Estate Limited (Hengli), a wholly owned subsidiary of Poly Real Estate. In place of a guarantee, Poly has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that the guarantor, Hengli, has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed USD notes. Furthermore, Poly's parent, China Poly Group Corporation (China Poly), has also granted a keepwell deed to Poly and Hengli to ensure Poly has sufficient assets and liquidity to meet its obligations under the keepwell and undertaking deeds; and that Hengli has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed notes. The final rating is contingent on the receipt of final documents conforming to information already received. KEY RATING DRIVERS Parent support benefits ratings: Poly's ratings benefit from a one-notch uplift reflecting strong operational and strategic linkage with its parent China Poly, in accordance with Fitch's "Parent and Subsidiary Rating Linkage" criteria. China Poly's support to Poly is evidenced by significant funding support to Poly, including providing a keepwell deed for Poly's proposed offshore debt issuance. Poly's strong growth has driven China Poly to possess the largest homebuilding operation among the 16 enterprises wholly owned by State-owned Assets Supervision and Administration Commission of the State Council (Central SASAC) that has property as one of its core businesses. Poly is therefore a core subsidiary of China Poly. The parent support, however, does not raise Poly's ratings above the 'BBB+' level, which is the highest in China's homebuilding industry, as the industry risk cannot be offset by this support factor. Leading Chinese homebuilder: Poly is one of China's top three homebuilders by contracted sales value and its operation is sufficiently diversified covering 43 cities, with over 90% of its sales from tier-one and tier-two cities in 2012. Poly also ranks in the top three in 18 cities. Its large scale gives it strong operational and financial flexibilities. Strong branding supports growth: Poly is one of the best performers among the top ten Chinese homebuilders. Its contracted sales had grown by a compounded annual growth rate of 51.5% since 2006 compared with China Vanke Co., Ltd's (Vanke, BBB+/Stable) 37.2% and China Overseas Land & Investment Limited's (COLI, BBB+/Stable) 34.3%. This is partly due to its established branding which emphasised on delivering comfortable housing at affordable prices. Poly's developments are characterised by space maximisation, design flexibility, and larger park and garden areas. Diversified funding channels: Poly has tapped funding from multiple channels to improve its financial flexibility. Quasi-equity like real estate funds that takes minority stakes in Poly's projects, together with new equity private placements, had raised CNY27bn of capital for Poly since 2006. Tapping the domestic capital market and obtaining shareholders' loans from China Poly give Poly additional sources of funding apart from bank borrowings. Aggressive growth drives leverage: Constraining Poly's standalone ratings are its relatively high leverage arising from recent high growth. Poly has expanded aggressively since 2006; its net property assets grew to CNY105bn in 2012 from CNY6bn in 2006. As a result, leverage as measured by net debt/adjusted inventory has grown to a high of 63% in 2010 before falling to 46.5% in 2012 as growth moderated. Poly's growth since 2006 was supported by CNY44.9bn of net debt increase and CNY8.4bn minority shareholders' equity injection. Stable operation drives outlook: Fitch expects Poly to retain its leadership position in the Chinese homebuilding market. Its focus to target mass market home buyers, and its operational and financial flexibilities can help it maintain its moderate pace of growth in a highly competitive and cyclical Chinese property market. Keepwell deeds not guarantees: Poly does not provide a guarantee to offshore subsidiaries given the difficulties of obtaining approval from the State Administration of Foreign Exchange, more commonly known as SAFE. However, both the keepwell deeds and Poly's undertaking deeds signal a strong intention from Poly and China Poly to honour its proposed debt obligations. RATING SENSITIVITIES Positive: No positive rating pressure is likely as the rating is already at the highest level for this industry. For its standalone ratings, future developments that may individually or collectively, lead to positive rating action include: - generation of neutral FCF on a sustained basis - reduction in net debt/adjusted inventory to below 35% Negative: Future developments that may individually or collectively, lead to negative rating action include: - weakened linkage with China Poly due to government policy changes, or a change in group strategy/policy - aggressive expansion resulting in net debt/adjusted inventory rising above 45% on a sustained basis - contracted sales/gross debt not exceeding 1.5x by 2014 - severe deterioration of industry environment resulting in prolonged poor operating and financial performance Contact: Primary Analyst Su Aik Lim Director +65 6796 7233 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable criteria, "Corporate Rating Methodology", dated 8 August 2012, are available at Related Research: "Rating Chinese Homebuilders", dated 15 October 2012 Applicable Criteria and Related Research: Corporate Rating Methodology here Rating Chinese Homebuilders here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.