RPT-Fitch affirms Vietnam's Vingroup at 'B+'; outlook stable
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Oct 21 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Vietnam-based Vingroup JSC's ("Vingroup") Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+'. The Outlook is Stable. Vingroup's senior unsecured rating has been affirmed at 'B+'.
Fitch has also assigned a 'B+(EXP)' rating to Vingroup's proposed USD senior note issue. The final rating is contingent upon receipt of the final documents conforming to information already received.
Vingroup's ratings reflect its small size when compared to global property developers and aggressive growth strategy. The ratings also capture Vingroup's strong market position as Vietnam's largest listed real estate developer, its sizable land bank, adequate liquidity and Fitch's expectation that recurring EBITDA from Vingroup's retail, hospitality and healthcare business will offer an improved coverage to interest expense in the medium term.
The Stable Outlook reflects Fitch's expectation that the Vietnamese property market has bottomed out, underpinned by the recent performance of primary and secondary property markets and macroeconomic indicators.
KEY RATING DRIVERS
Weak Residential Sales: Vingroup's 2012 and year-to-date residential pre-sales and new sales were significantly below Fitch's expectations because weakness in the property market lasted longer than anticipated. The Vietnamese authorities are, however, committed to macroeconomic stability, including lower inflation and a stable currency. These macroeconomic factors are supportive of the property sector and Fitch expects to see a marked increase in new property sales in 2014.
Aggressive Growth Strategy: Vingroup proposes to launch apartment and villa projects of aggregate contract value in excess of USD12.9bn between 2015 and 2018, funded predominantly by pre-sales. Should presales fail to be in line with expectations, Vingroup has the flexibility to scale back the project launches and associated capital expenditure. While this could support the company's liquidity, a prolonged period of nil or low new project sales reduces the medium-term cash flow visibility.
Adequate Liquidity: Vingroup's cash balance improved to USD113.92m (VND2,386.54bn) as of 30 June 2013 from USD77.18m (VND1,616.86bn) as of 31 December 2012, while short term deposits with banks increased to USD173.91m (VND3,643.5bn) from USD149.71m (VND3,136.52bn). The improvement in liquidity was primarily due to the net proceeds after debt repayment and taxes raised from the sale of Vincom Center A in H113 (gross sales proceeds USD467m). Liquidity would improve further in H213 because of USD236m from the sale of Vincom Center B and USD200m investment (USD180m through preference shares that entail cumulative dividends and USD20m through a convertible loan) from the Warburg Pincus consortium.
Moderate Earnings Visibility: A significant proportion of Vingroup's earnings till end-2014 are driven by contracted sales and handovers of three projects - Royal City, Times City and Vincom Village. Fitch estimates that more that 65% (in terms of contract value) of these projects have been received and that the unbilled amount (contract value less cash collections) is adequate to meet the residual project-specific construction costs. Successful new property launches will provide earnings visibility beyond 2014.
Negative: Future developments that may, individually or collectively, lead to negative rating
- Failure to achieve cash sales of at least VND5trn from new projects (excluding Royal City, Times City and Vincom Village) in the six months to 30 June 2014,
- Material increase in external borrowings to maintain current liquidity position, and
- A downgrade in Vietnam's Country Ceiling of 'B+'
Positive rating action is not expected in the medium term due to Vingroup's exposure to the inherently cyclical property business and its small scale.