Fitch Assigns China Overseas Land's USD Notes 'BBB+(EXP)' Rating

Wed Oct 23, 2013 1:37am EDT

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(The following statement was released by the rating agency) HONG KONG, October 23 (Fitch) Fitch Ratings has assigned China Overseas Land & Investment Ltd.'s (COLI; BBB+/Stable) proposed USD notes an expected rating of 'BBB+(EXP)'. The bonds are rated at the same level as COLI's Issuer Default Rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final ratings are contingent upon the receipt of final documents conforming to information already received. KEY RATINGS DRIVERS A Leading Homebuilder: COLI has been one of the top homebuilders in China since it started operations in 1984. It has consistently generated high profit margins - EBITDA margin of 34.98% in H113 - reflecting its premium prices and effective cost management. Its strong brand is supported by its nationwide presence, with a top-three market position in 11 major cities as of 30 June 2013 and a focus on first-time homebuyers and "upgraders" who seek better homes than their existing residences. Quality Affordable Housing: COLI's background as a construction company gives it valuable insight into construction costs, leading to higher-quality products and stronger pricing power. COLI will continue to leverage on its brand, and focus on first-time homebuyers and "upgraders" who demand better quality at affordable prices. This strategy drove contracted sales to increase at a compound annual growth rate (CAGR) of 32.6% from 2009 to 2012 - despite strict home-purchase restrictions on first-tier cities and some second-tier ones. Well-Established Track Record: COLI has displayed resilience through several industry downturns during its 28-year operating history, with high profitability relative to its peers and broad funding diversity. It has established itself as a nationwide homebuilder with operations around the Pearl River Delta, Yangtze River Delta, Bohai Rim, and the northern and western regions. Diversified Funding Enhances Liquidity: Its low funding costs are underpinned by access to the offshore bond and loan markets, and by its state-owned enterprise (SOE) status, which aids access to domestic funding. Its premium products with high margins also helped COLI to generate more stable funds from operations (FFO) compared with other Chinese homebuilders (average FFO 2010-2012: HKD9.2bn per year), despite not having the highest contracted sales or the largest land bank. Outlook Stable: Fitch Ratings expects that COLI will maintain its leadership position in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders; leveraging on operational and financial flexibility; and continuing to grow at a moderate pace in the highly competitive and cyclical Chinese property market. RATING SENSITIVITIES: 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; or - Decline in EBITDA margin to below 25% (H113: 35%); or - Deterioration in net debt/adjusted inventory to above 30% over a sustained period (H113: 12.7%); or - Contracted sales/ Total debt remains below 1.5x over a sustained period (H113: H1 2.2x); or - 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 the high cyclicality as well as the high regulatory risks in the Chinese property sector. Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Su Aik Lim Director +65 6796 7233 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, "Corporate Rating Methodology", dated 8 August 2012, are available at www.fitchratings.com. Related Research: Rating Chinese Homebuilders Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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.

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