Nov 25 (Reuters) - (The following statement was released by the rating agency)
Fitch has assigned Xinyuan Real Estate Co., Ltd.'s proposed senior unsecured USD notes an expected 'B+(EXP)'/'RR4' rating. The notes are rated at the same level as Xinyuan's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Financial strength balances scale: Xinyuan's rating reflects its solid financial strength, especially in maintaining sufficient cash to meet short-term debt obligations. Its small scale constrains its business diversity, with a narrow product mix, limited geographical spread, and a small number of projects being sold in a year relative to peers. Xinyuan's low EBITDA margin of about 13% on a five-year rolling average basis reflects that it is susceptible to sudden sharp home price swings, such as that in 2008.
Asset-light small homebuilder: Xinyuan's small holding of property development assets give its creditors less protection in the event of asset liquidation. Its land bank by saleable gross floor area (GFA) of 1.6m sqm was less than half of the size of similarly rated peers. Xinyuan's contracted sales of CNY3.9bn in the first nine months of 2013 and Fitch's expectation of record presales in 4Q13 suggest the company can achieve contracted sales above CNY5bn this year, comparable to other 'B+' rated Chinese homebuilders.
Land cost affects margin: Xinyuan's high proportion of land cost versus its selling price kept profit margin low. Land cost has been between 20% and 30% of its average selling prices (ASP). This is compared with less than 20% for most Chinese homebuilders. The higher proportion of land cost was in part due to its land being acquired in land auctions and also partly because Xinyuan's fast turnover business model does not allow for much land price appreciation, given the short lead time between land acquisition and the start of presales. However, the company aims to partly mitigate this acquiring land plots through negotiated land auctions, whereby land costs may be closer to 20% of ASP.
Healthy credit metrics: Xinyuan has been in a net cash position since 2011. Its low inventory levels are a result of its high asset turnover strategy, thus minimising investments in development properties. Fitch expects the company's 2013 contracted sales/total debt ratio to be between 2.5x and 3.0x, making it the highest among Fitch-rated Chinese homebuilders.
Replicating home base success: Xinyuan has developed 24 projects since 2001, 16 of which are in Zhengzhou. Since 2007, Xinyuan has replicated its successful Zhengzhou developments in other cities. This has helped Xinyuan gain new markets in Jinan, Kunshan, Chengdu, Suzhou and Xuzhou. These new markets are now growth opportunities for Xinyuan.
Undergoing faster expansion: The USD109m of equity and convertible debt it raised from private equity investor TPG Asia VI SF in September 2013, followed closely by this proposed notes issuance, shows that the company will continue to accelerate its growth plan in 2014. Prior to these fund raisings, its land bank has already grown by 33% from 1.2m sqm in 2012. Fitch expects these expansions to increase Xinyuan's net debt/adjusted inventory towards 25% in 2014 from a net cash position of USD15m in September 2013.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- reduction of scale as reflected by a fall in GFA land bank to less than two years
- contracted sales falling below CNY5bn
- net debt/adjusted inventory rising above 25%
- changes to its fast turnover model where contracted sales/gross debt fall below 1.5x
Positive: Positive rating action is not expected in the next 18-24 months due to Xinyuan's small operational scale and lack of business diversification. However, future developments that may, individually or collectively, lead to positive rating action include:
- significant increase in scale as reflected by contracted sales exceeding CNY15bn
- increase in business diversification by geography, by product mix as well as in presence in a greater number of cities
- maintaining a strong financial profile