RPT-Fitch rates China Vanke's CNY notes 'BBB+(EXP)'
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Dec 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned property developer China Vanke Co., Ltd's (Vanke; BBB+/Stable) proposed three-year senior unsecured Chinese yuan-denominated notes a rating of 'BBB+(EXP)'. The notes, to be issued by Bestgain Real Estate Lyra Limited (Bestgain), are to be jointly and severally guaranteed by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), a wholly owned subsidiary of Vanke. The final rating on the notes is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Keepwell and Deed of Equity Interest: Vanke is unable to provide a guarantee to offshore subsidiaries without approval from the Chinese government. In place of a guarantee, Vanke has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that the guarantor, Vanke HK, has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed CNY notes. In Fitch's view, the keepwell and undertaking deeds signal a strong intention from Vanke to honour its proposed debt obligations.
Leadership in China: Vanke is the largest Fitch-rated Chinese homebuilder by revenue and contracted sales. The company had revenue of CNY38.9bn in 1H13 and contracted sales of CNY145.9bn from January-October 2013 in over 60 cities, underlining its national presence. The majority of sales were in second-tier and third-tier cities and evenly distributed across four geographical areas where the population is concentrated. Vanke's expansion strategy will focus on the four areas for more efficient use of resources, better management and consistent products.
Mass-market Housing Focus: Vanke is focused on providing mass-market housing, especially small units for first-time buyers. At mid-2013, 90% of Vanke's contracted sales were for units below 144 square metres (sq m). This focus is aimed at meeting strong housing demand stemming from China's ongoing urbanisation, and is in line with the central government policy in ensuring sufficient supply of affordable mass-market homes. As a result Vanke achieved a CAGR 14.2% for contracted sales from 2010-2012.
Long Track Record: The company has more than 24 years of experience in homebuilding in China and has to date completed more than 500,000 homes. Vanke can use its strong brand name and network to secure high-quality and low-cost land.
Diversified Funding Resources: Vanke has diversified and multiple funding channels, including loans from domestic and foreign banks, project joint ventures, and access to onshore and offshore capital markets. It also has exposure to trust financing, which provides more flexibility than loans from domestic banks.
Outlook Stable: Fitch expects Vanke to maintain its leadership in the Chinese residential homebuilding market - with a strong focus in mass-market segments. The agency expects the company to take advantage of its operational and financial flexibility and continue to grow, at a moderate pace, in a highly competitive and cyclical Chinese property market.
Sufficient Liquidity: Vanke had CNY36.2bn cash at mid-2013. Fitch expects the group to maintain sufficient liquidity to fund development costs, land-premium payments, and debt obligations during 2013-2015 due to its diversified funding channels from capital markets, long-term relationship with banks, and flexible land-acquisition strategies.
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 Fitch-adjusted EBITDA margin to below 25% (1H13: around 23%)
- Increase in net debt/adjusted inventory to above 30% over a sustained period (end-1H13: around 22%)
- Contracted sales/total debt remaining below 1.75x over a sustained period (end-2012: around 1.9x)
- Deviation from its current focus on mass-market housing
Positive: Positive rating action is not expected over the next 12 to 18 months due to high cyclicality and regulatory risks in the Chinese property sector.
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