Fitch Rates Aoyuan's Proposed Notes at 'B+(EXP)'

Fri Jan 10, 2014 12:42am EST

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(The following statement was released by the rating agency) HONG KONG, January 10 (Fitch) Fitch Ratings has assigned China Aoyuan Property Group Limited's (Aoyuan; B+/Stable) proposed US dollar senior unsecured notes an expected rating of 'B+(EXP)'. Proceeds from the proposed issue will be used to refinance debt due 2014 and for general corporate purposes. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. KEY RATING DRIVERS Growing Business Scale: Aoyuan's contracted sales rose 91% in 2013 to CNY10bn , mainly because of its strong execution and an increase in properties ready for sale. The larger business scale provides the company a more stable cash flow, cost benefits, and offers it more choices in land acquisitions, which further strengthen its credit profile. Retail Property Exposure: In order to raise sales and profitability, the company complements core residential property sales with retail properties and offices, which in total contributed to 26% of total contracted sales in 2013. Aoyuan's retail property is typically located on the first several floors of the residential blocks in most of its projects. While retail properties are selling at a healthy pace currently, Fitch believes retail properties are more cyclical than residential properties and any further increase in the share of retail properties in Aoyuan's contracted sales may raise its business risk. Substantial Land Banking: The company in 2013 entered into land acquisition contracts that could yield around 2.1m square metres of gross floor area for CNY4.7bn of land premiums at average land cost of about CNY2,200 per sqm for the land. While the land premiums seem substantial, Fitch expects Aoyuan's liquidity and leverage to remain healthy, with the ratio of net debt to adjusted inventory likely to end 2013 at 35%, supported by its continued growth in sales and proceeds from the disposal of its Beijing project. Limited Geographic Diversification: Around 60% of contracted sales in the first ten months of 2013 were from Guangdong province in southern China, where competition remains intense. This limits Aoyuan's profitability and exposes the company to the uncertainties of local policy and the local economy. It has successfully replicated its business model in other provinces and Fitch expects the proportion of sales outside Guangdong to slowly increase in the next 24 months. Substantial SG&A Suppresses Margin: Aoyuan's EBITDA margin was only 16% in 2012, substantially narrowed by selling, general and administrative (SG&A) expenses from the gross profit margin of 31%. However, its expanding scale will bring some economies - the ratio of SG&A costs to revenue fell to 7% in 1H13 from 11% in 1H12. Fitch expects Aoyuan's EBITDA margin to improve to above 20% over the next 12 months. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Contracted sales falling below CNY8bn, or the ratio of contracted sales to total debt falling below 1x (2012:1.1x ) on a sustained basis - EBITDA margin in 2013 declining to 15% or lower - Net debt to adjusted net inventory rising towards 40% on a sustained basis - Deviation from the current fast churn-out and high cash-flow turnover business model - Proportion of contracted sales from retail properties rising above one third of its total contracted sales Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Successful execution of expansion strategy for the next two to three years, with contracted sales rising to more than CNY15bn a year , and EBITDA margin increasing to over 25% on a sustained basis. Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Vicki Shen Associate Director +852 2263 9918 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 at www.fitchratings.com. Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013 are available at www.fitchratings.com Related Research "Rating Chinese Homebuilders", dated 15 October 2012 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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