Fitch Affirms Yuexiu Property at 'BBB-', Outlook Stable

Tue Jan 28, 2014 9:19pm EST

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(The following statement was released by the rating agency) HONG KONG, January 28 (Fitch) Fitch Ratings has affirmed China-based Yuexiu Property Company Limited’s (YXP) Long-Term Issuer Default Rating (IDR) at ‘BBB-’. The Outlook is Stable. Fitch has also affirmed YXP’s senior unsecured rating at ‘BBB-’. The affirmation is due to YXP’s healthy sales growth based on a fast churn-out model, its diversification of sales outside Guangzhou and its moderate leverage level, which will likely remain under control. In Fitch’s view, YXP’s partnership with an investment fund to acquire land is a good way for YXP to expand its property development business. KEY RATING DRIVERS Faster Growth in Sales: YXP’s contracted sales rose 19% to CNY14.6bn in 2013 after it sped up its project turnaround process and expanded its presence outside Guangzhou. YXP targets to increase its sales to CNY25bn in 2015. With the larger scale in its property development business, Fitch believes YXP will be able to diversify its project concentration risk and become more competitive in land acquisitions. No Significant Rise in Leverage: In spite of an ambitious contracted sales target of CNY25bn in 2015, Fitch expects YXP’s leverage to remain under control. The agency expects YXP’s leverage (net debt/adjusted inventory) to reach 40% at end-2013 from 33% at end-2012 and further edge up in 2014. Leverage will likely fall below 40% in 2015 due to possible asset disposals and increased contracted sales proceeds. Fitch expects YXP’s leverage to stay under the 45% threshold where negative rating action may be considered. Favourable JV Structure: YXP has begun acquiring land jointly with an investment fund, which was set up by state-owned enterprises in Guangzhou and managed by its parent Guangzhou Yuexiu Group (GYX). Under the partnership, YXP has the option to buy shares it doesn’t already own in the projects 12-24 months after the original land purchase, if the company pays the fund the cost of the land and a premium of 11%-12% a year. This allows YXP to take full control of the project and its sales proceeds if the project sells well. At the same time, YXP’s downside risk is limited because it has no obligation to exercise the option on a particular project if sales fail to meet expectations. Expanding Outside Guangzhou: Fitch expects contributions from YXP’s projects in Wuhan and Hangzhou to increase gradually. Contracted sales in Wuhan already account for 10% of total sales in 2013. In Hangzhou, YXP entered the city area in 2013 after building its presence in suburban areas. In Guangzhou, YXP increased its exposure in the Luogang district, which is a new development zone that had the strongest sales in Guangzhou in 2013. As YXP expands outside Guangzhou, we expect its gross profit margin to edge down, though it will remain above 30%. Support from Government: YXP’s ratings benefit from a one-notch uplift from its moderately strong linkage with the Guangzhou government’s State-owned Assets Supervision and Administration Commission (SASAC). YXP’s partnership with the fund demonstrates the support offered by GYX and the Guangzhou government to help the company acquire quality land parcels. Limited Scale: YXP’s rating is constrained by its geographical concentration in Guangzhou, its limited contracted sales scale compared with similarly rated peers, its moderate leverage and its limited recurring EBITDA interest coverage. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include - - Evidence of stronger linkage with the Guangzhou government, - Recurring EBITDA/interest above 1.0x (2014 forecast: 0.51x) together with recurring EBITDA above CNY1bn (2014 forecast: CNY785m) Negative: Future developments that may, individually or collectively, lead to negative rating action include- - Weakened linkage with the Guangzhou government - Weakened financial profile of GYX leading to YXP having to provide support to its parent - Net debt/adjusted inventory (not including REIT assets) exceeding 45% - Deterioration in its recurring EBITDA/interest to below 0.5x - Significant drop in contracted sales Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 2801, 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 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. 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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