Fitch Affirms China Vanke at 'BBB+'; Outlook Stable

Mon Apr 28, 2014 9:39pm EDT

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(The following statement was released by the rating agency) HONG KONG, April 28 (Fitch) Fitch Ratings has affirmed China Vanke Co., Ltd's (Vanke) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency and local-currency senior unsecured ratings at 'BBB+'. The notes issued by Bestgain Real Estate Limited and Bestgain Real Estate Lyra Limited are also affirmed at 'BBB+'. These notes are jointly and severally guaranteed by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), a wholly owned subsidiary of Vanke. The affirmation reflects Vanke's delivery of strong contracted sales of CNY170bn in 2013 while maintaining strong focus on the mass market. However, its EBITDA margins weakened to 21.9%. It continued to retain its market leadership due to its strong operational and executional capabilities and it maintained sufficient liquidity. KEY RATINGS DRIVERS National Coverage and Large Scale: Vanke is the largest homebuilder in China's residential market by contracted sales. It has 398 projects for sale in 61 cities, of which over two thirds are Tier 1 and 2 cities. Its land bank of 62.7m square metres (sqm) in GFA is well diversified and is one of the largest in China. The large scale provides Vanke with operational and financial flexibility. It has also moved towards using prefabricated building components to ensure quality, quick replication, lower cost and standardisation. Sales Growth to Slow: Vanke's contracted sales have increased strongly, with three-year CAGR at around 27%-30% since 2007. In 2013, CAGR dropped to 16.5%. Fitch expects Vanke's growth in contracted sales to slow down due to more intense competition and a larger base effect. Three-year CAGR for contracted sales is likely to be around 15%-25% in the short to medium term. Lower Margins and Higher Churn: Vanke's EBITDA margins dropped to 21.9% in 2013 from 26.5% in 2012, in line with narrower margins in the sector. The decline was due to the sales from over 90% of furbished units (completed homes that had cabinetry and other fixtures installed) being recognised in 2013, compared with 80% in 2012. In addition, sales from the residential units sold in the market trough in the second half of 2011 are also starting to be recognised. Vanke follows a high asset churn strategy. As a result, its contracted sales to total debt ratio was at 2.1x in 2013 and has been above 1.75x since 2009, making its ratio one of the highest among peers in the sector. Fitch expects Vanke's EBITDA margins to remain at 20%-22% in the next two to three years as it continues with its high churn strategy and because sales are recognised from a higher proportion of furbished units and from more units sold during the market trough. . Focus on Mass Market: Vanke continued to focus on the mass-market segment in 2013, with units smaller than 144 sqm accounting for around 91.5% of residential contracted sales units in 2013. This allowed Vanke to continue to meet demand from China's urbanisation trend and maintain its large scale and market leadership. By focusing on the mass-market segment, Vanke achieved CAGR of 28% for contract sales from 2009 to 2013 despite strict home purchase restrictions imposed in first-tier and some major second-tier cities in China. Higher Funding Cost: Vanke's average funding cost in 2013 was 8.57%, higher than the 3%-6% for other Chinese homebuilders rated in the 'BBB' category (those rated 'BBB-', 'BBB' and 'BBB+'), which are mostly state-owned enterprises that receive government support. Vanke is privately owned and does not have that advantage. To improve its funding cost and capital structure, Vanke issued a 2.625% USD800m five-year offshore bond and set up a USD2bn multi-currency medium-term note program in 2013. Diversification Into Other Markets and Businesses: During 2013, Vanke expanded into homebuilding overseas, including in Hong Kong, US and Singapore via joint ventures with well-known local developers. Vanke also invested USD400m in Huishang Bank's IPO for a 8.28% stake. However, these remain insignificant, with the above investments forming less than 1% of Vanke's total assets of CNY479.5bn at end-2013. Outlook Stable: Fitch expects that Vanke will maintain its leadership in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders. Vanke will use its operational and financial flexibility and continue 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 20% (2013: 21.9%); or - Increase in net debt/adjusted inventory to above 30% over a sustained period (2013: 18.5%) - Contracted sales/total debt remaining below 1.75x over a sustained period (2013: 2.1x) - 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 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 2801, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andy Chang Associate Director +852 2263 9914 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 Rating Chinese Homebuilders here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=827996 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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