RPT-Fitch Rates China Overseas Land's Proposed USD Notes 'BBB+(EXP)'
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April 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China Overseas Land & Investment Limited's (COLI; BBB+/Stable) proposed US dollar notes an expected rating of 'BBB+(EXP)'. The proposed notes would be issued by China Overseas Finance (Cayman) VI Limited, a wholly owned subsidiary of COLI. The notes are unconditionally and irrevocably guaranteed by COLI.
The bonds are rated at the same level as COLI's Issuer Default 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 RATINGS DRIVERS
Leading Homebuilder: COLI has been one of the top homebuilders in China since it started operations in 1984. It has consistently generated high profit margins - EBITDA margin of 30% in 2013 - that reflect its premium prices and effective cost management. Its strong brand is supported by its nationwide presence and focus on first-time homebuyers and "upgraders" who seek better homes than their existing residences. COLI ranked among the top three largest home sellers in 10 major cities in 2013.
Slower Contracted Sales Growth: COLI expects contracted sales in 2014 of HKD140bn, unchanged from 2013, when its contracted sales rose 66%. This is due to the strong growth in the whole property market in 2013, resulting in a higher base of comparison. COLI's background as a construction company gives it valuable insight into construction costs, leading to higher-quality products and stronger pricing power. COLI will continue to use its brand reputation, and focus on first-time homebuyers and upgraders who demand better quality at affordable prices. We expect this strategy to help COLI to meet its 20% net profit growth in 2014.
Well-Established Track Record: COLI has established itself as a nationwide homebuilder with operations around the Pearl River Delta, Yangtze River Delta, Bohai Rim, and the northern and western regions. It has displayed resilience through several industry downturns during its 29-year operating history, with high profitability relative to its peers and broad funding diversity.
Diversified Funding Enhances Liquidity: COLI also has one of the lowest borrowing costs among homebuilders. Its weighted average borrowing cost was at 3.7% in 2013. Its low funding costs are the result of access to the offshore bond and loan markets, and its state-owned enterprise (SOE) status, which aids access to domestic funding. COLI continues to maintain a strong liquidity position and had HKD9.6bn in undrawn committed bank facilities and cash balance of HKD25.3bn at end-March 2013.
Outlook Stable: Fitch expects that COLI will maintain its leadership position in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders; leverage its operational and financial flexibility; and continue to grow at a moderate pace in the highly competitive and cyclical Chinese property market.
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 25%; or
-Deterioration in net debt/adjusted inventory to above 30% over a sustained period (2013: 23%); or
- Significant change from its current focus on first-time homebuyers and upgraders.
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.
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