Fitch: Vanke's Focus On Asset Turnover Supports Financial Profile

Tue Aug 19, 2014 6:36am EDT

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(The following statement was released by the rating agency) HONG KONG, August 19 (Fitch) Fitch Ratings says Chinese homebuilder China Vanke Co., Ltd (Vanke; BBB+/Stable) has demonstrated its superior management and asset turnover by further expanding its business scale - despite the negative sentiment in the sector in 1H14. The expansion supports its strong financial profile with abundant liquidity, but comes at the expense of narrower margins. Fitch does not expect Vanke's asset-light business model and high competition in the Chinese homebuilding market - which results in lower margins - to hurt its status as a Chinese homebuilder with one of the highest standalone ratings in the sector. Even as the company's contracted sales rose 21% in 1H14 from a year earlier to CNY100.9bn and it achieved an estimated ratio of contracted sales in the last 12 months to total debt of above 2.0x at end-June 2014, Vanke maintained moderate leverage, with the ratio of net debt to adjusted inventory at below 20% and its cash and equivalents at above CNY40bn at end-June 2014. The company was also conservative in its land acquisitions with only around CNY9.7bn of land premiums during 1H14. Its leverage and acquisition strategy distinguishes Vanke from some other Chinese developers who are over-aggressive in pursuing business scale. Vanke's margins narrowed further to around 20% at mid-2014from 22% in 2013, and Fitch does not expect substantial improvement in the next 24 months. However, its well-implemented asset- light business model is likely to help the company to maintain its contracted sales/adjusted inventory above 0.80x in 2014, more than the estimated sector median of around 0.65x. Vanke's ratings will not come under downward pressure at the current margin levels as long as it maintains its asset turnover and healthy financial profile. Vanke established a partnership plan at end-2013 that required project managers to make personal investments in their developments to align their interests with that of the company. Although the plan is still in its early stage, it reflects Vanke's efforts to continue making improvements to its management. For a more detailed analysis of the rating drivers and sensitivities for Vanke, please refer to the rating action commentary "Fitch Rates China Vanke's USD Notes Final 'BBB+'", dated 6 June 2014, available at www.fitchratings.com. Contact: Andy Chang Associate Director +852 2263 9914 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Vanessa Chan Director +852 2263 9559 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. 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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