Fitch Revises Xinyuan Real Estate's Outlook to Negative

Wed Aug 20, 2014 12:02am EDT

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(The following statement was released by the rating agency) HONG KONG, August 20 (Fitch) Fitch Ratings has revised US-listed China-based homebuilder Xinyuan Real Estate Co., Ltd.'s (Xinyuan) Outlook to Negative from Stable and affirmed its Long-Term Issuer Default Rating (IDR) at 'B+'. The agency has also affirmed the company's senior unsecured rating at 'B+'. Xinyuan spent substantial amounts on land acquisitions in 1H14 to expand its business scale in 2014, but sales failed to keep pace amid negative sentiment in the sector and its selling, general and administrative (SG&A) expenses surged, resulting in a weaker financial profile. The Negative Outlook reflects the pressure on the ratings if leverage cannot be stabilised or the SG&A expenses do not revert to reasonable levels. KEY RATING DRIVERS Weaker Sales Raises Leverage: Fitch estimates that Xinyuan paid CNY4bn in land premiums, but chalked up only around CNY3bn in contracted sales in 1H14. With land banking speeding ahead of sales, Xinyuan's net debt/adjusted inventory increased to around 36% at mid-2014 from a net cash position at end-2013.While projects on the newly acquired land will be ready to launch after 3Q14 and saleable inventory for 2H14 is likely to be enough to achieve the 2014 sales target of CNY9bn-10bn, any further deterioration of sales performance or aggressive land banking may raise leverage beyond Fitch's thresholds at which it may consider negative rating action. Increase in SG&A Expenses: Xinyuan's SG&A expenses in 1H14 rose sharply, mainly due to marketing activities for newly launched projects. SG&A expenses amounted to 13% of contracted sales in 1H14, compared with the 5%-10 % generally seen in the sector. This increase in expenses and the decline in gross profit margin - a common phenomenon in the Chinese homebuilding sector - drove its EBITDA margin down to 11% from 27% a year earlier. Fitch will continue monitor the company's expenses as part of our assessment of the company's management and execution abilities. Asset-Light Small Homebuilder: Xinyuan's small holdings of property development assets give its creditors less protection in the event of asset liquidation. Its land bank in terms of saleable GFA was 2.1 million square metres at mid-2014, smaller than that of similarly rated peers. Fitch expects the company to enlarge its land bank and expand its business scale substantially in the next 24 months. Diversified Funding Channels: The USD109m of equity and convertible debt it raised from private equity investor TPG Asia VI SF in September 2013 and an offshore note issuance soon after shows that the company has access to diversified funding sources to accelerate its growth plan in 2014. Fitch believes it has sufficient liquidity on its balance sheet to support its growth and mitigate downside risks. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - No material improvement in contracted sales in 2H14 - net debt/adjusted inventory rising above 35% on a sustained basis - changes to its fast turnover model such that contracted sales/total debt falls below 1.2x on a sustained basis (End-2013:1.2x) - SG&A remaining at over 10% of contracted sales. Positive: Future developments that may, individually or collectively, lead to positive rating action include: - The Outlook may be revised to Stable if the above negative guidelines are not met over the next 12 months Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 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 on 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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