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April 2 (The following statement was released by the rating agency)
Fitch Ratings has affirmed China Overseas Land & Investment Limited's (COLI) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed COLI's foreign-currency senior unsecured rating and the rating of China Overseas Finance (Cayman) III Limited at 'BBB+'.
The affirmation reflects that COLI delivered strong contracted sales of HKD138.5bn in 2014 while maintaining a stronger EBITDA margin of 30%. It continued to keep its leadership position with strong operational and executional capabilities and a prudent financial position.
KEY RATINGS DRIVERS
A 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 - reflecting its premium prices and effective cost management. Its strong brand is supported by its nationwide presence, with a top-three market position in 10 major cities in 2013 and a focus on first-time homebuyers and "upgraders" who seek better homes than their existing residences. Slower contracted sales growth: COLI expects flat growth in property contracted sales in 2014 at HKD140bn compared with the forecast growth of 25% for 2013.
This is due to the strong growth in the whole property market in 2013 and a higher base in 2013. 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 leverage on its brand, 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 compared with other homebuilders. Its weighted average borrowing cost is at 3.7% in 2013. Its low funding costs are underpinned by access to the offshore bond and loan markets, and by its state-owned enterprise (SOE) status, which aids access to domestic funding. COLI continues to maintain a strong liquidity position and had HKD8.76bn undrawn committed bank facilities and cash balance of HKD41.4bn in 2013.
Outlook Stable: Fitch Ratings expects that COLI will maintain its leadership position in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders; leveraging on operational and financial flexibility; and continuing 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% (2013: 30%); 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.