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April 14 (The following statement was released by the rating agency)
Fitch Ratings has affirmed US-listed China-based homebuilder Xinyuan Real Estate Co., Ltd.'s (Xinyuan) Long-Term Issuer Default Rating (IDR) at 'B+' with Stable Outlook. The agency has also affirmed the company's senior unsecured rating at 'B+'.
KEY RATING DRIVERS
Expansion With Sound Leverage: Fitch expects Xinyuan's 2014 net debt/adjusted inventory to increase to around 30% from net cash position in 2013 as a result of the expansion of its business scale. However, this level of leverage is still healthy compared with peers'. While Xinyuan acquired land that will yield 1.4 million sqm in GFA at a cost of CNY3.6bn in total land premiums in 2013, it had CNY6.2bn of contracted sales and maintained a net cash position. Following its substantial land banking and good performance in 2013, the company will continue to take advantage of its healthy financial position to leverage up to further expand, as reflected by its sales target of CNY10.2bn for 2014.
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 1.8 million sqm at end-2013, smaller than that of similarly rated peers. Fitch expects the company to enlarge its land bank substantially in the next 24 months. The company has demonstrated an outstanding ability to pick locations that will be well-received by buyers. This can been seen in its gross profit margin of around 30% - no worse than peers'- even though its sales have come mainly from land that was acquired over the past two years, when prices were increasing substantially.
Land Cost Affects Margin: Land cost forms over 25% of Xinyuan's average selling prices (ASP), compared with less than 20% for most Chinese homebuilders, which limits the company's profit margin. The higher proportion of land cost was mainly due to new land bank acquired in 2013, which accounted for around 79% of unsold land bank at end-2013 and Xinyuan's fast turnover business model, which does not allow for much land price appreciation.
Diversified Funding Channels: The USD109m of equity and convertible debt it raised from private equity investor TPG Asia VI SF in September 2013, followed closely by offshore note issuance, 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.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- reduction of scale as reflected by a fall in GFA land bank to less than two years of sales
- contracted sales falling below CNY5bn
- net debt/adjusted inventory rising above 35%
- changes to its fast turnover model so that contracted sales/gross debt falls below 1.2x (2013:1.2x)
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- significant increase in scale as reflected by contracted sales exceeding CNY15bn
- increase in business diversification by geography and by product mix.
- maintaining a strong financial profile