(Repeat for additional subscribers)
June 6 (The following statement was released by the rating agency)
Fitch Ratings has assigned China Vanke Co., Ltd's (Vanke; BBB+/Stable) USD400m 4.50% senior unsecured notes due in 2019 a final rating of 'BBB+'.
The notes are issued by Bestgain Real Estate Lyra Limited and are jointly and severally guaranteed by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), a wholly owned subsidiary of Vanke.
The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 28 May 2014.
KEY RATINGS DRIVERS
Keepwell and Deed of Equity Interest: In place of a guarantee, Vanke has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that the guarantor, Vanke HK, has sufficient assets and liquidity to meet its obligations under the guarantee for the medium-term note programme under which the US dollar notes are issued. In Fitch's view, the keepwell and undertaking deeds signal a strong intention from Vanke to honour its proposed debt obligations.
National Coverage and Large Scale: Vanke is the largest homebuilder in China's residential market by contracted sales. It has about 400 projects for sale in 61 cities, of which over two thirds are Tier 1 and 2 cities. Its land bank of 62.7m square metres (sqm) in GFA is well diversified and is one of the largest in China. The large scale provides Vanke with operational and financial flexibility. It has also moved towards using prefabricated building components to ensure quality, quick replication, lower cost and standardisation. Sales Growth to Slow: Vanke's contracted sales have increased strongly, with three-year CAGR at around 27%-30% since 2007. In 2013, CAGR dropped to 16.5%. Fitch expects Vanke's growth in contracted sales to slow down due to more intense competition and a larger base effect. Three-year CAGR for contracted sales is likely to be around 15%-25% in the short to medium term.
Lower Margins and Higher Churn: Vanke's EBITDA margins dropped to 21.9% in 2013 from 26.5% in 2012, in line with narrower margins in the sector. The decline was due to the sales from over 90% of furbished units (completed homes that had cabinetry and other fixtures installed) being recognised in 2013, compared with 80% in 2012. In addition, sales from the residential units sold in the market trough in the second half of 2011 are also starting to be recognised. Vanke follows a high asset churn strategy. As a result, its contracted sales to total debt ratio was at 2.1x in 2013 and has been above 1.75x since 2009, making its ratio one of the highest among peers in the sector. Fitch expects Vanke's EBITDA margins to remain at 20%-22% in the next two to three years as it continues with its high churn strategy and because sales are recognised from a higher proportion of furbished units and from more units sold during the market trough. Focus on Mass Market: Vanke continued to focus on the mass-market segment in 2013, with units smaller than 144 sqm accounting for around 91.5% of residential units in 2013. This allowed Vanke to continue to meet demand from China's urbanisation trend and maintain its large scale and market leadership. By focusing on the mass-market segment, Vanke achieved CAGR of 28% for contract sales from 2009 to 2013 despite strict home purchase restrictions imposed in first-tier and some major second-tier cities in China.
Higher Funding Cost: Vanke's average funding cost in 2013 was around 7%-8%, higher than the 3%-6% for other Chinese homebuilders rated in the 'BBB' category (those rated 'BBB-', 'BBB' and 'BBB+'), which are mostly state-owned enterprises. Vanke is privately owned and does not have that advantage. To improve its funding cost and capital structure, Vanke issued a 2.625% USD800m five-year offshore bond and set up a USD2bn multi-currency medium-term note program in 2013.
Diversification Into Other Markets and Businesses: During 2013, Vanke expanded into homebuilding overseas, including in Hong Kong, US and Singapore via joint ventures with well-known local developers. Vanke also invested about USD400m in Huishang Bank's IPO for a 8% stake. However, these remain insignificant, with the above investments forming around 1% of Vanke's total assets of CNY479.5bn at end-2013.
Outlook Stable: Fitch expects that Vanke will maintain its leadership in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders. Vanke will use 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 20% (2013: 21.9%); or
- Increase in net debt/adjusted inventory to above 30% over a sustained period (2013: 18.5%)
- Contracted sales/total debt remaining below 1.75x over a sustained period (2013: 2.1x)
- Deviation from its current focus on mass-market housing
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.