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March 28 (The following statement was released by the rating agency)
Fitch Ratings has assigned property developer Sunac
China Holdings Limited's (Sunac, 'BB-'/Stable) USD500m 9.375% notes due 2018 a
final rating of 'BB-'. The assignment of the final rating follows the receipt of
documents conforming to information already received and the final rating is in
line with the expected rating assigned on 26 Mar 2012.
Key Rating Drivers
Strong Growth: Sunac achieved a 86% year-on-year growth in contracted sales to
CNY35.6bn in 2012 despite a difficult year for its many peers in the industry.
The company is likely to extend its outperformance in 2013, reflecting strong
branding and execution in its core markets, i.e. mid- to high-end segments,
primarily in Tier-1 cities.
No Significant Deleveraging: Sunac's leverage, as measured by net debt/adjusted
inventory, remained over 40% at end-2012 (2011: 43%), after deconsolidating
Shanghai Sunac Greentown Real Estate Development Ltd, a joint venture with
Greentown. This is primarily due to continued landbank replenishment and project
Regulatory Risks Remain High: Sunac's focus on mid- to high-end segments
increases its exposure to regulatory risks compared with mass-market peers,
given the government's aim to make housing more affordable. Sunac's average
selling price in 2012 was CNY17,800 per square meter (psm) compared with China
Vanke Co., Ltd's CNY10,900 psm. Vanke is the largest homebuilder in China by
sales and focuses on mass- to mid-market housing.
No Impact From Shanghai Acquisition: In March 2013, Sunac and Greentown entered
into an agreement to acquire a plot of land in Huangpu District, Shanghai. This
acquisition cost Sunac CNY4.5bn for its 50% stake. The project, which is in an
upscale location, currently has over 271,000 sqm of completed gross floor area
ready for sale, mitigating Sunac's liquidity risk.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- adverse changes to Sunac's markets and product mix leading to an EBITDA margin
below 25% (2012: over 25% excluding impact of revaluation of acquisitions)
- funds from operations (FFO) interest coverage below 3x (2012:2.5x but Fitch
expects this to exceed 3x after refinancing trust loans)
- net debt/adjusted inventory above 50% (2012: over 40% after deconsolidating
the joint venture)
- lack of growth in contracted sales in 2013
Positive: Positive rating action is not expected in the next 12-18 months due to
Sunac's limited product and geographical diversification.