(The following statement was released by the rating agency)
Feb 19 - Fitch Ratings has assigned China Overseas Land & Investment Ltd (COLI) a
Long Term Issuer Default Rating (IDR) of 'BBB+' with Stable Outlook and a senior unsecured debt
rating of 'BBB+'.
The ratings reflect COLI's 28-year track record in the Chinese homebuilding
sector, displaying resilience through several industry downturns, high
profitability relative to peers', and high funding diversity.
COLI has been one of the largest homebuilders in China since it started
operations in 1984. It has consistently generated high profit margins - an
EBITDA margin of 37.3% in H112 - reflecting its premium prices and effective
cost management. Its nationwide presence with a top-three market position in 11
major cities as well as a focus on first-time homebuyers and upgraders support
its strong brand.
COLI's low funding costs are underpinned by its access to the offshore bond and
loan markets and by its state-owned enterprise status which aids access to
domestic bank funding. Its low funding costs and strong profitability have
enabled COLI consistently to generate the highest funds from operations (FFO)
among Chinese homebuilders (over HKD12bn in 2011), despite not having the
highest contracted sales or the largest land bank.
The company has also demonstrated the ability to manage its working capital
during downturns, particularly by limiting new land bank purchases. It
generated positive free cash flows even during the last two industry downturns
in 2001-2003 and 2009 and delivered resilient performance in 2011 and 2012
despite tightened regulatory measures.
COLI's low leverage, as measured by net debt/adjusted inventory of 25% in H112,
supports the ratings. Increased debt to fund land bank acquisition following
the 2009 downturn resulted in lower contracted sales/gross debt of around 1.4x
in 2011 and 2012. However, Fitch expects this to rise above 1.5x as the company
increases its sales. The Stable Outlook reflects Fitch's expectation that COLI
will maintain these financial metrics to support the current ratings.
The ratings are constrained by the industry's cyclicality and high regulatory
risks in China. Home purchases are highly sensitive to economic cycles and the
Chinese government continues to intervene in this market to curb excessive price
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
- Decline in EBITDA margin to below 25%
- Deterioration in net debt/adjusted inventory to above 30% over a sustained
- Contracted sales/ total debt remaining below 1.5x over a sustained period
- Significant change from its current focus on first-time homebuyers and
Positive: Positive rating action is not expected over the next 12 to 18 months
due to high cyclicality as well as high regulatory risks in the Chinese property