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March 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says today that China Aoyuan Property Group Limited’s (Aoyuan; B+/Stable) better-than-expected performance in 2013 does not put upward pressure on its ratings, mainly because it relied on commercial property sales to achieve the results. Fitch views sales of retail shops and offices, which accounted for 26% of Aoyuan’s 2013 contracted sales, to be more volatile than residential property sales.
Aoyuan is a typical small- to mid-sized property developer still in its growth stage. It took advantage of its low leverage at end-2012 to add more debt, which, together with proceeds from its IPO and disposal of a Beijing project, provided enough liquidity to acquire land to improve its business scale. As a result, contracted sales increased 91% in 2013 to CNY10bn. What sets Aoyuan apart from peers that also pursued larger scale is that, even as it expanded quickly, it still maintained healthy leverage, with net debt/adjusted inventory of 29% at end-2013, and reasonable sales efficiency, with contracted sales/total debt at 1.1x. This resilience helped to strengthen Aoyuan’s credit profile. However, its stronger financial performance was driven in part by substantial retail shop sales, which exposes Aoyuan to more volatile commercial property demand. Upward rating pressure will develop only when Aoyuan is able to demonstrate it can sustain its profitability and credit metrics with less reliance on commercial property.
For a more detailed analysis of the rating drivers and sensitivities for Aoyuan, please refer to the rating action commentary “Fitch Rates Aoyuan’s USD Notes at ‘B+'”, dated 16 Jan 2014, available at www.fitchratings.com.