November 2, 2017 / 3:43 AM / a year ago

Fitch Rates China Vanke's Proposed USD Notes 'BBB+(EXP)'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 01 (Fitch) Fitch Ratings has assigned China Vanke Co., Ltd.'s (Vanke; BBB+/Stable) proposed US dollar senior notes a 'BBB+(EXP)' expected rating. The proposed notes are issued under its medium-term note (MTN) programme rated 'BBB+'. The proposed notes will be issued by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK). 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 MTN programme. The final rating is contingent on the receipt of final documents conforming to information already received. Vanke's rating is driven by its position as one of the three largest homebuilders by sales in China and its ability to maintain a healthy financial profile. Contracted sales have risen by a CAGR of over 20% since 2007, reaching CNY396 billion in 9M17. Vanke's EBITDA margin has averaged around 22% over the past three years and its churn rate (as measured by contracted sales to gross debt) of 2.5x as at 30 September 2017 remained the highest among rated peers, although it has fallen from 2.6x in 2016 and 3.0x in 2015. Leverage, as measured by net debt to adjusted inventory, remained very low at 13% in 1H17 compared with industry peers. KEY RATING DRIVERS Robust Business, Financial Profile: Fitch expects Vanke to maintain its leadership in the Chinese residential homebuilding market, where sales volume is sustainable at the current level due to firm housing demand from first-time homebuyers and upgraders. Vanke's operational advantages from its scale, strong execution ability and healthy financial profile give it flexibility to control business risks in the highly competitive and cyclical Chinese homebuilding market. These factors support the Stable Outlook on the ratings. Healthy Cash-Flow Generation: Vanke's superior cash-flow generation is supported by improved recovery of sales proceeds and stable margins. Vanke's sales-proceeds recovery rate is one of the highest in the industry - the rate stabilised at around 95% in 2015-2016 from 90% in 2014 and 86% in 2013. Its EBITDA margin in 1H17 was higher at 24% compared with 20% at end-2016, helped by the improvement in selling prices since 1H15. Fitch expects Vanke to maintain the current sales-proceeds collection rate and margin in the next 24 months. Superior Churn, Low Leverage: Fitch expects Vanke to stay with its high-turnover model, with the ratio of contracted sales to total debt sustained above 2x, and leverage sustained below 20% over the next 24 months. Its leverage of 13% at end-1H17 was very low relative to peers with investment-grade ratings and also comparable with Vanke's average leverage of 12% between 2011 and 2016. Clear-Cut Majority Shareholder Emerges: China Evergrande Group's (B+/Stable) sale of its entire holdings of 1.6 billion A shares in Vanke to Shenzhen Metro Group Co., Ltd. (SZMC) allowed the latter to consolidate its position as the largest shareholder with approximately 29.38% of the total issued share capital upon completion of the transfer of shares in the Chinese homebuilder. This alleviated market concern that multiple large shareholders were attempting to exert control over the company. Fitch expects stronger co-operation with SZMC to strengthen Vanke's land bank in Shenzhen, a top-tier city that faces a limited supply of new land. Sector Risks Constrain Ratings: Fitch views the global property sector as highly cyclical. In addition, the Chinese homebuilding market continues to be policy and regulation driven, with the government aiming to maintain affordable housing prices for the general public and to curb speculative demand. DERIVATION SUMMARY Vanke's rating is driven by its position as one of the top three homebuilders by sales in China and its ability to maintain a healthy financial profile as contracted sales rose by a CAGR of over 20% since 2007 and reached CNY396 billion in 9M17. Vanke's EBITDA margin stabilised at 20%-22%, which is lower than that of China Overseas Land & Investment Limited (COLI, A-/Stable) at 26%-28% and China Resources Land Ltd (CRL, BBB+/Stable) at 26%-27%. Its churn rate has stayed above 2.5x since 2014, which is the highest among 'BBB+' peers. Its low leverage of 13% is comparable with COLI's 7% and CRL's 20%. No country-ceiling, parent/subsidiary aspects have an impact on the rating. The operating environment risks make it unlikely for companies in this sector to be rated above 'BBB+'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales by gross floor area to increase by 20% over 2017-2018; - Average selling price for contracted sales to increase by 3% for 2017-2018; - EBITDA margin of around 20% in 2017-2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -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. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Unfavourable changes to China's regulation or economy leading to a decline in contracted sales; or -Decline in EBITDA margin to below 20% on a sustainable basis (1H17: 24%, 2016: 20%; 2015: 22%); or -Increase in net debt/adjusted inventory to above 30% over a sustained period (1H17: 13%, 2016: 12%; 2015: 11%) -Contracted sales/total debt remaining below 1.75x over a sustained period (3Q17: 2.5x, 2016: 2.6x; 2015: 3.0x) -Deviation from its current focus on mass-market housing LIQUIDITY Abundant Liquidity: Vanke had CNY87 billion (including CNY7.5 billion in restricted cash) of cash on hand as of end-December 2016, allowing it to cover its short-term debt of CNY43 billion. The company has strong cash-generation ability, evident in its positive cash flow from operations in the past two years (2016: CNY38 billion; 2015: CNY13 billion) and a high cash collection ratio of above 90%. Improving Funding Structure: Vanke has access to various funding channels, including offshore and onshore bank loans, debt markets and onshore trust loans. Total debt was CNY129 billion at end-2016, made up of 59% in bank loans, 25% in bonds and 16% in trust and other loans. Vanke's average funding cost in 2016 dropped substantially to around 5% from around 9.4% in 2014, due to the company's efforts in improving its capital structure. Contact: Primary Analyst Andrew Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 22639914 Date of Relevant Rating Committee: 12 April 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 10 March 2017 to 7 August 2017 (pub. 10 Mar 2017) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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