April 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned US-listed China-based homebuilder Xinyuan Real Estate Co., Ltd. (Xinyuan) a Long-Term Issuer Default Rating (IDR) of ‘B+’ with Stable Outlook and a senior unsecured rating of ‘B+’ and Recovery Rating ‘RR4’.
Fitch has also assigned Xinyuan’s proposed senior unsecured USD notes an expected ‘B+(EXP)'/‘RR4’ rating. The notes are rated at the same level as Xinyuan’s senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received.
Key Rating Drivers
Financial strength balances scale: Xinyuan’s rating is dependent on its financial strength remaining solid, especially in maintaining sufficient cash to meet short-term debt obligations. Its small scale constrains its business diversity in terms of a narrow product mix, limited geographical spread, and a small number of projects being sold in a year relative to peers. Xinyuan’s low EBITDA margin of about 13% on a five-year rolling average basis reflects that it is susceptible to sudden sharp home price swings, such as that in 2008.
Asset-light small homebuilder: Xinyuan’s small holding of property development assets give its creditors less protection in the event of asset liquidation. Its land bank by saleable gross floor area (GFA) of 1.2 million square metres (sqm) at end-2012 was less than the size of similarly rated peers. Even including the new land Xinyuan is close to acquiring, its land bank will still be less than half of that of its peers. Further, its land acquisition strategy will continue to focus on fast-growing 2nd and 3rd tier cities with a concentration on Henan Province. Xinyuan’s contracted sales of CNY5.2bn in 2012 were, however, comparable to other ‘B+’ rated Chinese homebuilders.
Land cost affects margin: Xinyuan’s high proportion of land cost versus its selling price kept profit margin low. Land cost has been between 20% and 30% of its average selling prices (ASP). This is compared with less than 20% for most Chinese homebuilders. The higher proportion of land cost was in part due to its land being acquired in land auctions and also partly because Xinyuan’s fast turnover business model does not allow for much land price appreciation, given the short lead time between land acquisition and the start of presales. However, the company aims to partly mitigate this acquiring land plots through negotiated land auctions, whereby land costs may be closer to 20% of ASP.
Healthy credit metrics: Xinyuan has been in a net cash position since 2011. Its low inventory levels are a result of its high asset turnover strategy, thus minimising investments in development properties. The company’s 2012 contracted sales/total debt ratio of 2.7x was the highest among Fitch-rated Chinese homebuilders.
Replicating home base success: Xinyuan has developed 24 projects since 2001, 16 of which are in Zhengzhou. Since 2007, Xinyuan has replicated its successful Zhengzhou developments in other cities. This has helped Xinyuan gain new markets in Jinan, Kunshan, Chengdu, Suzhou and Xuzhou. These new markets are now growth opportunities for Xinyuan as seen by its development presence in Jinan, Suzhou, and Xuzhou.
Undergoing faster expansion: Xinyuan has gone through financial consolidation between 2008 and 2012 in the face of market uncertainty. Its financial strength makes it an attractive strategic partner to local land authorities for participation in early stage land development. This will help Xinyuan undergo a faster pace of land acquisition in Zhengzhou.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- reduction of scale as reflected by a fall in GFA land bank to less than two years
- contracted sales falling below CNY5bn
- net debt/adjusted inventory falling below 25
- changes to its fast turnover model where contracted sales/gross debt fall below 1.5x
Positive: Positive rating action is not expected in the next 18-24 months due to Xinyuan’s small operational scale and lack of business diversification. However, future developments that may, individually or collectively, lead to positive rating action include:
- significant increase in scale as reflected by contracted sales exceeding CNY15bn
- increase in business diversification by geography, by product mix as well as in presence in a greater number of cities
- maintaining a strong financial profile