August 28, 2014 / 11:22 AM / 3 years ago

Fitch Revises Sunac's Outlook To Positive

(The following statement was released by the rating agency) HONG KONG, August 28 (Fitch) Fitch Ratings has revised Sunac China Holdings Limited's (Sunac) Outlook to Positive from Stable and affirmed the property developer's Long-Term Issuer Default Rating (IDR) at 'BB-'. The agency has also affirmed Sunac's senior unsecured rating at 'BB-'. Sunac's performance in 1H2014 reflected sustainability of scale, high asset turnover, limited structural subordination, which has moderated constraints on the credit ratings. An upgrade will be considered if the company is able to manage land banking in 2H2014 to maintain a healthy financial position - even after paying for its 24.3 percent equity investment in fellow developer, Greentown China Holdings Limited (Greentown). Key Rating Drivers Sales Growth Reflects Sustainability: Fitch estimates Sunac to have achieved around CNY16bn of contracted sales on an attributable basis in 1H2014. While the year-on-year growth is limited, it reflects the sustainability of the company's business scale in the current difficult conditions in China's homebuilding sector. Sunac's current operating scale also demonstrates superior management, more stable operating cash flow, and more cost benefits compared to peers rated at BB-. Fitch uses attributable sales, the share of sales contributions from a company's ownership in joint-ventures (JVs), as one of the criteria to assess the business scale of companies with substantial JVs. High Turnover & Healthy Margin: Sunac's EBITDA margin was estimated to be around 24% in 1H2014 after excluding the impact of re-assessment of fair value, which is still at a healthy level compared to peers. Furthermore, its asset turnover is still at a higher-end, as reflected by the over 1.2x of contracted sales/total debt and 0.7x of contracted sales/adjusted inventory in 2013. Both sales turnover and margins demonstrate the generation of sufficient cash inflows to support its operations and expansion. Limited Structural Subordination Risk: Sunac is one of the most prolific users of JVs among Chinese developers, as reflected by its minority interests of CNY4.5bn and equity investments of CNY9.3bn at mid-2014. However, most of its JVs distribute cash flows regularly, which limits cash retained in the JVs and structural subordination. The major exception is the projects under Shanghai Sunac Greentown Real Estate Development Ltd. Company (SSG), but Fitch estimates SSG to have contributed only less than 20% of attributable sales, making it insignificant. Land Banking & Shares Acquisition: Fitch estimates Sunac paid CNY6.6bn for attributable land acquisitions in 1H2014 compared to our estimate of CNY16bn in attributable sales for the same period. In addition, the company plans to pay over CNY4bn to acquire shares of Greentown in 2H2014, which will generate limited cash for Sunac in the short-term. Given the major cash outflow for its stake in Greentown, key considerations for a rating upgrade will depend partly on how the company manages its land banking to maintain healthy leverage. Leverage, as measured by net debt/adjusted inventory, stood at 26% at mid-2014. Rating Sensitivities Positive: Future developments that may, individually or collectively, lead to positive rating action include: - EBITDA margin excluding impact of revaluation of acquisitions sustained above 22% - Contracted sales/total debt sustained above 1.2x - Conservative land acquisitions leading to net debt /adjusted inventory sustained below 40% - Limited growth in SSG relative Sunac's own growth Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Failure to meet the above guidelines over the next 12-18 months, which would lead to the Outlook being revised to Stable Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable criteria, "Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 26 May 2014, is available at Related Research "Rating Chinese Homebuilders: Sector Credit Factors", dated 15 October 2012 Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Rating Chinese Homebuilders here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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