April 12, 2017 / 6:40 AM / 4 months ago

Fitch Affirms China Vanke at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, April 12 (Fitch) The affirmation of the Long-Term Foreign- and Local-Currency Issuer Defaults Ratings (IDR) of China Vanke Co., Ltd. at 'BBB+' with a Stable Outlook reflects maintenance of a healthy financial profile even as contracted sales have risen consistently by a compound annual growth rate (CAGR) of 24% since 2007 - to reach CNY343 billion in 2016. The company remains China's largest homebuilder by sales. Its EBITDA margin has stabilised at around 22%, while its churn rate (as measured by contracted sales to gross debt) was at 2.6x at end-2016, lower than the 3.0x in 2015 and 2.9x in 2014. Leverage, as measured by net debt to adjusted inventory, remained very low at 12% 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 the flexibility to control business risks in the highly competitive and cyclical Chinese sector. These factors support the Stable Outlook on the ratings. Healthy Cash-Flow Generation: Improved recovery of sales proceeds and stable margins support Vanke's superior cash-flow generation. Its sales-proceeds recovery rate is one of the highest in the industry - the rate stabilised at around 95% in 2016-2015 from 90% in 2014 and 86% in 2013. The 2016 EBITDA margin was steady at 22.9% compared with 24% at end-2015 and 2014. Fitch expects Vanke to maintain the current sales-proceeds recovery 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 below 20% over the next 24 months. Leverage was maintained at around 11%-12% in 2016 and 2015. This remains very low relative to investment-grade-rated peers, and also comparable with Vanke's average leverage of 12.9% between 2011 and 2013. Short-Term Visibility on Shareholders: The move by China Evergrande Group (B+/Negative) to entrust its voting rights in Vanke to Shenzhen Metro Group Co., Ltd. (SZMC) gives more clarity to the latter's shareholder position for the next 12 months. This alleviated some market concerns on multiple large shareholders trying to exert control on the company. Fitch expects any stronger co-operation with SZMC to strengthen China 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 government aiming to maintain affordable housing prices for the general public and to curb speculative demand. DERIVATION SUMMARY Vanke managed to maintain a healthy financial profile even as contracted sales rose consistently by a CAGR of over 20% since 2007 and reached CNY343 billion in 2016. The company continues to be China's largest homebuilder by sales. Its EBITDA margin stabilised around 22%, which is slightly 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, as measured by contracted sales to gross debt, stayed above 2.5x since 2014, which is the highest amongst the 'BBB+' peers. Leverage, as measured by net debt to adjusted inventory, remained low at 12% - 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 rise by 3% for 2017-2018; - EBITDA margin of around 20%-22% 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 -Narrowing of the EBITDA margin to below 20% (2016: 23%; 2015: 22.6%, 2014:22%); or -Increase in net debt/adjusted inventory to above 30% over a sustained period (2016: 12%; 2015: 13%, 2014: 3%) -Contracted sales/total debt remaining below 1.75x over a sustained period (2016: 2.6x; 2015: 3.06x, 2014 2.94x) -Deviation from its current focus on mass-market housing LIQUIDITY Abundant liquidity: Vanke had CNY87 billion (including CNY7.5 billion restricted cash) of cash on hand as of end-December 2016, comfortably covering its short-term debt of CNY43 billion. Cash generation was strong, as evident in positive cash flow from operations in the last two years (2016: CNY38 billion; 2015: CNY13bn) and a high cash-collection ratio at 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 billiion at end-2016, among which 59% was bank loans, 25% bonds and 16% 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 endeavours in improving its capital structure. FULL LIST OF RATING ACTIONS China Vanke Co., Ltd. - Long-Term Foreign-Currency IDR affirmed at 'BBB+', Outlook Stable - Long-Term Local-Currency IDR affirmed at 'BBB+', Outlook Stable - Senior unsecured rating affirmed at 'BBB+ Bestgain Real Estate Limited - USD800 million 2.625% senior unsecured notes due 2018 affirmed at 'BBB+' Vanke Real Estate (Hong Kong) Company Limited - USD3.2 billion medium-term note programme affirmed at 'BBB+' - CNY1 billion 4.500% senior unsecured notes due 2018 affirmed at 'BBB+' - USD400 million 4.500% senior unsecured notes due 2019 affirmed at 'BBB+' - USD600 million 3.950% senior unsecured notes due 2019 affirmed at 'BBB+' Contact: Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Summary of Financial Statement Adjustments - Capitalised interest is adjusted for cost of goods sold, provided by the issuer. 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