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Fitch Affirms Vietnam's Vingroup JSC at 'B+'; Outlook Stable
October 4, 2016 / 9:16 AM / a year ago

Fitch Affirms Vietnam's Vingroup JSC at 'B+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, October 04 (Fitch) Fitch Ratings has affirmed Vietnamese property developer, Vingroup JSC's (Vingroup) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and the rating on its senior unsecured notes at 'B+'. Fitch has also assigned a Recovery Rating of 'RR4' to the senior unsecured notes. The Outlook on the IDR is Stable. The affirmation reflects Fitch's view that the company's robust performance in its property development business mitigates the losses in its nascent consumer retail business. As result, we expect Vingroup to maintain its current moderate net financial leverage. Deleveraging to a lower level may be possible when its retail business matures and starts being profitable, which is likely in 2019 if Vietnam's macroeconomic environment remains supportive. KEY RATING DRIVERS Unprofitable Consumer Retail Business: Vingroup in 2015 embarked on an aggressive strategy to gain market dominance in Vietnam's nascent consumer retail sector. Its multi-format retail business comprising supermarkets, convenience stores, electronic appliances and information and communication technology stores and specialty retail stores are located in 23 of Vietnam's 63 cities and provinces. As a result of a very fast rollout, which was evident from the nine-fold rise in revenue to VND4.31trn in 2015, the business remains unprofitable with a negative EBITDA margin of 29% in 2015 (2014: negative 18%). The company expects to start generating positive EBITDA in 2019, which is possible if it remains disciplined in its execution and the macroeconomic environment remains healthy. Robust Property Development Performance: Fitch views the rising granularity of Vingroup's property development portfolio and its ability to sustain a high pre-sales rate of around 85% favourably. Cash collections from property sales quadrupled to VND57.6trn in 2015 from VND14.65trn in 2014. Vingroup's sales and revenue up to end-2015 were mainly driven by Royal City, Times City and Central Park, with small contributions from Vinhomes Riverside, 56 Nguyen Chi Thanh, Can Tho Villas and Vinpearl beach villa projects. Vingroup's cash flows up to end-2019, however, will be driven by six projects under development - Vinhomes Gardenia, Vinhomes Golden River, Vinhomes Paradise, Vinhomes Riverside 2, Vinhomes Smart City and Vinhomes La Seine. Growing Investment Property Portfolio: Vingroup pursues a two-pronged strategy of aggressively expanding its property development and investment property businesses. Investment property revenue rose by 33% to VND6.76trn in 2015. EBITDA margin for the investment property business moderated to a still healthy 48% in 2015 (2014: 87%) due to higher marketing expenses. Stable Financial Profile: The robust performance of Vingroup's property development business translated into moderate net financial leverage of 42% in 2015 (2014: 43%) despite the sizeable capex incurred in 2014 and 2015. The coverage of consolidated interest expense by investment property EBITDA was lower at 0.91x in 2015 (2014: 1.39x) due to higher marketing expenses. Fitch estimates that Vingroup's cash flows from the property development business will offset its consumer retail business losses. Supportive Macroeconomic Environment: Vietnam (BB-/Stable) has sustained strong real GDP growth, underpinned by the robust performance of the manufacturing and services sectors, and medium-term growth prospects are favourable. The government has since July 2015 permitted foreign institutions and individuals who have been granted a Vietnamese visa to own properties with leases of 50 years or less, with the possibility of the leasehold tenor being renewed. These factors underpin the expansion of Vingroup's development, consumer retail and investment property businesses. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Vingroup include - Cash collections from property sales will be at least VND50trn a year in 2016-2019, - The VND7.0trn of outstanding preference shares as of end-2015 that were wholly subscribed by Warburg Pincus will be converted into equity in a cash-neutral transaction in 2018 RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - The ratio of net adjusted debt to the sum of net inventory and investment properties exceeding 60%, or - The ratio of cash collections from property sales to gross adjusted debt remaining below 1.0x on a sustained basis Positive: Future developments that may, individually or collectively, lead to positive rating action include: - The ratio of net adjusted debt to the sum of net inventory and investment properties declining to less than 40%, - The consumer retail business generating positive operating cash flows, and - Vingroup generating positive consolidated free cash flows (consolidated cash flow from operations less capex less dividends) on a sustained basis LIQUIDITY Comfortable Liquidity: Vingroup's cash balance and projected operating cash flows are adequate to meet contractual debt maturities till end-2019 and to partly finance capex. Outstanding cash and bank deposits at end-2015 was VND18.0trn. Fitch estimates the company will generate annual operating cash flows of at least VND40trn. Moderate Refinancing Risk: Contractual debt maturities for the 12-month periods ending 30 June 2017 and 30 June 2018 are VND7.1trn and VND16.3trn, respectively. The outstanding cash as of end-2015 is adequate to meet debt maturities till end-2017. FULL LIST OF RATING ACTIONS Vingroup JSC Long-Term Foreign Currency IDR affirmed at 'B+'; Outlook Stable Long-Term Local Currency IDR affirmed at 'B+'; Outlook Stable Rating on senior notes affirmed at 'B+'; Recovery Rating of 'RR4' assigned Contact: Primary Analyst Nandini Vijayaraghavan, CFA Director +65 6796 7216 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Hasira De Silva, CFA Director +65 6796 7240 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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