December 30, 2016 / 3:56 AM / 8 months ago

Fitch Upgrades China Aoyuan to 'BB-' from 'B+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 29 (Fitch) Fitch Ratings has upgraded China Aoyuan Property Group Limited's (Aoyuan) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is Stable. Fitch has also upgraded Aoyuan's senior unsecured rating and the ratings on its outstanding US dollar bonds to 'BB-' from 'B+'. Aoyuan's contracted sales have continued to increase robustly since Fitch placed the rating on Positive Outlook in January 2016. The sales growth has been supported by the company's execution of its fast-churn strategy and stable operating efficiency, while keeping steady land acquisitions and maintaining a healthy financial profile. The enlarged scale and enhanced credit profile make it more comparable to 'BB-' rated China homebuilders and we believe Aoyuan's credit profile will remain healthy in the next 12 months. KEY RATING DRIVERS Strong Sales Performance: Fitch estimates Aoyuan's 2016 contracted sales will reach CNY24.5bn after it tripled to CNY15.2bn in 2015 from 2012. The company's contracted sales for January-November 2016 increased 70% yoy to CNY22.2bn as it continued its fast-churn strategy. Fitch expects contracted sales to continue to increase in 2017 based on the company's project launch pipeline, although the pace of growth is likely to be slower than in 2016. In 2016, about 50% of Aoyuan's contracted sales was still in Guangdong province, but the company is prudently exploring opportunities in other provinces and overseas. Stable Financial Profile: What sets Aoyuan apart from its fast-growing peers is that it has maintained healthy leverage despite rapid expansion. Its leverage, as measured by net debt to adjusted inventory, was 29.8% at end-June 2016 and we expect the ratio to be stable at end-2016. Fitch also estimates its sales efficiency - measured by contracted sales in the last 12 months to gross debt - will improve to 1.3x by end-2016 from 0.9x at end-2015. We expect Aoyuan to maintain its fast-churn model and prudent land acquisition strategy; thus its financial profile will remain healthy in the next 12-18 months, which will support its credit profile. Prudent Acquisition Strategy: Aoyuan has maintained its pace of land acquisitions, even though its contracted sales have increased significantly. Fitch expects the company to continue to explore buying land in the Pearl River Delta, central China and Yangtze River Delta. It acquired four parcels with total land cost of CNY5.3bn in 1H16 and remained disciplined in land acquisitions in 2H16. Fitch expects the full-year land premium would still be less than 40% of contracted sales, which have increased; this would give the company comfortable headroom for future land acquisitions. Adequate Land Bank: Aoyuan had total sellable gross floor area of about 13 million square metres as of end-June 2016. Around 20% land bank by value is in lower-tier cities, but the percentage has continued to decrease and the land bank quality has improved over the years. Moreover, about half of Aoyuan's land in lower-tier cities is in smaller cities outside of Guangzhou that are still targeted at buyers from Guangzhou. Fitch considers the contracted sales from these sites to be satisfactorily predictable as they are easily accessible from Guangzhou and the company has a good execution track record. Slight Margin Decline: Fitch expects Aoyuan's EBITDA margin to gradually drop to between 20% and 25% after 2016 from more than 25% previously. This is due to a greater share of higher-margin products in the past, pressure from higher land costs as well as an increase in selling, general and administrative expenses as a result of the larger operational scale. Healthy Liquidity: Aoyuan's current liquidity position is strong, which supports its planned expansion. Total cash was CNY10.2bn at end-June 2016 against short-term debt of CNY4.1bn. The company is also committed to improve its debt structure. Recent funding initiatives, both onshore and offshore, diversified its funding channels, improved its debt maturity profile and reduced funding costs. As of end-1H16, short-term debt accounted for only 21% of total debt, and the company's weighted average funding cost was 8.4%. We estimate that by end-2016, Aoyuan will maintain a strong liquidity position and funding cost will fall further to 8%. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Pace of land acquisitions to be stable in 2017 and 2018 at 40%-50% of contracted sales - Contracted sales are estimated based on sellable resources in the next 12-18 months. Contracted sales to continue to grow although at a slower pace than in 2016 - The company's average selling price for its contracted sales will be slightly higher in 2017 due to a larger share of high-margin products - Company to maintain its fast-churn and high cash-flow turnover business model RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - EBITDA margin sustained below 20% (1H16: 23.4%) - Net debt/adjusted inventory sustained above 40% (end-June 2016: 29.8%) - Contracted sales to gross debt sustained below 1.2x (end-June 2016: 1.0x) - Sustained decrease of total sellable GFA in the land bank to below 3.5x of annual contracted sales GFA (12 months to end-June 2016: 5.6x) Positive: No positive rating action is expected unless Aoyuan is able to substantially increase its scale, and establish core markets in multi-regions without compromising its financial metrics. This is not expected over the next 12-18 months. FULL LIST OF RATING ACTIONS Long-Term Foreign-Currency IDR upgraded to 'BB-' from 'B+'; Outlook Stable Senior unsecured rating upgraded to 'BB-' from 'B+' USD300m 11.25% senior notes due 2019 upgraded to 'BB-' from 'B+' USD250m 10.875% senior notes due 2018 upgraded to 'BB-' from 'B+' USD250m 6.525% senior notes due 2019 upgraded to 'BB-' from 'B+' Contact: Primary Analyst Vicki Shen Director +852 2263 9914 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Jenny Wenjun Huang Associate Director +8525 2263 9922 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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