November 9, 2017 / 3:21 AM / a year ago

Fitch Assigns Yango Senior Unsecured Rating of 'B-'; Rates Bonds

(The following statement was released by the rating agency) HONG KONG, November 08 (Fitch) Fitch Ratings has assigned China-based property developer Yango Group Co., Ltd. (Yango; B/Positive) a senior unsecured rating of 'B-' with a Recovery Rating of 'RR5', and its proposed US dollar senior notes a 'B-(EXP)' expected rating and Recovery Rating of 'RR5'. The one-notch difference between Yango's senior unsecured rating and its Long-Term Issuer Default Rating reflects the subordination of its unsecured debt to secured debt. Secured debt accounted for around 70% of Yango's total borrowing as of end-September 2017, and made up more than 80% of Fitch-estimated liquidation value. The proposed notes are rated at the same level as Yango's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received. Yango intends to use the net proceeds from the proposed US dollar senior notes mainly to refinance its existing debt. KEY RATING DRIVERS High Quality Land Bank: Fitch believes Yango's land bank, which was acquired at low cost and partly located in Tier 1 cities, will support its business scale growth and healthy profit margin. Yango had 16.4 million sq m of land available for sale by gross floor area (GFA) as of end-2016. This was sufficient for four years of development. Tier 1 cities accounted for 24% of its total land bank at end-1H17. The average cost of the company's land bank was CNY3,252 per sq m at end-2016, or about 21% of Fitch's expected contracted average selling price (ASP) in 2017. Yango's land bank is larger than most of the lower-leveraged homebuilder peers rated 'BB' and 'BB-'. Strong Growth in Contracted Sales: Yango's expansion strategy has resulted in a moderate-sized operation of CNY35 billion in contracted sales in 2016, based on our estimate. We estimate contracted sales will increase 90% to CNY67 billion in 2017 as the company has maintained strong sales despite a subdued domestic property market in 1H17. The rapid sales growth and steady cash collection has also been aided by the company's fast-churn business model and enhancements to its projects with education resources operated by its parent Fujian Yango Group Co., Ltd. Yango's business profile may strengthen materially if it is able to expand to over CNY100 billion in contracted sales, especially after top management changes in 1H17. Improving EBITDA Margin: We expect Yango's EBITDA margin to improve because of the strong appreciation of housing prices in Tier 1 and 2 cities, where most of Yango's land reserves are located. Yango's 2016 EBITDA margin of 23% is comparable to those of its peers. Its EBITDA margin stayed in the low-to-mid 20% range between 2013 and 2016. High Leverage Constrains Rating: Yango's aggressive land acquisition since 2015, in which sales receipts were almost entirely reinvested in acquiring land, has driven leverage up. Its net debt to inventory reached 68% by end-2016 and 69% at end-1H17. We do not expect leverage to come off in 2017 and expect only marginal improvement in 2018, given the company's plan to continue enlarging its scale to stay competitive. Fitch expects Yango's land acquisition pace, relative to its sales, to slow in 2018 as its land bank will hit around 26 million sq m by end-2017, which will give it four years of land reserve, based on its enlarged scale. DERIVATION SUMMARY Yango has larger scale in terms of contracted sales and higher EBITDA than 'B' rated Chinese homebuilders like Guorui Properties Limited (B/Stable), Hong Yang Group Company Limited (B/Stable) and Oceanwide Holdings Co. Ltd. (B/Negative), which have contracted sales of less than CNY15 billion. Yango and Oceanwide both have high leverage of around 70%, but Yango is likely to expand its sales and deleverage at a faster pace. Yango's scale is also growing faster than similarly sized Ronshine China Holdings Limited (B+/Stable), but its leverage is higher than Ronshine's around 50%. Yango's land bank is more diversified than Ronshine, Guorui, and Hong Yang, which explains why its contracted sales can increase much faster; unconstrained by specific market weaknesses. This faster sales growth will also support Yango's rapid improvement in its financial profile; supporting its Positive Outlook. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Replenishing land to maintain land bank life of around four years - Contracted sales to increase by 90% and 75% in 2017 and 2018 - EBITDA margin after adjusting for capitalised interest to remain stable in 2017, but increase to 25% in 2018 and 29% in 2019. Recovery rating assumptions: - Yango will be liquidated in a bankruptcy because it is an asset trading company - 10% administrative claims - All proceeds from the proposed offshore bond issuance are used to refinance the secured borrowing The liquidation estimate reflects Fitch's view of the value of inventory and other assets that can be realised and distributed to creditors. - We applied a haircut of 25% to adjusted inventory, in line with Yango's homebuilding peers - We assumed Yango's CNY3billion of pledged deposits are used to pay debt - We applied a haircut of 60% to Yango's available-for-sale assets Based on our calculation of the adjusted liquidation value, after administrative claims of 10%, we estimate the recovery rate of the offshore senior unsecured debt at 15%, which corresponds to a Recovery Rating of 'RR5'. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Achieving management's 2017 target for the amount of sales collected and on track to achieve the target for 2018 - Net debt/adjusted inventory falling to around 65% in 2018 and continuing to deleverage - Contracted sales/gross debt sustained above 1x from 2018 Developments that May, Individually or Collectively, Lead to Negative Rating Action - Failure to achieve the positive sensitivities over the next 12 months - Changes to the company's top management team resulting in disruption to its business strategy LIQUIDITY Tight Liquidity: Yango had CNY31 billion in cash and CNY17 billion in unused bank facilities at end-1H17, which is insufficient to cover negative free cash flow of around CNY20 billion and short-term debt of CNY33 billion. The company has plans to optimise its debt structure and extend debt maturity by using multiple funding channels, including equity financing, and issuance of offshore bonds and perpetual capital securities. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 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 on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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