September 6, 2017 / 3:07 AM / a year ago

Fitch Rates China Aoyuan's Proposed USD Notes 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG, September 05 (Fitch) Fitch Ratings has assigned China Aoyuan Property Group Limited's (BB-/Stable) proposed US dollar senior notes an expected 'BB-(EXP)' rating. The notes are rated at the same level as Aoyuan'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. KEY RATING DRIVERS Strong Sales Performance: Aoyuan's 1H17 total contracted sales increased by 57% yoy to CNY16.5 billion, after quadrupling to CNY25.6 billion in 2016 from 2012 as the company continued its fast-churn strategy. Fitch expects contracted sales to continue to increase in 2017, backed by CNY54 billion-60 billion of sellable resources, although the pace of growth is likely to be slower than in 2016. About 72% of Aoyuan's 1H17 contracted sales remained in China's Guangdong province, but the company is prudently exploring opportunities in other provinces and overseas. Stable Financial Profile: Maintaining healthy leverage despite rapid expansion sets Aoyuan apart from its fast-growing peers. Leverage, measured by net debt/adjusted inventory, was 33.2% at end-June 2017, a slight increase from 28.7% at end-2016. This gives the company healthy headroom below the 40% level where Fitch would consider negative rating action. We expect the ratio to remain stable at end-2017. Sales efficiency, measured by contracted sales in the last 12 months/gross debt, was stable at above 1.2x at end-June 2017. We expect Aoyuan to maintain its fast-churn model and prudent land acquisition strategy. This should keep its financial profile healthy for the next 12-18 months, supporting its credit profile. Adequate Land Bank: Aoyuan had 95 projects, with 17.1 million square metres (sq m) of gross floor area at end-June 2017, sufficient for four to five years of development. Around 20% of land bank by value is in lower-tier cities, but the percentage continues to decrease, with land bank quality improving 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 the city. Fitch considers contracted sales from these sites to be satisfactorily predictable, as they are easily accessible from Guangzhou and the company has a satisfactory execution record. Healthy Liquidity: Aoyuan has a strong liquidity position, which supports its planned expansion. Total cash was CNY13.7 billion at end-June 2017, against short-term debt of CNY10.0 billion. The company is also committed to improving its debt structure. Funding initiatives in the last few years, both onshore and offshore, and diversified funding channels improved its debt maturity profile and cut funding costs. The company's weighted-average funding cost was 7.6% at end-1H17, falling from 8.1% in 2016. We estimate that by end-2017 Aoyuan will retain its strong liquidity position and its funding cost will fall further to 7.5%. DERIVATION SUMMARY Aoyuan's contracted sales are comparable with other 'BB-' rated Chinese developers that have contracted sales of CNY25billion-30 billion. These peers include KWG Property Holding Limited (BB-/Stable), Logan Properties Holdings Company Limited (BB-/Stable) and CIFI Holdings (Group) Co. Ltd. (BB-/Positive). Aoyuan's sales efficiency ratio is also similar to that of fast-churn homebuilders, such as CIFI, Future Land Holdings Co., Ltd. (BB-/Positive) and Times Property Holdings Limited (B+/Positive). Aoyuan's net leverage of below 35% in the past several years is in line with that of Logan and CIFI, but compares favourably against KWG, which has leverage of 40%-42%, Yuzhou Properties Company Limited (BB-/Stable), with leverage of 38%-42%, and Times Property's 38%-40%. No Country Ceiling or parent/subsidiary aspects affect the rating. 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: - A stable land acquisition pace in 2017 and 2018 at 40%-50% of contracted sales - Increasing contracted sales, which are estimated on sellable resources in the next 12-18 months, although at a slower pace than in 2016 - A slightly higher average selling price for contracted sales 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: Developments that may, individually or collectively, lead to negative rating action include: - EBITDA margin sustained below 20% (end-June 2017, estimated at 23%) - Net debt/adjusted inventory sustained above 40% (end-June 2017: 33%) - Contracted sales/gross debt sustained below 1.2x (end-June 2017: 1.1x) - Decrease of total land bank sellable gross floor area to below 3.5x of annual contracted sales gross floor area for a sustained period Positive: Positive rating action is not expected unless Aoyuan substantially increases its scale and establishes core markets in multi-regions without compromising its financial metrics. This is not expected over the next 12-18 months. LIQUIDITY Healthy Liquidity: Aoyuan has a strong liquidity position, which supports its planned expansion. Total cash was at CNY13.7 billion at end-June 2017, against short-term debt of CNY10.0 billion. The company is also committed to improving its debt structure. Funding initiatives in the last few years, both onshore and offshore, and diversified funding channels improved its debt maturity profile and cut funding costs. Short-term debt accounted for only 21% of total debt at end-1H17 and the company's weighted-average funding cost was 7.6%, from 8.1% in 2016. 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 Rebecca Tang Associate Director +852 2263 9933 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 29 December 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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