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Fitch Affirms Poly Real Estate at 'BBB+'; Outlook Stable
December 15, 2016 / 9:54 AM / a year ago

Fitch Affirms Poly Real Estate at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 15 (Fitch) Fitch Ratings has affirmed China-based Poly Real Estate Group Company Limited's (Poly) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. Poly's ratings benefit from a one-notch uplift due to the strong linkage with its parent, state-owned China Poly Group Corporation (China Poly), in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch has maintained the Outlook on Poly's standalone 'BBB' rating at Negative because potential acquisitions may put pressure on its leverage. The Negative Outlook on the standalone rating does not affect Poly's IDR and Outlook as the uplift for parental support will increase to two notches if the standalone rating is downgraded to 'BBB-'. KEY RATING DRIVERS Improving Financial Strength Fitch expects Poly's leverage, as measured by net debt/adjusted inventory, to increase to 41% at end-2016, after it declined to 38% at end-1H16 from 45% at end-2015. Poly has followed through with its commitment to deleverage by slowing land acquisitions, and it boosted contracted sales and maintained a strong cash collection rate amid robust market sentiment in 2016. The cash collection rate remained high at 98%-99% in 2015 and 2016 when conditions for mortgage loans were favourable. Poly's capital structure further strengthened following a private placement of CNY8.9bn of equity in June 2016. Uncertainties About Future Acquisitions Potential acquisitions of the property operations of state-owned enterprises (SOE) may pressure Poly's leverage in the next two years. In July 2016, Poly announced discussions between China Poly and Aviation Industrial Corporation of China (AICC) to restructure AICC's property business. The discussions included a proposal for Poly to buy around 70 projects from AICC for an amount not exceeding 15% of Poly's net assets. The purchases are part of China's plans to consolidate the real-estate sector, with Poly among the 21 SOEs with core business in property development that will buy the non-core property assets of central SOEs. Poly's leverage is likely to increase in the short term as a result of these acquisitions because the targets are usually sizeable. However, Fitch believes the additional assets will strengthen Poly's market position and land bank in the long term, with little impact on its margin and financial position, as the deals are likely to be negotiated at competitive market pricing. Fitch expects Poly's leverage to rise to 46% in 2017 and gradually trend down to 42% in 2018. Fitch will reassess Poly's standalone credit profile once full details of the AICC acquisition are announced. Revert to Sustainable Sales Growth Fitch expects Poly's contracted sales to increase by 10%-15% in 2017-2018, driven by acquisitions and organic growth. However, Poly's growth is likely to be slower than Fitch's estimate for 2016 of over 30% as increased policy intervention will curb speculative demand and keep volume and pricing stable in the higher-tier cities. Low supply and high costs of land in Tier-1 and 2 cities also raise land replenishment risk and incentivise developers to slow sales churn and preserve saleable resources in good locations. Poly's management intends to maintain the pace of land acquisitions (excluding M&A driven by real-estate consolidation), and its focus in Tier 1 and 2 cities, (including their satellite regions), which should help to keep a lid on replenishment costs. Poly's land bank is sufficient to support five years of contracted sales. Parental Support for Ratings Poly's ratings benefit from its strong operational and strategic linkage with its parent China Poly. China Poly provides significant funding support to Poly, including providing a keepwell deed for Poly's offshore debt issues. Poly is a core subsidiary of China Poly as its strong growth makes the latter the largest homebuilder among the 21 enterprises wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council. The parental support, however, does not raise Poly's ratings above the 'BBB+' level - which is the highest in China's homebuilding industry - as it is not sufficient to offset industry risk Leading Chinese Homebuilder Poly is one of China's top three homebuilders by contracted sales value. Poly's market share increased to 1.8% at end-2015 from 1.2% at end-2011. Its operation is sufficiently diversified across over 60 cities, with over 93% of its sales from Tier 1 and 2 cities in 2015 and 3Q16. Its large scale gives it strong operational and financial flexibility. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Acquisition of AICC's property business to close in 2017, with the transaction 100% financed via debt - Contracted sales by gross floor area (GFA) to increase 28% in 2016, 15% in 2017, and 10% annually from 2018, taking into account weaker market sentiment and growth from acquisitions - Average selling price of contracted sales to rise 5% in 2016 and 1% annually from 2017 as Poly diversifies into more lower-tier cities - Ratio of new land acquisitions to contracted sales GFA at 1.3x in 2016, and rise to 1.5-1.8x in 2017-2018 due to acquisitions. The ratio to fall to 1x in 2019 RATING SENSITIVITIES Future developments that may, individually or collectively, lead to negative action on Poly's ratings include: - Weakened linkage with China Poly due to government policy changes or a change in group strategy or policy Future developments that may, individually or collectively, lead to negative action on Poly's standalone ratings include: - Net debt/adjusted inventory sustained above 45% following acquisitions, - EBITDA margin sustained below 20% - Contracted sales / total debt sustained below 1.5x Future developments that may, individually or collectively, lead to positive action on Poly's ratings include: - 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. For its standalone ratings, we do not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade, as reflected in the Negative Outlook. However, if the above factors do not materialise, then the Outlook of its standalone ratings may revert to Stable. LIQUIDITY Ample Sources of Liquidity: Poly had CNY46.3bn in cash (CNY423m restricted cash) and access to CNY208bn of undrawn committed bank facilities at end-1H16. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2016-2018 due to its diversified funding channels and flexible land acquisition strategy. Poly's funding cost fell to 4.79% at end-September 2016 from 5.20% at end-2015 due to favourable interest rates in China and issuance of low-cost medium-term notes in onshore debt markets. FULL LIST OF RATING ACTIONS Poly Real Estate Group Company Limited (Poly) Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB+'; Outlook Stable Foreign-currency senior unsecured rating affirmed at 'BBB+' Poly Real Estate Finance Ltd Rating on USD500m 4.50% senior unsecured bond due 2018 affirmed at 'BBB+' Rating on USD500m 5.25% senior unsecured bond due 2019 affirmed at 'BBB+' The notes are unconditionally and irrevocably guaranteed by Hengli (Hong Kong) Real Estate Limited (Hengli), a wholly owned subsidiary of Poly, and they benefit from a keepwell agreement provided by Poly. Contact: Primary Analyst Fiona Zhang Associate Director +852 2263 9909 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +65 6796 7233 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016516 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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