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Fitch Assigns China Aoyuan's USD Notes Final 'BB-'
January 11, 2017 / 2:31 AM / a year ago

Fitch Assigns China Aoyuan's USD Notes Final 'BB-'

(The following statement was released by the rating agency) HONG KONG, January 10 (Fitch) Fitch Ratings has assigned China Aoyuan Property Group Limited's (Aoyuan; BB-/Stable) USD250m 6.35% senior notes due 2020 a final rating of 'BB-'. The notes are rated at the same level as Aoyuan's senior unsecured rating because they constitute the company's direct and senior unsecured obligations. The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 3 January 2017. KEY RATING DRIVERS Strong Sales Performance: Aoyuan's 2016 contracted sales increased 69% yoy to CNY25.6bn after tripling to CNY15.2bn in 2015 from 2012 under the company's continued fast-churn strategy. Fitch expects contracted sales to continue increasing in 2017 based on the company's project launch pipeline, although the pace of growth is likely to be slower than in 2016. About half of Aoyuan's 2016 contracted sales were still in Guangdong province, but the company is prudently exploring opportunities in other provinces and overseas. Stable Financial Profile: Aoyuan's healthy leverage despite its rapid expansion sets the company apart from its fast-growing peers. Leverage, as measured by net debt/adjusted inventory, was 29.8% at end-June 2016 and we expect the ratio to remain stable at end-2016. Fitch also estimates Aoyuan's sales efficiency, measured by contracted sales in the last 12 months/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 contracted sales have increased significantly. Fitch expects the company to continue exploring the acquisition of land in the Pearl River Delta, central China and Yangtze River Delta regions. 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 to remain less than 40% of contracted sales, which have increased; giving the company comfortable headroom for further land acquisitions. Adequate Landbank: Aoyuan had total sellable gross floor area of about 13 million square metres as of end-June 2016. Around 20% landbank by value is in lower-tier cities, but the percentage has continued to decrease and landbank 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 solid execution record. Slight Margin Decline: Fitch expects Aoyuan's EBITDA margin to gradually drop to between 20%-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 its larger operational scale. Healthy Liquidity: Aoyuan has a strong liquidity position, supporting 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 improving its debt structure. Onshore and offshore funding initiatives have diversified its funding channels, improved its debt maturity profile and reduced funding costs. Short-term debt accounted for only 21% of total debt at end-1H16 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 estimated on sellable resources in the next 12-18 months. Contracted sales to continue growing, 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: 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/gross debt sustained below 1.2x (end-June 2016: 1.0x) - Sustained decrease of total sellable gross floor area in the landbank to below 3.5x of annual contracted sales gross floor areas (12 months to end-June 2016: 5.6x) Positive: No positive rating action is 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. 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 Jenny Wenjun Huang Associate Director +852 2263 9922 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 (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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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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