Fitch: Yuexiu Property Deleverages On Strong Sales, Prudent Land Replenishment
YXP's leverage, or net debt/adjusted inventory, decreased to 30.7% in 1H16 (2015: 34.7%) as it reduced new-land purchases and sought development collaborations by selling stakes in projects to partners.
The land replenishment rate, measured by the ratio of GFA acquired to contracted sales GFA, on total basis remained low at around 0.2x in 1H16. Yuexiu has spent CNY1.2bn in the year to date on three land parcels in Guangzhou and Hangzhou, and Fitch expects the company's full-year land expenditure to remain under 25% of total contracted sales. The slow acquisition pace is consistent with company's prudent strategy and showed management's concern of the overheated land market.
Fitch believes YXP has sufficient land bank for development even though it slowed land acquisition and sales have risen. YXP has 13.7 million square metres (sqm) of gross floor area (GFA) in its land bank at end-1H16, of which 88% was in Tier 1 and 2 cities. This is sufficient for more than six years' of development.
YXP's contracted sales rose 39.5% to CNY16bn in 1H16 and we believe this pace of growth can be sustained, based on its plans for project launches in 2016. Yuexiu Property has around CNY33bn of saleable resources for 2H16 onwards. The stronger sales and low debt levels have driven up its sales efficiency, as measured by contracted sales /total debt, to 0.88x in 1H16 from 0.65x in 2015.
The property company's EBITDA fell 39% to CNY764m in 1H16 on slow revenue recognition but its EBITDA margin widened to 15% in 1H16 from a historical low of 14% in full-year 2015. The thin margin since 2015 also reflected in its lower recognised average selling price (ASP) of CN9,500 per sqm in 1H16 and CNY10,586 in 2015, compared with the average recognised ASP of CNY13,671 between 2012 and 2014, as well as the contracted sales ASP of CNY12,080 in the same period. Fitch expects the EBITDA margin to stabilise at 15%-16% for the next 18 months, supported by its quality land bank for which demand is resilient and stable sales of projects outside Guangzhou.
Rental income increased 37.1% to CNY233m while recurring EBITDA interest coverage continued to improve to 0.3x in 1H16 (2015: 0.28x, 2014:0.21x). Yuexiu Financial Tower started pre-leasing in 2015 and occupancy reached 75% at end-2Q16. With the Guangzhou Nanhai Starry Winking project starting to contribute rental income in 2017, Fitch expects recurring EBITDA interest coverage to stay above 0.3x over the next 18-24 months.