Fitch: Aoyuan to Continue Strong Contracted Sales in China
Aoyuan's contracted sales increased by 73% yoy to CNY10.5bn in 1H16. Fitch estimates the homebuilder will exceed its sales target of CNY17.5bn-18bn in 2016, supported by CNY19bn of saleable resources in 2H16, and expects Aoyuan to continue increasing contracted sales in the next two years to above CNY20bn. The homebuilder has 61 projects with 13.8 million square metres (sq m) gross floor area, sufficient for five years of development.
The homebuilder is continuously optimising its land bank, with third tier or lower cities accounting for 23% of its land bank, compared with 28% six months ago. Aoyuan has also been consistently seeking opportunities to expand outside the city of Guangzhou, with contracted sales in the city dropping to 16% in 1H16, from 28% in 1H15.
Newly acquired projects demonstrate the homebuilder's ability to quickly churn out new projects at a decent margin, although some of the projects acquired a few years ago in weaker markets, such as in Yulin and Shenyang, have historical low sell-through rates and margins. The Foshan project, acquired in November 2015 with an average land cost of CNY9,300/sq m, is expected to sell at CNY23,000/sq m and the Shenzhen project, acquired in April 2016 with average land cost of CNY15,000/sq m, is expected to sell at CNY30,000/sq m. These projects, together with projects in Guangzhou, will form up to half of Aoyuan's 2H16 contracted sales. Fitch expects the company's gross margin to stay above 25% in 2017.
Aoyuan's leverage, measured by net-debt/adjusted-inventory, was 29.8% at end-1H16 (2015: 27%) and its sales efficiency, measured by contracted-sales/total-debt, improved slightly to 1.0x, from 0.9x. The homebuilder spent CNY2.5bn on land acquisition in 1H16, which is within Fitch's full year forecast of CNY6bn. The Positive Outlook on the homebuilder reflects the agency's expectation that the company will continue growing contracted sales while remaining disciplined about land acquisition and maintaining consistent leverage and profitability, in which case a rating upgrade will be taken into consideration.