Fitch: Sunac's Planned Acquisition Enhances Operational Depth
The purchase, if it proceeds, will strengthen Sunac's operational depth in cities it has newly entered in the past year. The target projects are mainly located in tier-2 cities and mostly the same cities Sunac plans to expand in.
However, Fitch would consider rating action if the company's expansion increased its leverage sustainably above 45%, as measured by net debt/adjusted inventory. This transaction, together with Sunac's aggressive land acquisition in 2H16, has rapidly raised the company's leverage to over 40% (end-2015: 26%).
A further increase in leverage could be mitigated by the homebuilder's high sales efficiency, which it maintains at 1.0x, as measured by attributable contracted sales/total debt. From a liquidity perspective, only CNY1bn of the consideration would need to be paid in September 2016. The next instalment would be due in December 2016 and the majority of the consideration would be paid in 2017. Fitch expects Sunac's cash inflow from its strong pre-sale cash collection to improve its net-debt position during the instalment period.
Fitch believes Sunac may be able to maintain its leverage at a relatively high but reasonable level if it slows down its expansion pace in the next few months.