OREANDA-NEWS. Fitch Ratings has affirmed China Vanke Co., Ltd's (Vanke) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency and local-currency senior unsecured ratings and the ratings on its outstanding notes at 'BBB+'.

The notes issued by Bestgain Real Estate Limited and Bestgain Real Estate Lyra Limited are also affirmed at 'BBB+'. These notes are jointly and severally guaranteed by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), a wholly owned subsidiary of Vanke.

The full list of rating actions is at the end of this commentary.

The affirmation reflects Vanke's maintenance of a healthy financial profile even as contracted sales consistently increased by CAGR of 22% since 2007 to reach CNY261bn in 2015. The company continues to be China's largest homebuilder by sales. Its EBITDA margin stabilised around 22%, while its churn rate, as measured by contracted sales to gross debt, strengthened to 3.1x in 2015 from 2.9x in 2014. Leverage, as measured by net debt to adjusted inventory, remained very low at 12.6% compared with peers in the industry, even though it rose from the unusually low 3.0% in 2014.

KEY RATING DRIVERS

Robust Business, Financial Profile: Fitch expects Vanke to maintain its leadership in the Chinese residential homebuilding market, where sales volume is sustainable at the current level due to firm housing demand from first-time homebuyers and upgraders. Vanke's operational advantages from its scale, strong execution ability and healthy financial profile give it flexibility to control business risks in the highly competitive and cyclical Chinese homebuilding market. These factors support the Stable Outlook on the ratings.

Healthy Cash-Flow Generation: Improved recovery of sales proceeds and stable margins support Vanke's superior cash-flow generation. Vanke's sales-proceeds recovery rate is one of the highest in the industry - the rate increased to around 95% in 2015 from 90% in 2014 and 86% in 2013. EBITDA margin was stable at 22.6% compared with 22.0% at end-2014 despite poor demand and market sentiment, which put pressure on profit margins across the industry. Fitch expects Vanke to maintain the current sales-proceeds recovery rate and margin in next 24 months.

Superior Churn, Low Leverage: Fitch expects Vanke to stay with its high-turnover model, with the ratio of contracted sales to total debt sustained above 2x, and leverage sustained below 20% over the next 24 months. Leverage rose to 12.6% in 2015 from 3.0% in 2014. This level remains very low relative to investment-grade-rated peers, and also comparable with Vanke's average leverage of 12.9% between 2011 and 2013. Leverage was low in 2014 because Vanke reduced land acquisitions.

Increased Corporate Actions: Fitch believes that Vanke will continue to explore opportunities to enhance its industry leadership position and strengthen its land bank position. For example, it announced a memorandum of understanding with Shenzhen Metro Group Co., Ltd. (SZMC) on 14 March 2016 to acquire SZMC's property assets in exchange for Vanke shares. Vanke's 2015 dividend payout ratio rose to 43.87% from 35.05% in 2014 and 31.54% in 2013. Fitch views the increased payout as credit neutral because Vanke's cash-flow generation is strong and is supported by its healthy financial profile.

Falling Funding Cost: Vanke has reduced its average funding cost in 2015 to 6.5% from 7%-8% in 2014 because the proportion of bank loans and bonds with lower interest costs increased to 70% of total debt from 56.8% in previous years. Vanke's funding cost is still higher than the 3%-6% for other Chinese homebuilders rated in the 'BBB' category (those rated 'BBB-', 'BBB' and 'BBB+'), which are mostly state-owned enterprises that enjoy cheaper funding. Vanke's shareholders are more fragmented, with the largest shareholder holding 24.26% of the company, and the majority of its shareholders are not state-linked.

Sector Risks Constrain Ratings: Fitch views the global property sector as highly cyclical. In addition, the Chinese homebuilding market continues to be policy and regulation driven, with the government aiming to maintain affordable housing prices for the general public and to curb speculative demand.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Contracted sales by gross floor area to increase by 0%-7% over 2016-2018;
- Average selling price for contracted sales to increase by 0%-3% over 2016-2018;
- EBITDA margin of 20%-22% in 2016-2018

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Unfavourable changes to China's regulations or economy leading to a decline in contracted sales; or
- Decline in EBITDA margin to below 20% (2015: 22.6%); or
- Increase in net debt/adjusted inventory to above 30% over a sustained period (2015: 12.6%); or
- Contracted sales/total debt remaining below 1.75x over a sustained period (2015: 3.1x); or
- Deviation from its current focus on mass-market housing business and operational model

Positive: 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.

FULL LIST OF RATING ACTIONS

China Vanke Co., Ltd's
- Long-Term Foreign-Currency IDR affirmed at 'BBB+', Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB+', Outlook Stable
- Foreign-currency senior unsecured rating affirmed at 'BBB+
- Local-currency senior unsecured rating affirmed at 'BBB+

Bestgain Real Estate Limited
- USD800m 2.625% senior unsecured notes due 2018 affirmed at 'BBB+'

Bestgain Real Estate Lyra Limited
- USD2bn medium-term note programme affirmed at 'BBB+'
- CNY1bn 4.05% senior unsecured notes due 2016 affirmed at 'BBB+'
- CNY1bn 4.500% senior unsecured notes due 2018 affirmed at 'BBB+'
- USD400m 4.500% senior unsecured notes due 2019 affirmed at 'BBB+'