Fitch Rates China Aoyuan's Proposed USD Notes 'B+(EXP)'
OREANDA-NEWS. Fitch Ratings has assigned China Aoyuan Property Group Limited's (Aoyuan; B+/Positive) proposed US dollar senior notes a 'B+(EXP)' expected rating and Recovery Rating of 'RR4'.
The notes are rated at the same level as Aoyuan's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received.
The Chinese homebuilder's ratings are supported by its continued business expansion with moderate leverage and sufficient liquidity. The ratings are constrained by the high level of non-residential properties in the product mix and lower tier city exposure in its land bank.
KEY RATING DRIVERS
Improving Operational Strength: Aoyuan's contracted sales continued to increase in 1Q16, rising 42% from a year earlier. Fitch estimates Aoyuan's contracted sales is on track to reach CNY18bn in 2016 and CNY20bn in 2017, based on its plans for project launches. Aoyuan will be about four times as large as it was in 2012, mainly because it consistently increased the number of properties ready for sale and it executed projects well. Its larger scale gives the company a more stable sales base and greater financial flexibility in making land acquisitions.
Continued Geographic Diversification: In 2015, Aoyuan continued to carry out its fast-churn strategy, especially in projects outside of its home market of Guangdong and overseas. The share of contracted sales from Guangdong province dropped to 44% in 2015 from 67% in 2014, and the increase in sales was mainly driven by newly acquired projects in Guangxi, Anhui and Zhuhai, as well as overseas projects in Australia. Projects and land in these new regions were acquired in early and mid-2015 and have already contributed CNY4.5bn in contracted sales by end-2015, or about 30% of total sales volume.
Disciplined Land Acquisition: Fitch expects Aoyuan to maintain its current pace of land acquisitions, and the land premium for 2016-2017 will not exceed CNY6bn a year, or less than a third of its estimated full-year contracted sales. Aoyuan has purchased land at a stable pace of CNY4bn-5bn a year in the last six years, even though its contracted sales increased significantly.
Stable Financial Profile: Aoyuan's financial profile remained healthy at end-2015. Leverage, as measured by net debt/adjusted inventory, was 28% at end 2015, and sales efficiency, measured by contracted sales/total debt, remained around 1.0x. Fitch expects Aoyuan will continue to maintain its fast-churn model and prudent land acquisition strategy, thus its financial profile will stay healthy in the next 18 months, which will support its credit profile.
Low-Tier City Exposure, Low ASP: Aoyuan's leadership in its core markets in Guangdong Province has supported steady growth in contracted sales, and provides a strong base for expansion into other cities. However, the contracted average selling price is lower compared with peers' due to its higher exposure in lower-tier cities. The quality of Aoyuan's land bank is key to whether it will be able to sustain the growth in contracted sales. About 28% of Aoyuan's land bank is in cities in Tier 3 and below. Management has said that Aoyuan will target land replenishment in higher-tier cities, such as Guangzhou, Shenzhen and Zhuhai, to improve the quality of its land bank. Fitch believes Aoyuan's land replenishment in 2016 will be important for its future growth, considering its current land bank structure and the risks associated with it
Fitch's key assumptions within our rating case for the issuer include:
- Pace of land acquisitions to be stable in 2016/17
- Contracted sales are estimated based on properties available for sale in 2015 and the sell-through ratio. Contracted sales to reach close to CNY20bn by 2017.
- The company's average selling price for its contracted sales will be slightly lower in 2016-2017 due to the changes in its product mix and geographic distribution.
- The company will maintain its fast-churn and high cash-flow turnover business model
Positive: Future developments that may individually or collectively, lead to positive rating action include:
- Continued expansion with contracted sales rising to more than CNY18bn
- EBITDA above 25% on a sustained basis
- Maintaining the ratio of net debt to net adjusted inventory below 35% on a sustained basis
- Maintaining the ratio of contracted sales to gross debt above 1.0x on a sustained basis;
- No substantial increase of contracted sales contribution from retail properties.
Negative: Future developments that may individually or collectively, lead to negative rating action include:
- Failing to maintain the positive guidelines will lead to the Outlook reverting to Stable