December 14, 2016 / 8:26 AM / 8 months ago

Fitch Affirms China Overseas Land at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 14 (Fitch) Fitch Ratings has affirmed China Overseas Land & Investment Limited's (COLI) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed COLI's foreign-currency senior unsecured rating and the notes guaranteed by COLI at 'A-'. A full list of rating actions can be found at the end of this commentary. COLI's rating includes a one-notch uplift from its standalone rating of 'BBB+', in line with Fitch's bottom-up approach detailed in its Parent and Subsidiary Rating Linkage criteria. COLI is 61%-owned by China State Construction Engineering Corporation Ltd (CSCECL, A/Stable), the largest construction company in China, which is ultimately owned by the sovereign (A+/Stable). COLI's standalone rating of 'BBB+' reflects the company's strong contracted sales of HKD206.8bn for January-November 2016 (2015: HKD165.6bn) and its ability to maintain a strong EBITDA margin of 26%-27%. COLI has continued to maintain its leadership in the Chinese property market, and has a strong execution track record and consistent financial policy. The Stable Outlook reflects Fitch's expectation that COLI's operations will remain stable and integral to CSCECL. KEY RATING DRIVERS Homebuilding Operation of Strategic Importance: The operations of COLI and CSCECL are closely aligned with the Ministry of Housing and Urban-Rural Development's (MOHURD) duties in regulating and developing both construction and housing activities in urban and rural areas in China. As China's housing needs shift from building enough homes to providing comfortable housing, the complex and long-term task to upgrade China's old housing stocks, especially those built before 1990, will likely have to be spearheaded by state-owned enterprises (SOEs). CSCECL - with input from COLI - works closely with MOHURD in this area because it is the only SOE owned by the central government with the expertise and market-leading positions in both construction and housing. Increase Saleable Resources: Fitch expects the increase in saleable resources following asset injections by CSCECL and the acquisition of the property portfolio from CITIC Limited to support COLI's contracted sales growth in 2017. Fitch estimates COLI's attributable land bank increased by 35%-37% to around 48 million square metres (sq m) after the completion of the CITIC deal in September 2016. The estimate excludes the sale of property assets to subsidiary China Overseas Grand Oceans Group Ltd. (BBB/Stable), which is likely to complete by the end of December. COLI's contracted sales rose 24.8% yoy in the first 11 months of 2016, and we believe it remains on track to meet its 2016 contracted sales target of HKD210bn. Strong Cash Generation: Fitch expects COLI's leverage, as measured by net debt/adjusted inventory, to be 7%-10% at end-December 2016, a slight increase from 5.6% in December 2015, despite its large land acquisitions. COLI's leverage is low compared with other 'BBB' category Chinese homebuilders. COLI is the only leading Chinese homebuilder to have achieved a net cash position in 1H16. COLI's strong operating cash generation in 2015 and so far in 2016 has substantially offset the impact on its leverage from the acquisition of the property portfolio from CITIC Limited, which has a relatively high leverage. We believe COLI will continue to replenish the land for projects sold, but is under no pressure to build up its land bank. The current land bank is sufficient to support sales for the next three to four years. Diversified Funding Enhances Liquidity: COLI also has one of the lowest borrowing costs among Chinese homebuilders. Its weighted average borrowing cost was 4.0% at end-June 2016, compared with 4.2% at end-2015. Its low funding costs are the result of access to the offshore bond and loan markets, and its SOE status, which aids access to domestic funding. COLI continues to maintain a strong liquidity position and had HKD9.8bn in undrawn committed bank facilities and cash balance of HKD118bn at end-June 2015. Strong Business Profile Maintained: COLI continued to generate high EBITDA margins of 26% in 1H16 and 27% in 2015, even as margins in the industry have fallen to the 25% range from 30% in previous years. COLI's strong branding and its presence in high-growth economic zones around the Pearl River Delta, Yangtze River Delta and Bohai Rim, and key cities in western China like Chongqing and Chengdu puts it in a strong position to benefit from the shift towards demand from upgraders seeking better housing. This is demonstrated by its firm average selling price (ASP), which has remained between CNY15,000 and CNY17,000 per sq m, compared with the ASP of most nationwide homebuilders that were between CNY10,000 and CNY15,000. No Impact from Management Changes: Fitch believes the change in CEO will not impact COLI's rating. Mr Hao Jian Min in November 2016 resigned as chairman and CEO, and Mr Xiao Xiao was appointed to take over as chairman and Mr Yan Jianguo as CEO. In Fitch's view, COLI has a strong management and operation team in place that continues to deliver superior operational efficiency. COLI has demonstrated a solid track record for over 30 years in the Chinese homebuilding sector. Outlook Stable: Fitch expects COLI will maintain its leadership position in the Chinese residential homebuilding market, with a clear focus on first-time homebuyers and upgraders; continue to use its operational and financial flexibility; and continue to grow at a moderate pace in the highly competitive and cyclical Chinese property market. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Contracted sales by gross floor area to increase by 0%-10% annually over 2016-2018; - Average selling price for contracted sales to rise by 5%-15% annually for 2016-2018; - EBITDA margin of around 26%-29% in 2016-2018 RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Unfavourable changes to China's regulation or economy leading to a decline in contracted sales; or -Weakening linkages between COLI, the parent company and the central government; or -Decline in EBITDA margin to less than 25% (2015: 26.8%, 1H16: 26.3%); or -Deterioration in net debt/adjusted inventory to above 30% over a sustained period (2015: 5.6%, 1H16: -3.6%); or - Contracted sales/ net inventory remaining below 0.8x over a sustained period (2015: 0.6x, 1H16: 0.7x); or - Significant change from its current focus on first-time homebuyers and upgraders. 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 Overseas Land & Investment Limited - Long-Term IDR affirmed at 'A-'; Outlook Stable - Senior unsecured rating affirmed at 'A-' China Overseas Finance (Cayman) III Limited - USD500m 3.375% senior unsecured notes due 2018 affirmed at 'A-' - USD500m 5.375% senior unsecured notes due 2023 affirmed at 'A-' - USD500m 6.375% senior unsecured notes due 2043 affirmed at 'A-' China Overseas Finance (Cayman) VI Limited - USD800m 4.250% senior unsecured notes due 2019 affirmed at 'A-' - USD700m 5.950% senior unsecured notes due 2024 affirmed at 'A-' - USD500m 6.450% senior unsecured notes due 2034 affirmed at 'A-' China Overseas Land International (Cayman) Limited - EUR600m 1.75% senior unsecured notes due 2019 affirmed at 'A-' Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Fiona Zhang Associate Director +852 2263 9909 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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