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Fitch Affirms Vietnam's Vingroup at 'B+'; Outlook Stable
October 3, 2017 / 9:27 AM / in 18 days

Fitch Affirms Vietnam's Vingroup at 'B+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, October 03 (Fitch) Fitch Ratings has affirmed Vietnam-based property developer Vingroup JSC's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'B+' with Stable Outlook. The agency has also affirmed the company's senior unsecured rating at 'B+' with Recovery Rating of 'RR4'. The affirmation of Vingroup's ratings reflects the company's continued robust property sales, healthy performance of its retail malls and the resultant strong cash flows, which fund the aggressive expansion of its other businesses to a great extent, thus supporting steady leverage. Vingroup's rating is moderated by its aggressive expansion into consumer retail, such as supermarkets and convenience stores, which is likely to remain unprofitable in the near term, although it could bring long-term diversification benefits. Fitch believes that Vingroup will be better placed to withstand the cyclicality in property demand once its other businesses start to generate healthy operating cash flows. KEY RATING DRIVERS Property Sales to Remain Strong: Fitch expects Vingroup's property sales to remain robust over the next three to five years, supported by Vietnam's (BB-/Positive) strong macroeconomic growth outlook. The company's contracted sales rose to USD3.6 billion in 2016 from USD3 billion in 2015 due to the resurgence in property demand. Contracted sales were USD1.5 billion in 1H17. A large part of existing sales stem from the higher-end Vinhomes-branded villas and apartments, but the company expects its mid-market Vincity product to account for more sales in the future. Fitch expects the new product to attract demand from less-speculative end-users. Strong Macroeconomic Performance: We expect Vietnam's GDP growth to remain robust at 6.3% in 2017 and 6.4% in 2018, supported by a steady inflow of foreign direct investments, which is driving increased industrialisation. These trends are underpinned by the country's favourable demographics and rising incomes, and the government's policies, which appear to favour macroeconomic stability over growth. Other Businesses Expanding Rapidly: Vingroup is using the strong cash flows from its domestic property sales since 2015 and its retail mall business to fund rapid expansion in retail mall leasing, consumer retail, hospitality and other segments. The expansion into these other segments is driving strong revenue growth, but operating cash flows are lagging and will only improve once new retail outlets, such as supermarkets and convenience stores, break even, which takes about three years on average in the company's estimates. We currently expect Vingroup to spend around VND11 trillion (USD484 million) a year in capex in the next two years, to expand these other businesses, compared with the VND14 trillion it spent annually in 2015 and 2016. Satisfactory Financial Profile: We expect Vingroup's financial profile to remain satisfactory and in line with the parameters of its 'B+' ratings over the medium term. At end-2016, Vingroup's leverage, defined as net adjusted debt/adjusted inventory, increased slightly to 41% from 38% in the previous year. Cash collected from property sales/gross debt improved to 1.6x from 1.0x over the same period. We expect leverage and collections/gross debt to remain at around 50% and 1.0x, respectively, over the next few years. However, the financial profile may deteriorate faster if the company expands its other businesses more aggressively than we currently expect. DERIVATION SUMMARY Vingroup's rating compares well with peers such as Modern Land (China) Co., Limited (B+/Stable), Logan Property Holdings Company Limited (BB-/Stable) and PT Modernland Realty Tbk (B/Stable). Although Vingroup has a dominant position in its domestic market, its annual contracted sales are larger and its EBITDA margins are slightly higher than those of Modern Land China, the Chinese company has lower leverage and operates in a more stable market than Vingroup. Furthermore, Vingroup's ratings are limited by its aggressive expansion into retail and other businesses over the medium term. Fitch believes VIngroup will be better placed to weather a downturn in property markets once these other businesses start to generate operating cash flows. For these reasons Vingroup and Modern Land China are rated at the same level. Compared to Vingroup, Modernland Realty has a significantly smaller scale of operations, and around half of its contracted sales stem from the more volatile industrial property segment. However Modernland Realty is domiciled in Indonesia, which is a more mature market than Vietnam, and has stronger EBITDA margins than Vingroup on account of its lower-cost land bank. Still, Vingroup's significantly larger operating scale and leading domestic market position, supports a higher rating than Modernland Realty. Vingroup operates in Vietnam, which has a generally more risky macroeconomic environment than Indonesia (BBB-/Positive) and China (A+/Stable), where most of Vingroup's international peer-homebuilders are based. Compared with these other economies, Vietnam's property market is in a nascent stage of its development, having emerged only in 2015 from a sharp multi-year downturn. The improvement in demand was supported by new regulations that allow foreigners to own properties. Fitch believes that the proportion of property sales in Vietnam that is driven by investor demand rather than end-user demand is higher than for Indonesia and China, which can result in higher sales volatility during economic downturns. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Vingroup will have USD3 billion and USD3.5 billion of contracted sales in 2017 and 2018, respectively - The cost of construction will amount to VND78 trillion and VND85 trillion in 2017 and 2018, respectively - Retail business will continue to generate negative EBITDA in the next two years due to new store growth outpacing the turnaround in existing stores - Vingroup will have capex of around VND11 trillion a year in aggregate for all non-property business segments Key Recovery Rating Assumptions: - The recovery analysis assumes that Vingroup will be liquidated in a bankruptcy rather than continue as a going concern because it is primarily an asset-trading company - We have assumed a haircut of 25% for VND2.9 trillion in receivables, a 35% haircut on adjusted inventory of VND69.5 trillion (which is net of customer advances and loans received for the purpose of booking property units) and a 50% haircut on the VND26.1 trillion of property plant and equipment. - 10% administrative claims are applied on the liquidation value. - VND27.1 trillion of debt is secured against the company's fixed assets, while a further VND12.6 trillion is secured against shares and other non-fixed assets, which are treated as unsecured debt. - Based on the above, Fitch estimates that Vingroup's liquidation value will be able to cover 100% of the value of its secured and unsecured debt, corresponding to a 'RR1' Recovery Rating for its senior unsecured debt, after adjusting for administrative claims. Nevertheless Fitch continues to rate Vingroup's senior unsecured debt-class rating at 'B+' with a Recovery Rating of 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings criteria, Vietnam falls into 'Group D' of creditor-friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Net adjusted debt to adjusted inventory increasing to more than 60%, or - Cash collections from property sales to gross adjusted debt remaining below 1.0x on a sustained basis Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Net adjusted debt to adjusted inventory improving to below 40%, - The consumer retail business generating positive EBITDA, and - Vingroup generating positive consolidated free cash flows (consolidated cash flow from operations less capex less dividends) on a sustained basis LIQUIDITY Adequate Liquidity: At end-2016 Vingroup had VND2.9 trillion of approved but undrawn credit lines to cover VND5.6 trillion of debt maturing in the near term, and a cash balance of VND10 trillion. We expect Vingroup to post a free cash flow deficit for 2017 for which the company will need to seek external financing. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd South Tower, #22-11 One Raffles Quay Singapore 048583 Secondary Analyst Bernard Kie Associate Director +65 6796 7216 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Fitch excludes the profits attributable to minority interest from its EBITDA calculation, rather than dividends distributed to minorities, in order to account for structural subordination of cash flows of Vingroup. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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