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Fitch Rates China Vanke's USD Senior Notes Final 'BBB+'
December 28, 2016 / 2:14 AM / a year ago

Fitch Rates China Vanke's USD Senior Notes Final 'BBB+'

(The following statement was released by the rating agency) HONG KONG, December 27 (Fitch) Fitch has assigned China Vanke Co., Ltd.'s (Vanke, BBB+/Stable) USD600m 3.95% senior notes due in 2019 a final rating of 'BBB+'. The notes are issued by Bestgain Real Estate Lyra Limited and guaranteed by Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), a wholly owned subsidiary of Vanke. The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 15 December 2016. Vanke's ratings are supported by its maintenance of a healthy financial profile even as contracted sales 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 improved to 24.9% in 1H16 from 22.6% in 2015 and 22.0% in 2014, while its churn rate, as measured by contracted sales to gross debt, strengthened to 3.0x in 2015 from 2.9x in 2014. Leverage, as measured by net debt to adjusted inventory, remained very low at 8.2% in 1H16 compared with peers in the industry. KEY RATING DRIVERS Robust Business, Financial Profile: Fitch expects Vanke to maintain its leadership in the Chinese homebuilding market, where sales volume is sustainable at the current level due to firm 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 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 improved to 24.9% in 1H16 from at 22.6% in 2015 and 22.0% in 2014. 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 improved to 8.2% in 1H16 from 12.6% in 2015. This level remains very low relative to investment-grade-rated peers, and comparable with Vanke's average leverage of 12.9% between 2011 and 2013. Increased Corporate Actions: Fitch will continue to monitor the progress of the company's restructuring plan, particularly when the new shareholder starts to exert significant influence on Vanke's operations. Fitch will evaluate the impact of these developments on management's focus on the company's operation, and the sustainability of the company's business and financial profile. Fitch believes that the evolving shareholder structure has not yet had material impact on the operation of Vanke, based on 1H16 performance and contracted sales in the year to date. Falling Funding Cost: Vanke 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% previously. 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 25.4% 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% (1H16: 24.9%;); or - Increase in net debt/adjusted inventory to above 30% over a sustained period (1H16: 8.2%); or - Contracted sales/total debt remaining below 1.75x over a sustained period (1H16: 3.0x); 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 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 Chloe He Associate Director +852 2263 9967 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 18 April 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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