(The following statement was released by the rating agency)
July 16 - Fitch Ratings has affirmed Hong Kong-based Evergrande Real Estate Group Limited’s (Evergrande) Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘BB’ with Stable Outlook. Fitch has also affirmed Evergrande’s foreign currency senior unsecured rating at ‘BB’.
The ratings reflect Evergrande’s limited track record on sustainable growth as the company has just completed its rapid expansion for the past three years. Fitch notes that the company’s ability to manage its enlarged scale is yet to be proven, having grown to 187 projects in 103 cities at end-2011 from 49 projects in 25 cities at end-2009.
The ratings also reflect Evergrande’s position as one of China’s largest property developers with geographical diversification and its rapid expansion. The company has been able to grow its portfolio quickly through its standardisation model - replicating property projects across its product range with slightly differentiated features. The ratings also take into consideration its ability to deliver its contracted sales targets in 2011 despite a challenging market environment. This was backed by a flexible pricing strategy and a low-cost land bank. Evergrande’s liquidity and funding capabilities remain satisfactory; the company maintained strong relationships with domestic banks throughout the tight liquidity environment in 2011.
Fitch expects Evergrande to slow down land bank acquisition in H212, following several land purchases in H112, and also to maintain financial prudence. Fitch expects this will leave it with adequate liquidity over the next 18 months. Evergrande had CNY20.1bn in unrestricted cash and CNY36.9bn in unutilised bank credit facilities at end-2011. Based on operating cash flow stemming from current contracted sales, Fitch expects Evergrande to maintain sufficient liquidity to fund development costs, land premiums, and debt obligations from 2012 to 2013.
The Stable Outlook reflects Fitch’s expectations that Evergrande will achieve stronger contracted sales in H212 compared with H112. Fitch expects the company to deliver similar contracted sales of CNY80.4bn for 2012 with more project launches, and to continue to focus on meeting its contracted sales target. This should lead to stable cash flows and liquidity for 2012.
What could trigger a rating action?
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 and EBITDA margin erosion below 15%
-aggressive debt-funded expansion leading to a higher net debt-to-adjusted inventory ratio, potentially from a significant shift in management’s risk appetite or financial policy, or from tightening liquidity due to a sustained fall in free cash flows or weakened access to financing channels
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- sustained positive free cash flow
- sustained stable growth and margins
However, positive rating action is not expected over the next 12-18 months as the company continues on a high growth trajectory, requiring external funding.