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Fitch Affirms Poly Developments and Holdings at 'BBB+'; Outlook Stable

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Fitch Affirms Poly Developments and Holdings at 'BBB+'; Outlook Stable Fitch Affirms Poly Developments and Holdings at 'BBB+'; Outlook Stable 13 Dec 2018 05:37 AM ET Fitch Ratings-Hong Kong-13 December 2018: Fitch Ratings has affirmed Poly Developments and Holdings Group Co., Ltd.'s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency senior unsecured ratings and its rated issues at 'BBB+'. Poly's ratings benefit from a one-notch uplift due to the moderate linkages with its parent, state-owned China Poly Group Corporation (China Poly), in line with Fitch's Parent and Subsidiary Rating Linkage criteria. The ratings on Poly are supported by the company's solid business profile, which is evident in its good-quality land bank that focuses on Tier 1 and 2 cities, and large scale. Poly's growing non-development business also provides steady income that strengthens the company's debt service ability. The ratings are constrained by Poly's rising leverage, measured by net debt/adjusted inventory, which reached 59% by end-June 2018, following rapid expansion in 2017 and slow cash collection in 1H18. Fitch expects the company to deleverage in the coming years. KEY RATING DRIVERS Leverage to Fall After Peaking: We expect Poly's leverage, as measured by net debt to adjusted inventory, to remain above 55% in 2018 but to decline from 2019, underpinned by cash collection rate recovery, and slower land replenishment to support moderate sales growth of 5%-10% a year. Leverage peaked at an estimated 59% in 1H18, from 51% in 2017 and 36% in 2016, as Poly's rapid expansion put pressure on the company to replenish land to sustain sales growth. The higher 1H18 leverage was also caused by faster tax payment and lower trade payables totalling CNY19 billion. This contributed to almost all of the CNY20 billion net debt increase. The cash collection rate fell to 79% in 1H18 from 86% in 2017 and 99% in 2016, which slowed Poly's deleveraging. Strong sales in May and June (CNY96 billion) that would only see cash collection in 2H18, and delays in bank loan disbursements amid tighter home purchase restrictions kept the 1H18 cash collection rate low. The collection rate recovered to 86% in 9M18. Poly's land replenishment ratio, as measured by newly acquired gross floor area (GFA)/presold GFA, fell to 1.2x in 9M18 from 1.8x in 2017, and total land premium fell to 54% of total contracted sales value from 93% in 2017. The slower land acquisition pace will allow Poly to deleverage from 2H18. Healthiest Current Liability Among Peers: Poly relies much less on working capital than other large Chinese homebuilders, which take advantage of their strong bargaining power in the supply chain to obtain more favourable payment terms with their contractors and suppliers. Poly's payables-to-adjusted inventory was estimated at only 14%, compared with investment-grade peers' average of 38% at end-2017. This also partly explains why Poly has a higher-than-peer leverage. We believe Poly will face the least financial pressure in the event deterioration in the industry forces developers to reduce the use of vendor credits because their suppliers are also likely to face higher liquidity pressure. Quality Land Bank Secures Growth: Poly's contracted sales grew 46% yoy to CNY304 billion in 9M18, following 47% growth in 2017. The sales were driven by transactions in Tier 2 cities that were mainly located in the Pearl River Delta and Yangtze River Delta. Fitch expects the company's strong presence in Tier 1 and 2 cities, ample saleable resources and favourable product mix to support sales growth and allow it to maintain healthy, albeit reduced, profitability of over 25%. Poly had 144 million sq m of land at end-June 2018, sufficient to support development for the next four to five years. Parental Support for Ratings: Poly's ratings benefit from its moderate operational and strategic linkages with its parent, China Poly. Poly is a core subsidiary of China Poly, and its strong growth makes China Poly the largest homebuilder among the 98 enterprises wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council. Poly will continue to serve as a key platform among the 21 state-owned property enterprises designated in 2011 to buy non-core property assets from other enterprises owned by the central government. Poly finished its acquisition of 20% of Poly Property Group in June 2018, which marks the completion of the property business consolidation within China Poly, and solves the longstanding issue of internal competition. With the consolidation, Poly will lead new property development projects in China (excluding Hong Kong and Macau). Growing Non-Development Business: We expect Poly's diversified operations to improve the company's debt servicing ability, with non-development EBITDA over interest expense to remain at 0.3x-0.4x in the next few years. Income from the company's non-property development businesses, including investment properties, property management and community consumer services, increased 64% yoy in 1H18 to CNY5.4 billion and we estimate EBITDA grew 30% to CNY2 billion. Poly has been expanding its investment property business, with book value at CNY17 billion at end-2017 compared with CNY11.7 billion at end-2016. DERIVATION SUMMARY Poly's leverage is the highest among peers in the 'BBB' rating category, such as China Vanke Co., Ltd. (BBB+/Stable), China Overseas Land & Investment Limited (A-/Stable; standalone: BBB+/Stable), China Resources Land Ltd (BBB+/Stable) and Country Garden Holdings Co. Ltd. (BBB-/Stable). However, Poly's leverage relies much less on working capital, while peers take advantage of their strong bargaining power in the supply chain to obtain more favourable payment terms with their contractors and suppliers. Poly's leverage after working capital adjustment is estimated to be similar as that of Vanke but much lower than that of Country Garden. Poly's margin of over 25% is comparable with those of China Overseas Land and China Resources Land and beats Country Garden's less than 20%, as the latter adopts a higher churn model and lower-tier cities make up a significant part of its sales. Poly's ratings are supported by its good-quality land bank that focuses on Tier 1 and 2 cities and its large scale. Poly's expanding non-development business also provides income that boosts its debt service ability, with its EBITDA interest cover remaining at 0.3x-0.4x, higher than that of Country Garden. Poly's ratings benefit from a one-notch uplift due to its moderate linkage with its parent, state-owned China Poly, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Contracted sales by GFA to increase by 20% in 2018 and 5% annually from 2019, taking into account negative market sentiment in 2019 - Average selling price of contracted sales to grow 5% in 2019 and 2% beyond, considering Poly's focus on Tier 2 cities - Ratio of acquired GFA/contracted sales GFA at 1.3x in 2018 and 1.0x from 2019, which will support a land bank life of four to five years (9M18: 1.2x) - Cash collection rate of 85% in 2018 and 88% in 2019, assuming the company faces less cash collection pressure when sales growth slows (2017 and 9M18: 86%) RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Fitch would consider positive rating action if the company was able to expand its scale without compromising its financial profile, with net debt/adjusted net inventory ratio sustained below 40% Developments That May, Individually or Collectively, Lead to Negative Rating Action Issuer Default Rating: - Weaker linkage with China Poly due to government policy changes or a change in group strategy or policy Standalone credit profile: - Any increase from Poly's 2018 leverage level without corresponding offset in its payables to inventory ratio - EBITDA margin below 25% for a sustained period - Contracted sales/total debt below 1.5x for a sustained period LIQUIDITY Ample Sources of Liquidity: Poly had CNY96 billion in unrestricted cash and access to CNY190 billion of undrawn bank facilities at end-9M18 (these facilities are uncommitted; committed facilities are uncommon in the Chinese banking environment). Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations due to its diversified funding channels and flexible land acquisition strategy. Poly's average funding cost stayed low at 4.9% at end-1H18, little changed from 4.8% in 2017 despite the tighter credit environment, benefiting from the company's state-owned entity background. FULL LIST OF RATING ACTIONS Poly Developments and Holdings Company Limited - Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB+'; Outlook Stable - Foreign-currency senior unsecured rating affirmed at 'BBB+' Poly Real Estate Finance Ltd. - Rating on USD500 million 5.25% senior unsecured bond due 2019 affirmed at 'BBB+' - Rating on USD500 million 4.75% senior unsecured bond due 2023 affirmed at 'BBB+' - Rating on USD500 million 3.95% senior unsecured bond due 2023 affirmed at 'BBB+' The notes are unconditionally and irrevocably guaranteed by Hengli (Hong Kong) Real Estate Limited, a wholly owned subsidiary of Poly, and they benefit from a keepwell agreement provided by Poly. Contact: Primary Analyst Adrian Cheng Director +852 2263 9968 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Lulu Shi Associate Director +86 21 6898 8003 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: [email protected] Additional information is available on www.fitchratings.com .
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