The FINANCIAL -- Hong Kong-19 July 2011: 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 affirmation reflects Evergrande's position as one of China's largest property developers with geographical diversification. It also reflects its ability to continue to deliver and meet its sales targets in 2nd and 3rd tier cities, backed by a flexible pricing strategy and low-cost land bank. Their liquidity and funding capabilities remain satisfactory. These strengths are countered by its aggressive expansion and by the fact that it is being controlled by a single shareholder.
Evergrande's strategy of targeting third-tier cities has allowed it to avoid the full impact of the government's residential property tightening measures; including home purchase restrictions in over 35 main Chinese cities, and underpinned its strong sales performance to date. Contracted sales increased to CNY8.5bn in June 2011 from CNY4.5bn in February 2011. As more projects are being launched in third-tier cities, average selling prices (ASP) have weakened to CNY6,849 per sqm in June 2011 from CNY7,212 per sqm in March 2011. Nevertheless, for H111 ASP grew 10% yoy to CNY6,918 per sqm.
Fitch believes the company's focus on driving sales volumes through modest price discounting is a prudent strategy to protect itself against the risk of liquidity shortfall in a credit-tightening environment. Fitch expects Evergrande to maintain financial prudence and to slow down land bank acquisition in H211 given the current weakening environment, leaving it with adequate liquidity over the next 18 months. Evergrande had CNY12.4bn in unrestricted cash and CNY33.25bn in unutilised bank credit facilities at end-2010. Based on the operating cash flow stemming from Evergrande's current contracted sales performance, Fitch expects Evergrande to maintain sufficient liquidity to fund its development costs, land premiums, and debt obligations from 2011 to 2013.
The Stable Outlook reflects Fitch's expectations that the company will continue to deliver contracted sales growth in H211 and meet its full-year contracted sales target of CNY70bn and, possibly, the unofficial CNY100bn target for 2011 (as mentioned on the company's website). Although the recent home purchase restrictions have affected sales volume and overall prices, Fitch does not expect any material impact on Evergrande's cash flows and liquidity position in 2011.
Negative rating action may result from unfavourable changes in China's regulation or economy leading to a decline in contracted sales and EBITDA margin erosion to below 15%. Downward pressure may also arise from aggressive debt-funded expansion leading to the net debt-to-inventory ratio exceeding 25%, from a significant shift in management's risk appetite or financial policies, or from tightening liquidity due to a sustained fall in free cash flows or weakened access to financing channels.
Positive rating action is not expected over the next 12-18 months due to the highly cyclical and inherently volatile cash flow of the industry, high regulatory risks in the Chinese property sector and a lack of significant contribution from rental income.
Related Stories
