On July 15, Fitch confirmed that China overseas Development Co., Ltd. (China Overseas Land & Investment Limited, referred to as "China overseas Development", 00688.HK) is rated as "A -" for its long-term issuer default rating (IDR), foreign currency senior unsecured rating and senior unsecured notes guaranteed by China overseas Development. IDR looks forward to "stability".
China's overseas development rating reflects the support of its ultimate parent company, China Construction Corporation (China State Construction Engineering Corporation Ltd.,), which provides support to China overseas Development's direct parent company, China overseas Group Co., Ltd. (China Overseas Holding Limited, referred to as "China Shipping Group"), and flows to China's overseas development.
China's overseas development has always maintained a leading position in China's real estate market, as well as a good implementation record and financial policies. The "stable" outlook reflects Fitch's expectation that China's overseas development business will remain stable and become an integral part of China Shipping Group and China Construction.
Key rating drivers
The strategic importance of the residential construction business:China's overseas development and Chinese construction business are closely related to the responsibilities of the Ministry of Housing and Urban-Rural Development of the people's Republic of China (China's Ministry of Housing and Urban-Rural Development) in regulating and developing China's urban and rural construction and housing activities. State-owned enterprises (SOE) are leading the upgrading of China's pre-1990 stock of housing as it shifts from simply building to meeting housing demand to providing comfortable housing, a cumbersome and time-consuming task. Through the import of overseas development from China, China Construction works closely with the Ministry of Housing of China, and is the only state-owned enterprise with expertise and market leadership in the field of construction and housing.
Strong business conditions remain the same:China's overseas development has an adjusted EBITDA profit margin of 30.9% in 2019, which is at a higher level among large peers. With its strong brand and operating in high-growth economic zones, China's overseas development is in an important position to benefit from the transition to upgrading demand. This can be seen in its strong average selling price, which is higher than that of most homebuilders in the country.
Stable sales and land acquisitions:Total contract sales for China's overseas development rose 31.4 per cent year-on-year to 320.6 billion yuan in 2019. Management remains cautious about the outlook for the real estate market and intends to be conservative on the issue of land acquisition. By the end of 2019, its land reserve life is about 4 years. Fitch expects total contract sales for China's overseas development to grow at a slow rate of 5.7 per cent to 339 billion yuan in 2020.
Sound financial position:The leverage ratio of China's overseas development, as measured by net debt / adjusted inventory, remains low compared with other Chinese residential builders, and Fitch expects it to remain stable under its conservative land acquisition policy. As a result of the higher premium paid for land acquisitions, leverage rose from 22.4 per cent in 2018 to 22.6 per cent in 2019. At the end of 2019, the cash balance of China's overseas development banks was 95.4 billion yuan, while short-term debt was 32.1 billion yuan. Fitch believes that China's overseas development will continue to supplement the land it has sold, but it has no pressure on land reserves. Fitch predicts that the leverage ratio of China's overseas development will hover at 24% 26% between 2020 and 2022.
Diversified financing increases liquidity:Among Chinese residential builders, China's overseas development has the lowest borrowing costs. In 2019, its weighted average borrowing cost was 4.2 per cent, similar to 2018, because China's overseas development had access to offshore bond and loan markets, as well as its state-owned enterprise status, which helped access domestic capital. Lower borrowing costs keep China's overseas development liquid.
Summary of rating derivation
Since its inception, China overseas Development has been one of the largest residential builders in China, and in its 40-year operating history, the company has shown resilience in several industry recessions. Because of its premium price and effective cost management, its adjusted EBITDA profit margin has been higher than that of large peers. Its strong brand is supported across the country and focuses on first-time buyers and buyers looking for higher-quality housing than existing homes. Fitch expects this strategy to help China's overseas development remain profitable in the medium to long term.
Fitch assesses the independent credit status of China's overseas development in "bbb+". The final rating of China's overseas development is "A -" taking into account the support of its ultimate parent company, China Construction. Fitch also rated the mother-child relationship between China overseas Development and China Shipping as "Strong", while the link between China Shipping and China Construction was considered "Moderate". China's Ministry of Housing and Construction stressed that upgrading old housing is its long-term goal, and that Chinese construction and China's overseas development will help achieve this goal. China overseas Development is the only residential construction platform for China Shipping Group and China Construction, as evidenced by the injection of real estate projects into China's overseas development. China overseas Development is the only central and local government real estate state-owned enterprise integrated with its parent company.
Fitch compares China's overseas development with its large residential construction industry with a rating of "BBB+", including Vanke Enterprise Co., Ltd. (China Vanke Co., Ltd., referred to as "Vanke Enterprise", 02202.HKJ 000002.SZ BBBQ / Stability), China Resources Land Co., Ltd. (China Resources Land Ltd, referred to as "China Resources Land", 01109.HK). BBB+/ stable) and Poly Development Holdings Group Co., Ltd. (Poly Developments and Holdings Group Co., Ltd., referred to as "Poly Real Estate", 600048.SH BBBQ / stable). China's overseas development has a low leverage ratio (as measured by net debt / adjusted inventory) and is one of the companies with the highest EBITDA profit margins. The regional layout of China's overseas development is similar to that of Vanke and China Resources Land, while the business scale of Vanke is even larger.
Key rating hypothesis
The key rating assumptions of Fitch in the issuer rating study include:
-contract sales by floor area fell by 2% in 2020, but increased by 3% in 2021
-from 2020 to 2021, the average sales price of contract sales increased by 5% per cent per year.
-from 2020 to 2021, EBITDA's profit margin was about 28% Mel 31%.
Rating sensitivity
Future development factors that may alone or jointly lead to positive rating / upward action by Fitch include:
Due to the high periodicity and regulatory risks of China's real estate industry, it is not expected to take positive rating action on China's overseas development in the next 12 to 18 months.
Future development factors that may alone or jointly lead to negative rating / downgrade actions by Fitch include:
-the link between China's overseas development and its parent company, China's overseas development, and the central government has been weakened.
-adjusted EBITDA profit margin continues to fall below 25.0%
-the existence of net debt / adjusted treasury deteriorated to more than 30.0% over a period of time
Liquidity and debt structure
Ample liquidity:As of the end of December 2019, China had 95.4 billion yuan in cash for overseas development, including 2.6 billion yuan in restricted cash (2018: 87.9 billion yuan, including restricted cash). This provides a strong buffer against short-term debt of 32.1 billion yuan at the end of December 2019. Fitch expects the group to maintain sufficient liquidity because of its diversified financing channels from offshore and offshore capital markets, long-term relationships with offshore and onshore banks, and flexible land acquisition strategies. fund development costs, land premiums and debt obligations.