(The following statement was released by the rating agency)
SINGAPORE/HONG KONG, August 02 (Fitch) Fitch Ratings has assigned Poly Real
Estate Finance Ltd.'s USD500m 4.5% guaranteed notes a final 'BBB+' rating. The
notes are unconditionally and irrevocably guaranteed by Hengli (Hong Kong) Real
Estate Limited (Hengli), a wholly owned subsidiary of Poly Real Estate Group
Company Limited (Poly, BBB+/Stable).
In place of a guarantee, Poly has granted a keepwell deed and a deed of equity
interest purchase undertaking to ensure that the guarantor, Hengli, has
sufficient assets and liquidity to meet its obligations under the guarantee for
the USD notes. Furthermore, Poly's parent, China Poly Group Corporation (China
Poly), has also granted a keepwell deed to Poly and Hengli to ensure Poly has
sufficient assets and liquidity to meet its obligations under the keepwell and
undertaking deeds; and that Hengli has sufficient assets and liquidity to meet
its obligations under the guarantee for the notes.
The final rating is in line with the expected rating assigned on 13 June 2013,
and follows the receipt of documents conforming to information already received.
KEY RATING DRIVERS
Parent support benefits ratings: Poly's ratings benefit from a one-notch uplift
reflecting strong operational and strategic linkage with its parent China Poly,
in accordance with Fitch's 'Parent and Subsidiary Rating Linkage' criteria.
China Poly's support to Poly is evidenced by significant funding support to
Poly, including providing a keepwell deed for Poly's offshore debt issues.
Poly is a core subsidiary of China Poly as its strong growth has enabled the
latter to become the largest homebuilder among 16 enterprises wholly owned by
state-owned Assets Supervision and Administration Commission of the State
Council, which has property as one of its core businesses. The parent support,
however, does not raise Poly's ratings above the 'BBB+' level - which is the
highest in China's homebuilding industry - as it is not sufficient to offset
Leading Chinese homebuilder: Poly is one of China's top three homebuilders by
contracted sales value and its operation is sufficiently diversified across 43
cities, with over 90% of its sales from tier-one and tier-two cities in 2012.
Poly also ranks among the top three homebuilders in 18 cities. Its large scale
gives it strong operational and financial flexibility.
Strong branding supports growth: Poly is one of the best performers among the
top ten Chinese homebuilders. Its contracted sales have seen a compounded annual
growth rate of 51.5% since 2006 compared with China Vanke Co., Ltd's (Vanke,
BBB+/Stable) 37.2% and China Overseas Land & Investment Limited's (COLI,
BBB+/Stable) 34.3%. This is partly due to its established branding which focuses
on delivering comfortable housing at affordable prices.
Diversified funding channels: Poly has tapped funding from multiple channels to
improve financial flexibility. Quasi-equity-like real estate funds taking
minority stakes in Poly's projects and new equity private placements have raised
CNY27bn of capital for Poly since 2006. Tapping the domestic capital market and
obtaining shareholders' loans from China Poly provide Poly with additional
sources of funding apart from bank borrowings.
Aggressive growth drives leverage: Constraining Poly's 'BBB' standalone rating
is its high leverage arising from recent rapid growth. Poly has expanded
aggressively since 2006; net property assets grew to CNY105bn in 2012 from
CNY6bn in 2006. As a result, leverage as measured by net debt/adjusted inventory
rose to a high of 63% in 2010 before falling to 46.5% in 2012 as growth
moderated. Poly's growth since 2006 has been supported by CNY44.9bn of net debt
increase and CNY8.4bn minority shareholders' equity injection.
Stable operation drives outlook: Fitch expects Poly to retain its leadership in
the Chinese homebuilding market. Its focus on mass market home buyers and its
operational and financial flexibility should help maintain moderate growth in a
highly competitive and cyclical Chinese property market.
Keepwell deeds not guarantees: Poly does not provide a guarantee to offshore
subsidiaries given the difficulties of obtaining approval from the State
Administration of Foreign Exchange, more commonly known as SAFE. However, both
the keepwell deeds and Poly's undertaking deeds signal a strong intention from
Poly and China Poly to honour its proposed debt obligations.
Negative: Future developments that may individually or collectively, lead to
negative rating action include:
- weakened linkage with China Poly due to government policy changes, or a change
in the group's strategy/policy
- aggressive expansion resulting in net debt/adjusted inventory rising above 45%
on a sustained basis
- contracted sales/gross debt failing to rise above1.5x by 2014 (2012 at 1.25x)
- severe deterioration in the operating environment resulting in prolonged poor
No positive rating pressure is likely as the rating is already at the peak for
this industry. For its standalone ratings, future developments that may
individually or collectively, lead to positive rating action include:
- generation of neutral free cash flow on a sustained basis
- reduction in net debt/adjusted inventory to below 35%
Su Aik Lim
+65 6796 7233
Fitch Ratings Singapore Pte Ltd
6 Temasek Boulevard
#35-05 Suntec Tower Four
+852 2263 9559
+65 6796 7221
Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
Additional information is available on www.fitchratings.com
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Chinese Homebuilders
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