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Rating Action:

Moody's upgrades China Vanke's ratings; outlook stable

 The document has been translated in other languages

23 Jul 2015

Hong Kong, July 23, 2015 -- Moody's Investors Service has upgraded China Vanke Co., Ltd.'s issuer rating to Baa1 from Baa2.

At the same time, Moody's has upgraded (1) the rating on the medium term note (MTN) program to (P)Baa2 from (P)Baa3 for Bestgain Real Estate Lyra Limited; and (2) the senior unsecured debt rating to Baa2 from Baa3 on the bonds issued by Bestgain Real Estate Limited and Bestgain Real Estate Lyra Limited.

The outlook on all ratings is stable.

Vanke Real Estate (Hong Kong) Company Limited (unrated), a wholly owned subsidiary of China Vanke, guarantees (1) the MTN program of Bestgain Real Estate Lyra Limited and the associated bonds; as well as (2) the bonds issued by Bestgain Real Estate Limited.

In addition, all the MTNs and bonds are supported by a Deed of Equity Interest Purchase Undertaking (EIPU) and a Keepwell Deed between China Vanke, Vanke Real Estate and the bond trustee.

RATINGS RATIONALE

"The upgrade reflects China Vanke's leading market position and its strong performance in contracted sales through the cycles," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

China Vanke has a strong track record of property sales execution and is a leading developer in China in terms of its scale and national brand.

In addition, its sales are more resilient than those of its peers in China. This is evidenced by the 25.9% year-on-year growth in contracted sales to RMB215 billion in 2014, compared to a 7.8% decline for the overall industry.

In the first six months of 2015, China Vanke's contracted sales continued to grow 9.0% year-on-year to RMB110 billion.

"The upgrade also considers China Vanke's business strategy of disciplined spending on land that has resulted in the lowest debt leverage among peers," says Tsang, who is also the Lead Analyst for China Vanke.

China Vanke focuses on managing its business and financial risks. This is an important attribute that positions the company at the higher end of the Baa rating category.

China Vanke typically acquires land that is sufficient to support 2-3 years of development, compared with 4-5 or more years of coverage among its peers.This relatively small sized land bank provides it with the flexibility to manage regulatory events, urbanization development and demographic changes.

For example, demand for housing in China in the last 5 years has shifted towards mass-market units and away from deluxe and investment properties. China Vanke's relatively light land bank strategy allows it to adjust its business strategy on a more timely basis to respond to changes in demand.

Moody's estimates, on average, the company's spending on land acquisitions has been equivalent to around 40% of its cash from property contracted sales over the past five years.

Such disciplined spending on land has resulted in low debt leverage. The company's debt leverage measured by revenue/adjusted debt ratio was 2.0x and adjusted net debt/net capitalization was below 10% at end-2014. This is the lowest level of debt leverage among Moody's-rated China property developers.

Moody's expects the company's revenue/adjusted debt leverage will be around 1.5x-2.0x and adjusted net debt/net capitalization 20%-25% over the next 2 years. These levels position the company at the Baa1 rating.

China Vanke's strong liquidity is another factor supporting its Baa1 rating. The company's strong cash flow from contracted sales enables it to maintain a strong liquidity position.

Its cash to short-term debt ratio was strong at 2.7x at end-December 2014. Even amid difficult market conditions in 2012, its liquidity ratio remained acceptable at 1.4x at end-December 2012.

At the same time, China Vanke's rating is constrained by its declining profit margin, a result of its fast turnover business model to address increasing mass-market demand as well as increasing land replenishing cost.

China Vanke's profit margins have been declining for the past 2-3 years and its gross margin will likely to approach low-20% in the next 1-2 years, from 25% in 2014.

Moody's expects China Vanke will continue to manage the pressure on profit margins by improving its operating cost structure and reducing its borrowing costs. For example, the company has issued onshore bonds at the end of 2014 that have lower interest cost than its trust loans.

Moody's furthermore expects China Vanke's strong credit profile has increased its ability to support its subsidiary, Vanke Real Estate, which in turn is a guarantor for the MTNs issued by Bestgain Real Estate Lyra Limited and the bonds issued by Bestgain Real Estate Limited. As a result, Moody's has upgraded the debt ratings by one notch to Baa2 from Baa3.

The three notches of support from China Vanke to Vanke Real Estate reflects Moody's expectation that China Vanke will provide financial support to Vanke Real Estate in a situation of stress.

Moody's assessment is based upon the following factors: (1) China Vanke fully owns and provides operating support to Vanke Real Estate, which is a highly integrated part of the group; (2) Vanke Real Estate will continue its role as the group's main offshore funding platform to support home market projects; and (3) China Vanke has provided financial support to Vanke Real Estate by directly funding its projects.

The ratings outlook is stable, reflecting Moody's expectation that China Vanke will maintain its strong sales execution, prudent financial discipline, and will be able to manage the financial risk from its declining profit margins.

A ratings upgrade is unlikely in the near term. However, the rating could be upgraded over the medium term if China Vanke: (1) can develop strong recurring income that can buffer the volatility associated with its development business; and (2) maintains low debt leverage with adjusted net debt/net total capitalization below 20% and revenue/adjusted debt above 2.0x on a sustained basis.

On the other hand, the ratings could be downgraded if: (1) China Vanke's sales performance deteriorates, in turn causing its debt leverage to rise and/or its liquidity position to weaken; or (2) it changes its cautious land acquisition strategy.

Credit metrics indicative of downgrade pressure include adjusted net debt/net capitalization exceeding 30%, and revenue/adjusted debt falling below 1.40x-1.45x.

Any signs of weakening liquidity, such that the company's cash falls below 1.25x-1.50x of short-term debt on a sustained basis, or a decrease in its ability to access the bank or capital markets, would also weigh on its ratings.

The ratios above are calculated based on Moody's standard adjustments and the definition stated in Moody's Homebuilding And Property Development Industry published in April 2015. Interest coverage formula is modified for Chinese developers to substitute "capitalized interest" in the numerator for "interest charged to cost of goods sold" as the latter is not separately disclosed in audited financial statements. Total debt does not include adjustments for mortgage guarantees.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Founded in 1984, China Vanke Co., Ltd. is one of the largest property developers in China by contracted sales. As of end-2014, it had more than 400 projects across China's four major economic regions: Beijing region, Guangshen region, Shanghai region, and Chengdu region.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Kaven Tsang
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's upgrades China Vanke's ratings; outlook stable
No Related Data.
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