China Overseas Land & Investment Limited’s (COLI; A-/Stable) net cash position at 1H16 – its first in more than 10 years – is likely to revert to a net debt position by end-2016 after it completes the acquisition of the property portfolio from CITIC Limited, Fitch Ratings says. Nevertheless, COLI’s strong operating cash generation, which helped the home builder to turn to net cash position of CNY8.7bn at end-June 2016 from net debt of HKD13.6bn at end-2015, supports its ratings. COLI slowed down its land acquisitions in 1H16 as the CITIC acquisition, which is on track to be completed in August-September 2016, will add a sizeable land bank at reasonable cost. Fitch believes COLI is most likely among Chinese homebuilders to maintain its profitability, given that it is shying away from building its land bank when land prices have risen rapidly. Fitch forecasts COLI’s leverage, measured by net debt/adjusted inventory, will increase to 15%-20% after the CITIC acquisition in 2016, from 5.5% in 2015, though not much higher than the 14.6% in 2014. Fitch believes COLI’s management has a strong track record of prudent financial management, and the company is likely to deleverage rapidly to around 10%-15% in next one to two years. COLI is the only leading Chinese homebuilder that have achieved a net cash position in 1H16. This prepared COLI’s balance sheet for the acquisition of the property portfolio from CITIC Limited, which is relatively highly geared. Fitch estimated the implied potential liabilities to be around HKD62.78bn, based on COLI’s reported total consideration at about HKD99.86bn, of which HKD37.08bn will be fulfilled via share issuance and an asset transfer. The property portfolio from CITIC Limited comprises attributable gross floor area (GFA) of 23.52 million square meters (sqm), which COLI will acquire for an average of CNY3,550 per sqm. Around 14.04 million sqm of the attributable land, the bank is located in 10 major cities in which COLI operates, and the addition will increase the land bank in these cities by 1.7x. Aside from the acquisition of the property portfolio from CITIC Limited, COLI also acquired four parcels of land with total attributable GFA of 2.28 million sqm at a cost of CNY8.2bn in 1H16. One site is in Hong Kong, two parcels are related to existing projects in China, and one is a new project in China. The total land premium for the three land parcels in China of attributable GFA of 2.17 million sqm was CNY6.4bn, which was 22% less than the CNY8.3bn that COLI paid for five sites with attributable GFA of 2.26 million sqm in 1H15. Fitch expects COLI to maintain strong credit metrics and continue to generate stable EBITDA margin of 26%-28%. The company’s EBITDA margin was 26.3% in 1H16 (end-2015: 26.8%, end-2014: 28.0%), with its cash collection rate improving to 76% in 1H16 from 64% a year earlier. Fitch expects the churn rate, measured by total contracted sales/total debt to reach around 1.2x-1.4x in 2016, compared with 1.21x in 2015 and 1.05x in 2014.
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Source: Reuters.com
