Fitch affirms Vietnam's Vingroup JSC at 'B+'; outlook stable

Oct 7th at 17:26

07-10-2014 17:26:29+07:00

Fitch Ratings has affirmed Vietnam-based property developer Vingroup JSC's (Vingroup) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR), senior unsecured rating and the rating on its senior notes at 'B+'. The Outlook is Stable.

Vingroup's ratings reflect its small when compared to global property developers and its aggressive growth strategy. The ratings also capture Vietnam's improving macroeconomic conditions that are likely to accelerate property sales growth, Vingroup's strong market position as Vietnam's largest listed real estate developer, its sizable land bank, its adequate liquidity and Fitch's expectation that Vingroup's new projects - Vinhomes Nguyen Chi Thanh and Vinhomes Tan Cang - would be launched successfully, which would provide the majority of funding for the capital expenditures from 2H14.

KEY RATING DRIVERS

Rising Residential Sales Rate: In the eight months ended 31 August 2014, Vingroup's sales rate improved to around 90% of apartment launches from the 70% to 80% that prevailed in 2013. Fitch expects Vingroup to maintain the sales rate due to a stronger macroeconomic environment and new project launches.

Neutral Impact Of Acquisition: Vingroup's acquisition of a 70% stake in the Vietnam-based hypermarket operator Ocean Retail and Real Estate Management JSC (ORC) is unlikely to result in an increase in gross debt. This acquisition would result in a marginal increase in Vingroup's businesses that generate recurring revenues like retail, healthcare and hospitality.

New Development Cycle: During the two and a half years ended 30 June 2014, Vingroup's cash flows were primarily driven by sales from Royal City, Vincom Village and to a limited extent by Times City. Having developed the first two projects to their maximum potential, Vingroup's cash flows from 2H14 onwards are expected to be driven by Times City, Vinhomes Nguyen Chi Thanh and Vinhomes Tan Cang. The improving market for residential apartments and the mostly mid-market positioning of the new projects are likely to support the company's current sales rate.

Aggressive Growth Plans: Vingroup proposes to incur annual capex in excess of VND20trn (USD942m) from 2014 to 2018. The large capex is scalable and investment is projected to be funded mostly through contracted sales and pre-sales. While Fitch expects the ratio of net debt to adjusted inventory to decline from 2017 onwards, it is likely to remain at approximately 60% until end-2016.

Low Refinancing Risk Till June 2016: Annual debt repayments do not exceed USD250m (about VND5.25trn). Fitch expects Vingroup's operating cash flows and VND6.72trn outstanding cash balance as of 30 June 2014 to meet its contractual debt repayments till July 2016.

Improving Macroeconomic Environment: Fitch revised the Outlook on Vietnam's 'B+' Long-Term Foreign and Local Currency IDRs to Positive in January 2014. Vietnam's real GDP growth is expected to be sustained at over 5%. Inflation fell from 9.2% in 2012 to 6.6% in 2013 and further to 1.4% in 1H14. Lending rates have correspondingly declined. Fitch expects the improving macroeconomic factors to provide a fillip to the low but rising urbanisation and disposable incomes in Vietnam, which will benefit the urban residential market.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Failure to achieve total cash sales (contracted sales plus pre-sales) of at least VND15trn a year and maintain a net debt / inventory net of presales and investment properties of less than 60% (FY13 net debt / inventory net of presales and investment properties: 37%) on a sustained basis, and

- A downgrade in Vietnam's Country Ceiling of 'B+'

Positive rating action is not expected in the medium term due to Vingroup's exposure to the inherently cyclical property business and its small scale.

Fitch