Xinyuan Real Estate Liquidity Assessment #B# Rating Affirmed With Stable Outlook

Stocks and Financial Services Press Releases Tuesday February 13, 2018 18:23
HONG KONG--13 Feb--S&P Global Ratings

HONG KONG (S&P Global Ratings) Feb. 13, 2018--S&P Global Ratings affirmed its 'B' long-term corporate credit rating on China-based Xinyuan Real Estate Co. Ltd. The outlook is stable. We also affirmed the 'B-' long-term issue rating on the company's senior unsecured notes.

We revised our assessment of Xinyuan's liquidity to less than adequate from adequate due to the company's recent large land acquisitions and elevated short-term debt.

Owing to its depleting land resources, Xinyuan stepped up its land acquisitions in 2017 to secure resources for future growth. Based on its fourth-quarter results, the company's debt grew significantly to US$3.3 billion in 2017, from US$2.1 billion in 2016, with 57% of the debt classified as short-term debt. We believe the company faces stronger liquidity pressure, even though its cash and cash equivalents has risen by US$541 million for the same period.

In addition, we believe the payments for land acquisitions in 2017 have not been fully reflected in the company's books. This is because Xinyuan purchased most of its land in the second half of the year, with some consideration to be paid in 2018. Recently, the company has bought land more frequently through project acquisitions, which generally have more flexible payment schedules.

We project that Xinyuan's capital expenditure on land acquisitions and construction costs was high at Chinese renminbi (RMB) 15 billion-RMB16 billion in 2017, and will be RMB18 billion-RMB20 billion in 2018. This is commensurate with the company's growth target and the increasing number of new projects. We therefore estimate its debt-to-EBTIDA ratio at about 8.5x in 2017 and 2018, compared with 7x in 2016.

The rating affirmation reflects Xinyuan's growth momentum and stabilizing margins. In 2017, the company achieved about 40% growth in contracted sales. Its margin stabilized at 23%. We also view the accelerated land acquisitions as a result of its low land replenishment in 2015 and 2016, rather than a significant change in the company's appetite to grow. Historically, the company has demonstrated an uneven pace of land acquisition.

We assess Xinyuan's liquidity to have weakened to less than adequate. We expect the company's liquidity sources to be about 1.0x liquidity uses over the 12 months to December 2018.

The stable outlook reflects our expectation that Xinyuan will mildly increase its sales and margins over the next 12 months. We expect the company's leverage to remain stable but high over the period due to its need for land reserve replenishment and construction expenditure.

We may lower the rating if Xinyuan's leverage deteriorates and its debt-servicing ability worsens, as indicated by an EBITDA interest coverage of less than 1.5x or debt-to-EBITDA ratio further weakening from our expectation of 8.5x as of 2017.

We may also downgrade Xinyuan if the company's access to financing weakens materially, such that its liquidity profile deteriorates further.
The rating upside is remote in the next 12 months, given Xinyuan's persistently high leverage. A ratio of debt to EBITDA below 5x on a sustainable basis could lead to an upgrade.

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