Fitch Ratings has affirmed
Fitch has also affirmed COGO's foreign-currency senior unsecured rating and the rating on the outstanding notes it guarantees at 'BBB'.
COGO is rated top-down at one notch below the 'bbb+' Standalone Credit Profile (SCP) of its parent,
COGO's SCP of 'bb' is supported by its solid market position, robust leverage and strong financial flexibility, but is constrained by its below-peer sales.
Key Rating Drivers
Strong Parent Supports Rating: We believe COLI has 'High' operational, 'Medium' strategic and 'Low' legal incentives to support COGO. COGO is operationally integral to COLI's core property-development business. COLI continues to expand its footprint in Tier 1 and 2 cities, while COGO, which shares the same brand, focuses on strong Tier 3 and 4 cities. COGO's presence in lower-tier cities is integral to COLI's position as a nationwide homebuilder. However, COGO's financial contribution to COLI is small and COGO has limited legal ties with COLI, such as guarantees or cross-defaults.
Steady Sales Recovery: COGO's sales fell by 43% in 2022, below the 28% decrease of the overall market. We believe this stems from its focus on lower-tier cities with less robust demand. Sales were also hit by the Covid-19 lockdown in 1H22 in the
Weaker Markets but Strong Position: We believe COGO retains a strong competitive position and can benefit from a recovery in markets in
Moderate Rise in Leverage: COGO's leverage, measured by net debt/net property assets, rose to 36% in 2022, from about 30% in 2021. We expect leverage to decline slightly in 2023, based on our expectation of double-digit sales growth, while land acquisition expenditure is largely similar to the reduced levels in 2022. COGO spent only
Management said COGO continues to be active in the land bidding process but did not secure many projects in 5M23, as some of the cities it operates in had very competitive land auctions, some of which were settled via a lottery allocation system.
HIBOR Hike Raised Funding Costs: COGO's reported weighted-average interest rate rose to 4.8% as of end-2022, from 3.8% a year ago. The increase was mainly attributable to an increase in the Hong Kong Interbank Offered Rate (HIBOR) to 6.3% by end-2022 from 2.0% at end-2021, and was partly offset by a fall in the cost of yuan loans to 4.4% by end-2022, from 4.8% at end-2021. About 30% of COGO's debt is floating-rate
Our rating case assumes COGO will refinance part of its
Profitability to Bottom Out: COGO's gross profit margin (GPM) fell by 8.6pp to 14.4% in 2022, from 23.0% in 2021, due to weaker selling prices that pressured project profitability and inventory write-downs (
Derivation Summary
COGO's IDR is one notch below the 'bbb+' SCP of its parent, COLI. COGO's SCP is constrained by the scale of its attributable sales, which is smaller than that of 'bb' rated peers.
We estimate that COGO's attributable sales in 2022 was about
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Total contracted sales to increase by 15% in 2023 (5M23: 35%), based on strong recovery in 5M23 from a low base in 2022, and flat sales in 2024;
Cash collection rate to remain strong at more than 95% in 2023 and 2024 (2022: 113%);
Land gross floor area acquired/gross floor area sold at 0.6x in 2023 and 1.0x in 2024 (2022: 0.6x);
Construction expenditure to account for 55% of sales in 2023 and 50% in 2024;
Weighted-average interest rate to increase by 40bp in 2023 and decrease by 45bp in 2024, based on Fitch's forecast of US dollar policy rate movements and our expectation that
Dividend pay-out ratio of 20% in 2023 and 2024 (2022: 21%).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A perceived strengthening of incentives for COLI to support COGO.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A perceived weakening of incentives for COLI to support COGO.
A lowering of COLI's SCP.
For COLI's SCP, the following sensitivities were outlined by Fitch in a Rating Action Commentary on
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action is not expected over the next 12 to 18 months due to the high cyclicality and regulatory risks in
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration in COLI's net debt/net property assets to above 35% over a sustained period could lead to a lower SCP.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Sufficient Liquidity: COGO had unrestricted cash of
Issuer Profile
COGO is a mid-sized Chinese developer with a leading position in lower-tier cities. The company ranked within the top-three developers by 2022 sales in 18 of the 40 cities in which it operates.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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