Fitch Ratings has assigned Vietnam-based Dat Xanh Group Joint Stock Company's (DXG; B/Stable) proposed US dollar senior unsecured notes a long-term rating of 'B' with a Recovery Rating of 'RR4'. The proposed notes will be issued by DXG and guaranteed by some of its subsidiaries.
The proposed notes are rated at the same level as DXG's Issuer Default Rating as they constitute direct senior unsecured obligations of the issuer and guarantors. Proceeds from the new issue will be used for financing and developing real-estate projects. DXG's listed subsidiary, Dat Xanh Real Estate Services (DXS), is excluded from the guarantor group. DXS's subsidiaries are guarantors, such that the issuer and subsidiaries that are in the guarantor group in aggregate constitute around 80% of DXG's consolidated revenue, operating profit and assets.
DXG's rating reflects the company's expanding market position as a residential property developer in southern Vietnam and its status as the country's largest real-estate brokerage, counterbalanced by its limited record in generating and sustaining contracted sales of at least VND6 trillion. The Covid-19 pandemic and strict movement restrictions have exacerbated the company's execution risk and ability to sustain strong contracted sales growth in the next 12-18 months.
KEY RATING DRIVERS
Growth Phase, Execution Risk: Fitch believes DXG can achieve rapid growth over the next three years, despite the lack of a consistent record in delivering annual contracted sales of at least VND6.0 trillion, a key positive rating sensitivity. DXG's VND5.1 trillion of contracted sales in 1H21 were significantly higher than the VND3.4 trillion in 2020, led by strong demand for residential property and land-bank accumulation since 2017. However, positive rating action is dependent on steady performance as regional lockdowns have raised execution risk.
DXS Excluded from Guarantor Group: DXS's exclusion has limited impact on DXG's rating profile as around 80% of assets and operating cash flows remain in the guarantor group. DXG manages the group's treasury function centrally and therefore has access to DXS's cash via intercompany loans, in addition to dividends. We believe DXG's real-estate development will continue to benefit from the distribution reach of DXS.
DXS is Vietnam's largest primary real-estate brokerage, with an estimated sales share of 29%, according to Savills. The full-service broker distributes DXG's projects and provides consultancy and sales management for more than 100 projects across the country. However, this is counterbalanced by its significant working-capital needs, which drain operating cash flow during periods of fast growth. The broker pays a deposit to guarantee a minimum portion of contracted sales for each project, which is recovered after the contracted sales threshold is met.
Narrowing FCF Gap: DXG's rating is limited by its negative free cash flow (FCF) due to land purchases for property development and the working capital associated with its brokerage services. Fitch expects FCF to narrow to -13% of gross debt in 2021, excluding land purchases, from -17% in 2020, supported by higher contracted sales and a moderation in the brokerage arm's working-capital needs. Fitch expects DXG's bargaining power as a full-service broker to improve with operating scale in the next two years, especially with smaller developers, as the sector consolidates.
Strong Balance Sheet: Fitch expects DXG's net debt/adjusted inventory to stay under 50% over the next three years. This provides the company with leverage headroom to fund its growth aspirations in real-estate development and counterbalances cash flow risks. It also has discretion to temporarily slow land purchases and the growth of its brokerage services if contracted sales fail to meet its targets, as its land bank was sufficient for seven years of contracted sales at end-June 2021.
DXG's moderate leverage, especially relative to international peers, is also supported by public and preferential equity issuance, which totalled VND3.9 trillion over 2016, 2019 and 2020. The group also raised VND2 trillion via the listing of DXS in 1H21 and DXG's shareholders have approved the issuance of an additional VND4.0 trillion in preferential equity in 4Q21. Fitch has factored these amounts into our assumptions.
Robust Medium-Term Outlook: Fitch expects strong economic growth, a rising middle class and urban migration to continue to drive residential property demand in key cities such as Hanoi, Ho Chi Minh City and their satellite towns. Fitch forecasts Vietnam's real GDP to grow by 7.2% in 2022, benefiting from the resumption of global trade and reshoring of foreign direct investments from China. Fitch believes supply shortages in Ho Chi Minh City will boost average selling prices and interest for new launches.
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