OREANDA-NEWS. Fitch Ratings says China Vanke Co., Ltd. (Vanke; BBB+/Stable) continued to demonstrate a strong management track record in its 2015 results with rapid asset turnover, and maintained stable margins despite a weak housing market in the first half in 2015.

Vanke continues to deliver faster asset churn, as measured by contracted sales to total debt ratio of 3.10x at end-2015, from 2.94x at end-2014 and 2.09x at end-2013. The EBITDA margin remains stable at around 22.6% compared with 22.0% at end-2014, despite the strong headwinds causing pressure on profit margins across the industry.

Fitch expects Vanke to stay with its high-turnover model, with the ratio of contracted sales to total debt sustained at above 2x, and also to maintain its EBITDA margins over the next 24 months.

Leverage (as measured by net debt/adjusted inventory) has risen to 12.6% from a very low base of 3.0% in 2014. This level remains very low relative to investment-grade-rated peers, and also comparable with Vanke's average leverage of 12.9% between 2011 and 2013. The higher leverage was due to Vanke's larger land-acquisition activities in 2015 for land replenishment, which saw its land premium to sales percentage jump to 42% from 20%.

Vanke also announced a Memorandum of Understanding (MOU) with Shenzhen Metro Group Co., Ltd. (SZMC) on 14 March 2016 for an asset-for-share deal. Fitch believes that this transaction will enhance Vanke's leadership position and strengthen its land bank position in Shenzhen. Shenzhen is one of the Tier 1 cities facing a limited supply of new land, similar to Beijing and Shanghai. Fitch does not expect leverage to be an issue in light of Vanke's low leverage, track record of prudent financial management, and this transaction being substantially being paid via share issuance.

The estimated consideration for this transaction will be in the range of CNY40bn-60bn, and with SZMC intending to sell certain premium property projects above various subway stations to Vanke. Following the share issuance for this transaction, SZMC may become a long-term major shareholder of Vanke, subject to the final details of the transaction.

Vanke's dividend payout ratios increased to 43.87% versus 35.05% at end-2014 and 31.54% at end-2013. Fitch views the increased payout as credit neutral, as Vanke's cash flow-generation capabilities has been strong and can support such a dividend policy.

Vanke delivered one of the highest contracted sales in the Chinese property development industry in 2015 at CNY261bn, up 21.5% from the previous year. Contracted sales by gross floor area rose by 14.4% to 20.67 million square metres (sq m), while the average selling price (ASP) for contracted sales was up 6.2% to CNY12,649 per sq m. The sales proceeds recovery rate also jumped, to 95% from 90%.

For a more detailed analysis of the rating drivers and sensitivities for Vanke, please refer to the rating action commentary "Fitch Affirms China Vanke at 'BBB+'; Outlook Stable", dated 28 April 2015, available at www.fitchratings.com.