China-based homebuilder Jiayuan International Group was upgraded by Fitch to B+ from B citing ‘deleveraging and expansion via organic growth and asset acquisitions from its largest shareholder’. Jiayuan has reduced reliance on trust and other loans to 13% of total debt in 1H2021 from 24% in end-2020. Fitch says that leverage (net debt/adjusted inventory) for the combined group including its sister company Jiayuan Chuangsheng Holding Group Co. will stay within 40-45% over the next two years, with the company trying to stay well within the ‘three red-lines’ for liquidity and leverage measures. With regard to asset acquisitions, Jiayuan acquired four Shandong projects from its largest shareholder, Mr. Shum Tin Ching, in June 2021 for RMB 6.1bn ($940mn), of which 15% was settled in cash and the rest in equity and convertible bonds. They also acquired property projects from related parties at a total enterprise value of RMB 5.5bn ($850mn). Besides, Jiayuan’s focus for over 20 years in the Yangtze River Delta region, expansion into Shanghai, Anhui, Shandong, Tier 2 and 3 cities in southern and western China add to its positives. Its profitability is also strong with EBITDA margins over 30% and even though they expect gross margins to decrease over the next two years, it would be to a lesser extent than most peers.

When comparing to other similar rated developers, while attributable contract sales are at the lower end of B+ peers barring Hopson, Fantasia and Redco, EBITDA margins of Jiayuan at 30-35% are wider as compared to B+ peers at 20-30%. They add, “Jiayuan did not sacrifice sales churn to achieve the stronger profitability, with its contracted sales/total debt of 1.3-1.4x above the average of ‘B+’ peers.” Also, Jiayuan’s scale is larger than B rated peers except Kaisa and their churn and margins are also higher than peers, adding to the rating upgrade.

Jiayuan’s dollar bonds were flat – its 12.5% 2023s are at 97.63 and its 11% 2024s are at 93.7.

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