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Fujian Yango Group Co. Ltd. Assigned ‘B’ Rating With Stable Outlook

          HONG KONG (S&P Global Ratings) April 12, 2018--S&P Global Ratings today assigned its 'B' long-term issuer credit rating to Fujian Yango Group Co. Ltd. The outlook is stable. 
          Fujian Yango engages in property development, education services, and commodities trading in China. It also has a majority shareholding in an environmental services company and investments in some financial services companies. 
          The rating on Fujian Yango reflects the group's high debt leverage and the refinancing risk associated with its large short-term borrowings. The rating also reflects the group's execution risk and integration risk from the acquisitions of new businesses, and strong growth aspirations. Nevertheless, these risks are offset by our expectation that the strong contracted sales growth of the property development segment will generate significant cash inflow for debt repayment and future expansion. Also, we anticipate that the company will adopt a more prudent approach toward new business acquisitions or investment.
          In our view, Fujian Yango's property segment, Yango Group Co. Ltd., is the key rating driver. Yango Group dominates the group's revenue, profit, assets, and debt. The group's asset-light and low leverage education services segment, despite being highly profitable, only makes a small contribution to the group. We also expect the recently acquired environmental services business, Fujian Longking Co. Ltd. (Lonking), to be only a moderate contributor, accounting for less than 20% of the group's EBITDA. 
          We expect Yango Group to continue to spend significantly on land acquisitions in the coming two to three years. The company will do this to support its high sales growth and meet its target to be a top-10 developer in China in terms of sales. We forecast that the cash outflow for land acquisitions will be equivalent to 85% of contracted sales in 2017, and gradually reduce to 55% in 2019. These ratios are higher than many of our rated developers that usually spend 40%- 50% of their sales on land banking. 
          In our view, Yango Group can maintain robust sales growth between 2017 and 2019, generating large cash flows for future development. Our view is based on the company's increased saleable resources in the past two years and a likely acceleration in land acquisitions, partly through mergers and acquisitions, which can shorten the lead-time for project launches. We project that Yango Group's contracted sales will increase to about Chinese renminbi (RMB) 100 billion in 2018, from an estimated RMB65 billion–RMB70 billion in 2017. We anticipate that Yango Group will maintain its leading position in Fuzhou and certain key cities in Fujian province. We also expect the company to retain good project execution while enlarging its scale. Fujian Yango's aspiration to increase penetration in its existing business segments and expand into new industries creates additional execution risk and integration risk, in our opinion. The group spent RMB3.67 billion in June 2017 to acquire a 17.17% stake in "A-share" listed Longking, and subsequently increased its shareholdings to 23.04%. 
          Fujian Yango has no prior experience in the environmental services industry or any business connection with the company. The group plans to exercise control on the board and consolidate Longking's financials. Before this transaction, Fujian Yango was in the process of acquiring a large insurance group in Israel for a similar amount. We expect that Fujian Yango may increase debt to further invest in its existing business segments, including through acquisitions. It may also reconsider forays into the financial sector. 
          We forecast that our adjusted debt for Fujian Yango will increase to around RMB155 billion in 2018, from an estimated RMB125 billion–RMB130 billion in 2017 and RMB76 billion in 2016. The debt is likely to increase because of the rapid expansion of the property development arm, since Yango Group accounted for over 90% of the group's debt. 
          Yango Group also has a short debt maturity profile, which results in the same for the group. In the first half of 2017, we estimate the weighted average debt maturity of Fujian Yango was only slightly over two years. We project Fujian Yango's debt leverage will gradually improve in the coming few years, despite remaining high. That is because the revenue recognition upon project completion and delivery in Yango Group is likely to outgrow the increase in debt. In our view, the group's broad funding channels and high cash balance can somewhat mitigate the large near-term debt repayment risk. 
          We consider the financial position and credit metrics of Fujian Yango on a consolidated basis. Fujian Yango may incur a large cash leakage to other shareholders if it needs to distribute the cash balances of Yango Group and Longking to the parent for debt repayment or other purposes. This is because the group only holds about 32.83% of the outstanding shares of Yango Group (43% if we include the shareholdings in its acting-in-concert party, Fujian Kangtian Industrial Co. Ltd.) and 23.04% of Longking. As at the end of June 2017, over 90% of the group's cash is at Yango Group. We currently determine that the repayment and liquidity risks of the parent are not materially different from our consolidated view. Yet, we may reassess the parent's stand-alone financial risk if it substantially increases its debt and leverage for acquisitions. 
          The stable outlook reflects our expectation that Fujian Yango's financial leverage will moderately improve in the coming 12 months. We expect Yango Group to remain the main contributor to the group's earnings and debt, and to achieve high revenue and contracted sales growth. At the same time, we expect Fujian Yango to be prudent in acquisitions for its non-property segments. 
          We may lower the rating if Fujian Yango becomes more aggressive toward debt-funded expansions, including any major acquisitions in its various business segments. In such a scenario, the financial leverage and stand-alone debt serviceability of Fujian Yango will further deteriorate from its level at the end of 2016. 
          We could also lower the rating if the land acquisition by Fujian Yango's property business turns out to be more aggressive than we expect, resulting in significant leverage increase over 2016. We may lower the rating if the company faces difficulties to refinance its debt, mainly raised by its property business, thus leading to an overall weakening of its liquidity and debt maturity profiles. 
          We may raise the rating if the group's financial leverage improves and the property arm continues to demonstrate strong sales execution, such that the overall debt-to-EBITDA ratio is significantly better than our expectation of 13x-15x on a sustained basis.