DXG's rating reflects the company's expanding market position as a residential property developer in
PDR's rating reflects its expanding market position as a property developer in Vietnam and its healthy financial profile. Fitch expects PDR's cash collections from contracted sales to rise to VND5.5 trillion in 2021 and VND11 trillion in 2022 from VND4.5 trillion in 2020 due to strong demand amid the country's growth prospects. The rating also factors in the lag between the company's cash collections and its contracted sales due to its reliance on wholesale buyers.
Reliance on Wholesale Buyers: PDR ties up with wholesale buyers for the exclusive sale and marketing of its property projects. Wholesale buyers receive a discount on the selling price in return for underwriting project sales, sell individual homes to end-buyers, and provide cash flows to PDR based on the construction schedule. PDR is responsible for the development and handover of the projects to the end-buyers and retains the ownership title of each home until all dues have been collected.
Focus on Cash Collection: The company records contracted sales for the entire project at the point of signing the master agreement with the wholesale buyer, while the wholesale buyer typically launches projects to individual home buyers - which predates cash collections - with a lag of three-to-six months on average.
Therefore, Fitch uses PDR's implied cash collections - measured as revenue from property sales + change in customer deposits + change in account receivables - rather than contracted sales to measure operating scale. Strong domestic demand for residential property in the next 12-24 months and the presence of a large number of wholesale buyers in the local market mitigate the risks associated with relying on a few wholesale buyers.
Improving Diversification: PDR has evolved from being a high-rise developer in Ho Chi Minh City (HCMC) to selling a mix of high- and low-rise homes and moving into second-tier cities, improving geographical diversification. This has reduced PDR's exposure to slow regulatory approvals in HCMC, although we believe profitability will be pressured in the next few years. Fitch projects EBITDA margins to fall to 30%-32% (2020: 40%) as PDR's products may face competition from incumbents in new locations, necessitating larger discounts to wholesale buyers.
Fitch expects PDR to reduce project concentration as cash collections will stem from three-to-five projects in 2021-2022, from one-to-two projects in 2019-2020. The company completed its first township project, Nhon Hoi, in Binh Dinh province in 2020 with total contracted sales of VND6.6 trillion (VAT excluded) and is currently developing a high-end apartment project, Astral City, in Binh Duong province with total contracted sales of VND9.6 trillion (VAT excluded).
Negative FCF on Land Acquisitions: PDR has 768 hectares (ha) of land bank under varying stages of regulatory approvals. This includes Land Use Rights Certificates for 176ha of land spread across four provinces and fully paid for, which is adequate for contracted sales in the next three-to-five years given PDR's large share of high-rise projects. It plans to spend VND1.9 trillion in 2H21 and VND4.4 trillion in 2022 on new land bank, clearance costs and master plan approvals, including master plan enhancements, on existing land bank, leading to negative free cash flow (FCF).
Low Leverage Cushions Investments: PDR's leverage is comfortable for its rating. We expect net debt/adjusted inventory to remain between 20% and 30% in 2021-2023. This will provide PDR with headroom to absorb negative FCF in 2021-2022 amid the land acquisitions. Fitch projects PDR to generate neutral-to-positive FCF in 2023-2024 on rising cash collections and falling land acquisition needs. Fitch thinks PDR has limited ability to scale back its land purchase requirements relative to rated peers that have larger, fully paid land banks.
Strong Economic Growth: Fitch expects demand for residential property in Vietnam to remain strong in the medium term, supported by domestic economic growth that is driving urbanisation, rising affluence and a growing middle class. Fitch expects Vietnam's GDP to grow by 3.8% in 2021 and 7.9% in 2022, as the lost growth momentum caused by the Covid-19 pandemic in 3Q21 may be regained in subsequent quarters as output and social activities normalise.
PDR's 'B' rating is comparable with that of its Vietnamese developer peers, such as Dat Xanh Group Joint Stock Company (DXG, B/Stable) and BIM Land Joint Stock Company (BIML, B/Stable). We think PDR's rating also compares well with that of Indonesian developer peers, such as PT Ciputra Development Tbk (CTRA; B+/Stable) and PT Lippo Karawaci TBK (LPKR; B-/Stable).
Fitch expects PDR's annual contracted sales to rise to VND10 trillion-16 trillion in 2021-2022, supported by greater geographical diversity and focus on residential property compared with BIML's lower projected contracted sales of VND7 trillion-8 trillion from its tourist-centric townships in Ha Long and Phu Quoc. However, this is balanced by BIML's record of faster cash collection with higher margins as it sells mainly to retail homebuyers, compared with PDR's wholesale approach. There is also an element of execution risk to PDR's fast growth as it lacks a record of operating at a much larger scale. Hence, both companies are rated at the same level.
Both DXG and PDR have been diversifying their projects to second-tier cities and we expect strong growth in the medium term. However, this translates to execution risks on balancing their cash flows and land acquisition, while obtaining funding simultaneously as both companies have no record of operating at a much larger scale. Fitch expects PDR to book larger contracted sales than DXG. However, this is balanced by DXG's better cash collection rate from selling directly to retail homebuyers and a large distribution network via the brokerage business that supports greater sales reach. Hence, both companies are rated at the same level.
Fitch rates CTRA one notch higher than PDR to reflect CTRA's record as a leading property developer in Indonesia and its more diverse product offerings across price points and geographies that have allowed it to maintain steady contracted sales across economic cycles. CTRA also has a portfolio of non-development income-generating assets including shopping malls and hotels. In contrast, PDR has a smaller operating scale and greater geographical and project concentration. There are execution risks to PDR's projected high growth in contracted sales in the next two years.
PDR is rated one notch above LPKR as the Vietnamese developer generates larger contracted sales and cash collections. We project PDR will maintain better FCF and lower leverage in the medium term.