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Dat Xanh's rating reflects the company's expanding market position as a residential property developer in southern Vietnam and its status as the largest real estate brokerage in Vietnam.

Fitch Assigns Dat Xanh Group First-Time 'B' IDR; Outlook Stable
Fitch Ratings has assigned Vietnam-based Dat Xanh Group Joint Stock Company a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B'. The Outlook is Stable.
Dat Xanh's rating reflects the company's expanding market position as a residential property developer in southern Vietnam and its status as the largest real estate brokerage in Vietnam. Its land bank of 2,293 hectares at end-June 2021 and country-wide sales and distribution capabilities through its property brokerage platform, Dat Xanh Real Estate Services Joint Stock Company, has been key to this growth.
The rating also reflects Dat Xanh's 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.
Growth Phase, Execution Risk: Fitch believes Dat Xanh can achieve rapid growth over the next three years, although it lacks a consistent record in delivering annual contracted sales of at least VND6.0 trillion, Fitch rating upgrade trigger for the company. Dat Xanh achieved VND5.1 trillion of contracted sales in 1H21, significantly higher than the VND3.4 trillion for full-year 2020, stemming from strong demand for residential property and an accumulation of landbank since 2017. However, regional lockdowns have raised execution risk, with positive rating action dependent on steady performance.
Brokerage Arm Supports Reach: Dat Xanh's real-estate development benefits from the sales and distribution network of its brokerage arm, Dat Xanh Services, Vietnam's largest primary real-estate brokerage, with an estimated market share of 30%. The full-service broker distributes Dat Xanh's projects in addition to providing consultancy and sales management for more than 100 projects across the country.
The brokerage arm has achieved annual third-party contracted sales of VND30 trillion-40 trillion in the last three years and we expect it to contribute about half of Dat Xanh's total revenue. However, its work is capital-intensive, which drains operating cash-flow during periods of high growth. The broker pays a deposit to guarantee a minimum portion of contracted sales for each project, which is recovered after a minimum contracted sales threshold is met. Dat Xanh usually funds part of the cash out flow with equity to keep leverage at moderate levels.
Narrowing FCF Gap: Dat Xanh's rating is limited by its negative free cash flow (FCF), which stems from land purchases for property development and the working capital associated with its brokerage services segment. 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 working capital needs of the brokerage arm. Fitch expects Dat Xanh's bargaining power as a full-service broker to improve with operating scale, especially with smaller developers, as the sector consolidates.
Strong Balance Sheet: Fitch expects Dat Xanh's net debt/adjusted inventory to hover at around 30% over the next two 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 as at end-June 2021.
Dat Xanh's moderate leverage, especially relative to international peers, is also supported by public and preferential equity issuances, which totalled VND3.9 trillion over 2016, 2019 and 2020. The group also raised VND2 trillion via the listing of Dat Xanh Services in 1H21 and Dat Xanh's shareholders have approved the issuance of a further VND4.0 trillion of preferential equity in 4Q21. Fitch has factored these amounts into the assumptions.
Robust Medium-Term Outlook: Fitch expects demand for residential property to remain robust in the mid-term, driven by strong economic growth and a rising middle class and urban migration, which will continue to drive demand in key cities like Hanoi, Ho Chi Minh and satellite towns. Fitch forecasts Vietnam's real GDP to rise 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 to boost average selling prices and interest for new launches.
Dat Xanh's rating can be compared with Vietnamese developer, BIM Land Joint Stock Company (BIML, B/Stable), as well as that of Indonesian property developers, PT Ciputra Development Tbk (CTRA, B+/Stable) and PT Lippo Karawaci TBK (B-/Stable).
Dat Xanh's residential real-estate development provides greater cash flow stability than BIML's tourism-led property portfolio. Dat Xanh's brokerage business also offers more geographically diverse revenue streams compared with BIML's exposure to two main townships in Ha Long and Phu Quoc. However, this is offset by Dat Xanh's large working-capital needs, which, together with significant land acquisitions, drain its cash flow from operation (CFFO) during periods of high growth. In contrast, BIML has a record of maintaining positive CFFO over the years, stemming from its mostly pre-paid land bank. Both companies are likely to maintain leverage - defined as net debt/adjusted inventory - at around 30% in the next two years, although we have a slightly higher leverage tolerance for Dat Xanh given its exposure to less-cyclical cash flow from residential property sales.
CTRA's rating stems from its record of sustaining annual attributable contracted sales of more than USD300 and a more neutral operating cash flow profile compared with Dat Xanh, stemming from its mostly pre-paid landbank. CTRA's higher rating is also supported by its greater product and price-point diversity, with a presence in the low-end to luxury residential space, as well as exposure to non-development income from commercial properties, such as shopping malls, offices and hotels. CTRA has demonstrated its ability to shift its product mix to cater to varying demand patterns, helping it navigate residential property market downturns.
Lippo's rating reflects its weaker business and financial profile; its contracted sales scale is smaller than Dat Xanh's around USD150 million. Both companies have reported negative FCF/gross debt in the last few years, but we expect the cash flow gap to improve in the next 12-18 months. Nevertheless, Lippo's leverage is likely to remain higher than that of Dat Xanh over the medium-term, at around 45%-50%.

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