S&P upgrades Vingroup credit outlook

“We revised the outlook to reflect our view of the potential for Vingroup's capital structure to strengthen on sound operating cash flow, despite hefty outlays to support growth,” said the S&P report.

At the same time, the rating agency affirmed the 'B' long-term corporate credit rating and the 'axBB-' ASEAN regional scale rating for the Vietnam-based property developer. It also affirmed a 'B' long-term issue rating on the senior unsecured notes issued by Vingroup.

According to S&P, Vingroup's brand name and execution record ensures its leading position on the Vietnamese property market. 

The developer's property sales in January to July 2016 totalled VND40 trillion (US$1.8 billion), with most of its current projects under construction at least 60% sold. This is similar to the sales of roughly VND44 trillion (US$2 billion) one year ago. 

For the first 9th month of 2016, Vingroup recorded a net after-tax profit of VND3.1 trillion (US$141.5 million), thrice the figure in the same period in 2015, and achieved 103% of the profit target approved during the 2016 Annual General Meeting. 

With a market capitalization of VND118 trillion (US$5.38 billion) as of September 30, 2016, Vingroup is one of the largest listed companies in Vietnam.

The company's projects now look more diversified between Hanoi and Ho Chi Minh City after the launch of Vinhomes Central Park and Vinhomes Golden River in Ho Chi Minh City. 

Beyond property development, Vingroup is expanding its retail mall portfolio. Currently it has about 25 operating projects, up from the nine a year ago, with plans to increase to 66 by the end of 2017. 

"The company is aggressively growing its consumer retail footprint in various formats," said S&P Global Ratings credit analyst Kah Ling Chan. "On top of better earnings diversity, consumer retail adds stability in cash flow and income to Vingroup's portfolio. Vingroup has indicated that, in the longer-term, it targets to have 50% of its revenue from more stable recurring income sources.”

Given the aggressive expansion in various divisions, S&P expects Vingroup's capital expenditure to remain elevated at close to VND100 trillion over the 2016-2018 period, mostly for land purchases. 

S&P believes Vingroup will partly finance the spending using its growing cash flows and that reported debt will peak in 2017 at about VND53 trillion (US$2.4 billion). 

"We affirmed the rating because Vingroup continues to have significant exposure to cyclical and volatile cash flows from development properties, even as its property investment and consumer retail activities continue to grow,” Chan said. 

However, Chan also pointed out that the group has shown the ability to weather a property downturn in 2012-2014, owing to differentiated projects, including complementary services, such as schools, retail, and hospitals, for a comprehensive lifestyle for Vietnam's young population and rising middle class. 

The positive outlook reflects the prospects for an upgrade in the next 12-18 months if Vingroup consolidates its record of rolling out its property development and retail operations, translating into a more prudent and predictable leverage.

However, downward pressure could also emerge if Vingroup's property sales fall substantially short of expectations, with continued, debt-funded capital spending or acquisitions without commensurate incremental cash flows.