Investing.com -- Fitch Ratings has downgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Chinese homebuilder China Vanke Co., Ltd. to ’CCC+’, from ’B’. The ratings agency also lowered the Long-Term IDR for China Vanke’s wholly owned subsidiary, Vanke Real Estate (Hong Kong) Company Ltd (Vanke HK), to ’ CCC (WA: CCCP )’, from ’CCC+’. The downgrade reflects weaker than expected sales and cash flow generation for China Vanke in 1Q25, resulting in a further reduction in its liquidity buffer against significant capital-market debt maturities this year.

China Vanke’s liquidity buffer has been impacted by negative free cash flow (FCF) generation in 1Q25 and 2024. The company’s unrestricted cash, including pre-sale cash deposits, decreased to CNY71.1 billion by the end of March 2025 from CNY77.3 billion at the end of September 2024. This is against short-term debt of CNY156 billion, including capital-market debt of CNY27 billion maturing in the next 12 months.

Shenzhen Metro Group (SZMG), China Vanke’s largest shareholder with a 27.18% stake, provided CNY10.3 billion in shareholder loans to China Vanke this year. This support helped China Vanke address CNY13 billion in capital-market debt that matured year-to-date. However, another CNY23 billion of capital-market debt is maturing for the rest of 2025.

China Vanke’s 1Q25 sales declined 40% to CNY34.9 billion, underperforming the 10% drop for China’s top-100 developers, according to data from the National Bureau of Statistics. Fitch has revised China Vanke’s contracted sales forecast to -40% in 2025 and -25% for 2026.

China Vanke had -CNY8 billion of FCF in 1Q25, including proceeds from bulk asset sales. Fitch expects cash outflow to narrow for the remainder of 2025, as 1Q25 FCF is typically affected by seasonal factors and the company also expects its newly completed floor area in 2025 to decline by 40%.

China Vanke contracted bulk asset sales of CNY27 billion and received CNY10 billion in proceeds in 2024, and further contracted and received about CNY4 billion in 1Q25. Fitch expects the company will receive about CNY15 billion in asset sales proceeds in 2025 to supplement its cash flow and repay debt.

Vanke HK is China Vanke’s sole offshore financing platform. Its ratings are one notch below those of its parent, based on Fitch’s assessment of ’Medium’ legal, strategic and operational incentives for the parent to provide support.

Fitch’s key assumptions for China Vanke include sales dropping by 40% in 2025 and 25% in 2026, and FCF after asset disposal proceeds of negative CNY1 billion-2 billion in 2025-2027.

The recovery analysis assumes that Vanke HK would be liquidated in a bankruptcy. The liquidation value approach usually results in a higher value than the going-concern approach, given the nature of homebuilding. The allocation of value in the liability waterfall results in a Recovery Rating of ’RR4’ for the offshore senior unsecured debt.

China Vanke’s rating could be negatively affected by weaker contracted sales or FCF generation than expected, or deterioration in liquidity or funding access. Vanke HK’s rating could be downgraded if incentives for China Vanke to support Vanke HK weaken. Positive rating action is not expected in the near term, unless there is sustained recovery in the company’s contracted sales and FCF, or extraordinary financial support from its major shareholder, leading to an improved liquidity profile.

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