Singapore, June 26, 2015 -- Moody's Investors Service says that of the B2-Ba3 Indonesian and Chinese property developers that it rates, Indonesian developers as a whole will continue to show higher profitability levels and stronger debt structures over the next 12 months.
"In addition, of the B2-Ba3 developers that we rate, Indonesian property developers have captured stronger domestic market positions when compared with their Chinese peers; a situation which provides the former with greater financial and operational flexibility," says Jacintha Poh, a Moody's Assistant Vice President and Analyst.
However, Poh also explains that the smaller size of the property market in Indonesia will constrain revenue growth for Indonesian developers and prevent them from reaching the operating scale and geographic diversity of their Chinese peers.
"As for Chinese developers, their cash receipts are less predictable when compared with their Indonesian counterparts, because of government interventions which result in price and demand volatility," says Dylan Yeo, a Moody's Analyst.
Moody's analysis is contained in its just-released report titled "Property -- Indonesian and Chinese Developers with B2-Ba3 Ratings: Indonesian Developers Are Financially Stronger Than Chinese Counterparts," and is co-authored by Poh and Yeo.
Moody's report points out that Indonesian developers demonstrate stronger liquidity profiles because their near-term refinancing risks are lower and their cash to short-term debt ratios are higher, as their debt structures consist mainly of long-dated bullet maturity bonds.
However, Indonesian developers are exposed to more foreign-currency risk. They exhibit a higher portion of US dollar bonds in their debt structure, and the rupiah is more volatile against the US dollar when compared with the renminbi. This exposure raises their funding costs when the rupiah depreciates against the dollar; as has been the case over the past four years.
Moody's report also says that while developers in both Indonesia and China will face margin pressure over the next 12 months, Indonesian developers will record higher margins than their B2-Ba3 Chinese peers, because while the formers' land and construction costs are rising, such costs are still lower in Indonesia and the pricing power of Indonesian developers is greater.
In addition, land cost is a larger component of cost of sales for Chinese developers when compared with their Indonesian peers, because Chinese developers benefit from a shorter period of land appreciation, due to their fast turnover business models. Moreover, competition in the Chinese property sector has driven up prices for land auctioned by the government.
Because of the need to maintain liquidity and service funding costs, most Chinese developers rated in the B2-Ba3 range exhibit a land bank life of about 3-5 years and must replenish their land bank more frequently than their Indonesian peers.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1000942.
Moody's offers complimentary access to its new topic page, China -- Reform and Rebalancing; a centralized source for Moody's research related to key credit issues in China as the country's rebalancing story unfolds. This report is part of Moody's ongoing coverage on this theme. Register today at www.moodys.com/chinarebalancing for access to all research on this page.
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