The ratings outlook is stable.

The proposed bonds will be used to primarily fund Aoyuan's land acquisitions and project development, and to refinance the company's existing indebtedness and for general corporate purposes.

The provisional status of the bond rating will be removed after Aoyuan has successfully issued the bonds with satisfactory terms and conditions.

RATINGS RATIONALE

"Aoyuan's B2 corporate family rating reflects its track record in property development in economically strong Guangdong province," says Kaven Tsang, a Moody's Vice President and Senior Analyst, adding, "This track record has further helped the company secure new projects in prime locations in and outside Guangdong".

"Aoyuan's expansion beyond Guangdong to some extent could alleviate the risk of geographic concentration but such expansion would add execution and funding risks in the next 1-2 years. While Aoyuan has reported satisfactory sales in Shenyang this year, it has yet to establish its reputation outside Guangdong," says Tsang.

"The B2 rating also considers the strength of the company's management, which has guided Aoyuan through the last two down-cycles with some access to offshore bank debt funding," says Tsang.

Aoyuan's main products are mass-market residential properties which exhibit some sales resilience despite the current purchase restrictions imposed by the government.

Moody's expects Aoyuan to generate annual contract sales of about RMB5 billion this year, a level which is comparable to that of mid-single-B developers.

"On the other hand, the B2 corporate family rating is constrained by Aoyuan's small scale and a track record of high volatility in sales and profitability," says Tsang.

Moody's expects its EBITDA margin to stay around 25% in the next 2 years as sales stabilize. EBITDA interest coverage will also stay around 2x-2.5x as its raises new debt to fund its expansion. These metrics match its B2 corporate family rating.

"Aoyuan also has an adequate liquidity position as the completion of the disposal of its interest in the Chang'an Ave project in Beijing will provide additional funding of around RMB2.6 billion. This amount together with the proposed bond issuance will provide funding for the company's current expansion plan" says Tsang.

Aoyuan's bond rating is notched down to B3, reflecting structural and legal subordination. The ratio of secured and subsidiary debt to total assets was around 20% as of June 2012. This ratio will likely stay above 15% in the coming 1-2 years as the company will continue to draw on onshore and/or secured bank loans to fund construction and expansion.

The stable outlook reflects Moody's expectation that the company will maintain adequate liquidity in the absence of aggressive debt-funded acquisitions.

Downward rating pressure could emerge if (1) Aoyuan's liquidity and operating cash flow generation is weaker than anticipated, due in turn to declining sales, or the emergence of more regulatory controls on China's property sector; (2) there is a decline in prices and profit margins which negatively affect interest coverage and financial flexibility; or (3) it engages in material debt-funded acquisitions.

In such a situation, the company's balance sheet cash (including restricted and unrestricted cash) could fall below 50% of short-term debt, and/or its credit metrics could deteriorate, showing an EBITDA margin below 15%; EBITDA/interest below 1.5x; or adjusted debt/capitalization above 55% on a sustained basis.

Upward rating pressure could emerge over the medium term if Aoyuan establishes a track record in: (1) achieving planned sales over the next 1-2 years; (2) maintaining a reasonable cash balance above RMB2.5-3.0 billion; and (3) demonstrating strong financial discipline, such that its EBITDA margins exceed 30%, EBITDA/interest exceeds 3x-3.5x, and adjusted debt capitalization falls below 40-45% on a sustained basis.

The principal methodology used in rating China Aoyuan Property Group Limited was the Global Homebuilding Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Founded in 1997 and listed in October 2007, China Aoyuan Property Group Limited is a property developer operating in China with 28 projects in Guangdong, Guangxi, Jiangxi, Liaoning Jiangsu, Hunan, and Chongqing. Its total land bank amounts to 8.8 million sqm (including partly owned projects, but excluding land without title documents) of gross floor area as of June 2012.

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Kaven Tsang Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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