*DJ Fitch Rates Yuzhou Properties' Proposed USD Notes'BB-'
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February 11, 2020 21:03 ET (02:03 GMT)
Press Release: Fitch Rates Yuzhou Properties' Proposed USD Notes'BB-'
The following is a press release from Fitch Ratings:
Fitch Ratings-Hong Kong-11 February 2020: Fitch Ratings has assigned China-based Yuzhou Properties Company Limited's (BB-/Stable) proposed US dollar senior notes a 'BB-' rating.
The notes are rated at the same level as Yuzhou's senior unsecured rating because they constitute its direct and senior
- unsecured obligations. Yuzhou intends to use the net proceeds from the issue to primarily refinance its existing debt.
Yuzhou's ratings are supported by a higher contracted sales scale and healthy profitability, with an EBITDA margin of above 25%. Its quality, low-cost land bank should continue to support a wider margin than those of peers. The company's sales expansion and relatively short land-bank life of about three years, however, will limit room for deleveraging.
KEY RATING DRIVERS
Expansion Pressures Leverage: Fitch expects leverage - measured by net debt/adjusted inventory that proportionately consolidates joint ventures and associates - to stay at about 40% in the next 18-24 months (1H19: about 40% after adjusting for unpaid land premium of CNY2.8 billion, end-2018: 39%). The company had a total land bank by end June-2019 of 19.2 million square metres (sq m), which was sufficient for development in the next three to four years. Yuzhou's contracted sales will not be able to continue expanding at the current pace unless the company replenishes its land bank. Fitch estimates Yuzhou will spend 50%-60% of its annual total contracted sales on acquiring land (1H19: 49%).
Larger Sales Scale: Fitch estimates Yuzhou's total annual contracted sales will rise to more than CNY100 billion in 2021. Yuzhou's total contracted sales climbed by 34% to CNY75.1 billion in 2019, driven by an increase in gross floor area sold to 5.0 million sq m, while the contracted average selling price stayed flat at CNY15,110 per sq m (2018: CNY15,125). The company achieved its sales target for 2019, taking into account its pipeline of CNY80 billion in saleable resources available in 2H19, of which 55% by sales value were projects located in the Yangtze River Delta, where housing demand remains resilient.
Margins to Stay Healthy: Fitch expects Yuzhou's gross profit and EBITDA margins to stay healthy at 27%-28% and 25%, respectively, in 2019-2020. Yuzhou's gross profit margin was 27% in 1H19 (2018: 31%). Yuzhou had unrecognised contracted sales by end-June 2019 of CNY68 billion, which carry a gross profit margin of about 30% and will be recognised on the income statement over the next two to three years. Operating costs remained well-controlled, with selling, general and administrative expenses as a percentage of revenue falling to 4.2% in 1H19, from 5.3% in 1H18.
DERIVATION SUMMARY
CIFI Holdings (Group) Co. Ltd. (BB/Stable) is Yuzhou's closest peer in terms of geography, as both companies focus on the Yangtze River Delta region. Yuzhou is also strongly positioned in the West Strait Economic Zone and has less exposure to the Bohai Rim region. CIFI has higher attributable contracted sales and lower leverage, which explains why it is rated a notch higher than Yuzhou. CIFI has higher sales efficiency than Yuzhou, but a narrower EBITDA margin.
In terms of scale, Times China Holdings Limited (BB-/Stable), which is focussed on the Greater Bay Area, had a similar level of 2018 attributable contracted sales as Yuzhou, at around CNY50 billion. Times China has adopted a faster churn strategy, and thus its EBITDA margin is narrower than that of Yuzhou, as is its leverage.
KWG Group Holdings Limited (BB-/Stable) has slightly lower attributable contracted sales than Yuzhou. KWG's focus is on Guangzhou, although both companies have some exposure to Suzhou, Shanghai and Tianjin. KWG has a slower churn model than Yuzhou, which explains its slightly wider EBITDA margin. KWG's leverage is rising towards Yuzhou's level.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- - Annual total contracted sales of CNY86 billion in 2020, and CNY104 billion in 2021 (2018: CNY75 billion)
- - 50%-60% of contracted sales to be spent on land acquisitions to maintain a land-bank reserve sufficient for three to four
- years of development (1H19: about three years)
- - Gross profit margin of 27%-28% in 2019-2021 (1H19: 27%)
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- - Proportionally consolidated net debt/adjusted inventory sustained below 40%
- - Proportionally consolidated contracted sales/gross debt sustained above 1.2x (2018: 0.8x)
- - EBITDA margin sustained above 25%
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- - Proportionally consolidated net debt/adjusted inventory above 45% for a sustained period
- - Proportionally consolidated contracted sales/gross debt below 1.0x for a sustained period
- - EBITDA margin below 20% for a sustained period
LIQUIDITY
Sufficient Liquidity: Yuzhou had a total cash balance of CNY38.9 billion, including restricted cash of CNY3.2 billion, as of end-1H19. This is sufficient to cover debt maturing within a year of CNY13.6 billion and to support planned expansion. The company has diversified funding channels to ensure the sustainability of its liquidity, including bank loans, onshore and offshore bond issuance, as well as equity placements.
Contact:
Primary Analyst
- Silvia Fun CFA, CPA
- Associate Director
- +852 2263 9975
- Fitch (Hong Kong) Limited
- 19/F Man Yee Building
- 68 Des Voeux Road Central, Hong Kong
Secondary Analyst
- Rebecca Tang
- Director
- +852 2263 9933
Committee Chairperson
- Su Aik Lim
- Senior Director
Date of Relevant Rating Committee: 11 September 2019
ESG Considerations
- Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg.
Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
- Corporate Rating Criteria (pub. 19 Feb 2019)
- https://www.fitchratings.com/site/re/10062582
- Corporates Notching and Recovery Ratings Criteria - Effective from 23 March 2018 to 14 October 2019 (pub. 23 Mar 2018)
- https://www.fitchratings.com/site/re/10024585
- Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)
- https://www.fitchratings.com/site/re/10058988
Additional Disclosures
- Solicitation Status
- https://www.fitchratings.com/site/pr/10109601#solicitation
- Endorsement Policy
- https://www.fitchratings.com/regulatory
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(MORE TO FOLLOW) Dow Jones Newswires
February 11, 2020 21:03 ET (02:03 GMT)