TEXT-Fitch Rates Shimao's Proposed USD Notes 'BB(EXP)'
(The following was released by the rating agency)
HONG KONG, January 07 (Fitch) Fitch Ratings has assigned Hong Kong-based Shimao Property Holdings Limited's (Shimao; 'BB'/Stable) proposed seven-year USD notes an expected rating of 'BB(EXP)'.
The bonds are rated at the same level as Shimao's Issuer Default Rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final ratings are contingent upon the receipt of final documents conforming to information already received.
The ratings reflect Shimao's concentration in property sales and industry wide regulatory risks as well as its large and well-located land bank of 38.8 million sqm (as at 30 June 2012) across China and the company's proven track record in property development.
Management's focus on maintaining both ample liquidity and ready access to various funding channels further supports its ratings. The company continues to have strong support from over 20 onshore and offshore banks.
Contracted sales increased significantly in 2012 as overall market conditions improved. Shimao also successfully adjusted its residential property development mix to focus on first-time home buyers and upgraded the quality of its housing stock.
Shimao also has one of the highest recurring rental income streams and the highest rental income-to-EBITDA ratio among Chinese property companies rated by Fitch. Its recurring rental income from investment properties is derived from its 64%-owned Shanghai Shimao unit. Management expects to continue investing in commercial/retail properties and hotels. Fitch believes the investment portfolio will offer additional financial flexibility for the group, if required.
The ratings are constrained by the company's concentration in property sales, which contributed over 90% of its 2011 revenue, as well as by regulatory risks in the Chinese property market.
The Stable Outlook reflects Fitch's expectation that Shimao will maintain a stable operating performance and prudent financial policies in the short- to medium-term. The agency expects Shimao to continue to meet its contracted sales target in 2013.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-continued weakening of the operating environment, leading to EBITDA margin erosion below 25%
-aggressive debt-funded expansion leading to net debt-to-inventory exceeding 45%-50% -acquiring land above 30% of current average selling price
-Tightening liquidity due to a sustained fall in free cash flows, or weakened access to financing channels
Positive: Positive rating action is not expected over the next 12 to 18 months due to the industry's highly cyclical and inherently volatile cash flows, as well as high regulatory risks in the Chinese property sector.
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