Fitch Rates Wuzhou's Proposed Notes 'B(EXP)'

Tue Jan 7, 2014 9:09pm EST

Related Topics

(The following statement was released by the rating agency) HONG KONG, January 07 (Fitch) Fitch Ratings has assigned China-based commercial property developer Wuzhou International Holdings Limited's (Wuzhou, B/Stable) proposed USD senior unsecured notes an expected rating of 'B(EXP)'. The notes are to be issued as a tap to the USD100m 13.75% notes due 2018 issued in September 2013, with the same terms and conditions. The notes are rated at the same level as Wuzhou's senior unsecured rating of 'B' as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received. KEY RATING DRIVERS Small-scale property developer: Wuzhou's rating is constrained by its small scale compared with Fitch-rated peers. With historical contracted sales of CNY1.2bn, CNY2.1bn and CNY2.8bn in 2010, 2011, and2012 respectively, Wuzhou is still a small property developer in China. It faces concentration risk with 55% of its contracted sales in H113 derived from Jiangsu province and seven out of 11 of its completed projects in Wuxi. It remains to be seen whether Wuzhou can successfully transfer its business model from Wuxi to other cities in China. As the number of projects under management increases across different provinces, it will be challenging for the company to maintain a high-quality tenant mix in each project. Volatile commercial property sales: As a commercial property developer in China, Wuzhou is exposed to higher risk than residential property developers. Commercial property sales mainly target investment demand, which can be adversely affected during economic downturns or in an environment of tighter liquidity. Investment demand is also highly dependent on brand reputation, which is susceptible to operating performance of existing projects. In general, cash flow projection from property sales is less predictable for commercial property developers, compared with residential property developers. Strong commercial sites limited: With a longer list of requirements, including high foot traffic, easy accessibility and high residents' income levels, commercial property sites with strong development potential are harder to come by than residential sites. Wuzhou's upcoming projects are mostly situated in third-tier cities. While the company enjoyed low land cost (typically a few hundred CNY/sqm), it faces the risk of whether there will be enough consumption demand in third-tier cities to support retail outlets in the projects. Operational success in Wuxi: Wuzhou has completed two wholesale markets and five mixed-use commercial complexes in Wuxi, establishing a critical mass in its hometown. Wuzhou has been successful in selling the majority (80%-90%) of its project space on a strata-title basis and keeping the remainder for lease income. The company actively manages the tenant mix for shop buyers after the projects open and its properties enjoy an average occupancy rate of above 90%. Capitalising on its success and experience in Wuxi, Wuzhou is now expanding in the eastern, central, south-western and north-eastern parts of China. With a quick churn-out business model, Wuzhou targets to grow its contracted sales to CNY5bn in 2013 from CNY2.8bn in 2012. Wuzhou recorded contracted sales of CNY4.7bn in the year to November 2013, up 87% yoy. After-sale tenant-mix management: Wuzhou differentiates itself from other commercial property developers by providing after-sale tenant-mix management and negotiating leases with prospective tenants on behalf of shop owners. In return, Wuzhou charges shop owners a commercial management service fee. The fee is equal to 100% of the rental value in the first three years of the lease and then 8%-10% of the rental value in the fourth year onwards. If Wuzhou can continue maintaining an optimal tenant mix and high occupancy rates in its existing projects, it could enhance its brand reputation and attract more buyers to its future projects. Strong network of buyers: Wuzhou's founder, Mr. Shu Cecheng, was in the trading and manufacturing business before turning to property development in 2004. Mr. Shu has an extensive business network, which offers Wuzhou a pool of potential tenants and shop buyers, especially in wholesale markets. This is crucial to Wuzhou as it relies heavily on project sales, which generate cash and enable the company to replenish its land bank quickly. Sufficient liquidity: Fitch expects Wuzhou to have sufficient liquidity to cover its short-term debts. As at mid-2013, Wuzhou had CNY1.8bn of cash (of which CNY377m was restricted cash and pledged deposits) and CNY1.6bn in undrawn credit facilities. That is more than enough to cover its CNY835m debt to be repaid in the coming 12 months. However, Wuzhou's financial flexibility is limited because all of its debt is secured debt. The company plans to diversify its funding sources and reduce its reliance on secured debt. Also, the company plans to reduce the proportion of trust loans in its portfolio to less than 25% in the next one-two years from 33% as of end-H113 to reduce its overall borrowing costs. RATING SENSITIVITIES Positive: Future developments that may collectively lead to positive rating actions include: -Annual contracted sales being sustained above CNY8bn while maintaining current margins and credit metrics, and -Increase in geographical diversification by establishing its presence in a greater number of provinces, and -Satisfactory operating conditions for completed projects, in particular for those that have been open for more than three years Negative: Future developments that may, individually or collectively, lead to negative rating action include -A significant reduction in annual contracted sales -Deviation from the current fast churn-out business model -Net debt/adjusted inventory being sustained above 40% (2012: 31%) -EBITDA margin staying below 20% on a sustained basis (2012: 32%) -Contracted sales/ total debt staying below 1.0x on a sustained basis (2012: 1.2x) Headquartered in Wuxi in Jiangsu province, Wuzhou is a commercial property developer focusing on specialised wholesale market and multi-functional commercial complexes in the second- and third-tier cities in China. Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Michelle Leong Associate Director + 852 2263 9929 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

FILED UNDER: