Fitch Rates China's Shimao Proposed USD Notes 'BB+ (EXP)'

Mon Jan 13, 2014 9:32pm EST

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(The following statement was released by the rating agency) HONG KONG/SINGAPORE, January 13 (Fitch) Fitch Ratings has assigned property developer Shimao Property Holdings Limited's (Shimao; BB+/Stable) proposed seven-year senior unsecured US dollar denominated notes an expected rating of 'BB+(EXP)'. The bonds are rated at the same level as Shimao's senior unsecured 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. KEY RATING DRIVERS Strategic Focus Improves Performance: Shimao has refocused on key regions and cities where it has operational advantages. Its expansion into new cities and third- and fourth-tier cities remains selective. Improved internal management in eight key regions allows better day-to- day management of regional operations and sales. For the 11 months ended 30 November 2013, the group realized contracted sales of CNY61.3bn, exceeding its 2013 sales target of CNY55bn by 11.4%. Fitch expects contracted sales to continue to grow in 2014. Shift in Product Mix: To raise contracted sales, Shimao adjusted its residential property development mix to focus on first-time home buyers and buyers upgrading their homes, as well as improved the quality of its housing stock. Shimao continues to focus on small-to-medium sized units of 90sqm-140sqm, which account for around 75%-80% of its units available for sale for 2013 and 2014. Shimao has one of the highest recurring rental income streams and the highest rental income to EBITDA ratio among Chinese property companies rated by Fitch in the 'BB' category. Delivery of Prudent Financial Strategy: During the challenging operating environment in 2011, Shimao demonstrated operational flexibility and prudent financial management. It slowed down land acquisition to conserve cash. The company continues to have strong financial support from over 10 onshore and offshore banks. Management's focus on maintaining ample liquidity and ready access to various funding channels further supports its ratings. Solid Recurring Income: The company's 64%-owned Shanghai Shimao provides rental income while Shimao's hotel operations are another source of recurring income. Management expects to continue investing in commercial and retail properties and hotels. Fitch believes this will offer additional financial flexibility for the group if required. However, over the past three years, more than 90% of Shimao's revenue was from property sales. Stable Operating Performance: Fitch expects Shimao to maintain a stable operating performance and prudent financial policies in the short-to-medium term and to continue to increase its contracted sales in 2014 to more than CNY70bn. A large and well-located land bank of 37.2 million sqm across China as of 30 June 2013 and its proven track record in selective expansion to third and fourth-tier cities will also underpin its stable performance. Sufficient Liquidity: At June 2013 Shimao had CNY18.9bn in cash (of which CNY2.1bn was restricted cash) and CNY20bn in unused bank credit facilities. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2013-2015, based on its diversified funding channels and flexible land acquisition strategy. RATING SENSITIVITIES 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 20% (1H 2013: 28%) -aggressive debt-funded expansion leading to net debt-to-inventory exceeding 40% (1H 2013: 51.4%) -Contracted sales/gross debt below 1.25x (1H 2013: 1.3x) on a sustained basis -Tightening liquidity due to a sustained fall in free cash flows, or weakened access to financing channels Positive: Future developments that may, individually or collectively, lead to positive rating action include: -Longer track record of stable business growth -Expansion, improved scale and cash efficiency without impact on profitability, with EBITDA margin above 20% on sustained basis -Demonstrated leverage flexibility, with debt-funded expansion leading to net debt-to-inventory below 35% on a sustained basis -Contracted sales/gross debt above 1.25x on a sustained basis Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 2801, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andy Chang Associate Director +852 2263 9914 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: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013 are available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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.

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