Fitch Publishes China South City's 'B+' Rating; Outlook Positive

Sun Jan 19, 2014 8:59pm EST

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(The following statement was released by the rating agency) HONG KONG, January 19 (Fitch) Fitch Ratings has published China-based trade centre developer China South City Limited’s (CSC) Long-Term Issuer Default Rating (IDR) of ‘B+’ with Positive Outlook, senior unsecured rating of ‘B+’ and Recovery Rating of ‘RR4’. Fitch has also assigned CSC’s proposed US dollar senior unsecured notes an expected rating of ‘B +(EXP)', and Recovery Rating of ‘RR4’. The notes are rated at the same level as CSC’s senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating of the proposed notes is contingent upon receipt of documents conforming to information already received. KEY RATING DRIVERS Positive Outlook: The positive outlook reflects the company’s increasing scale and geographic diversification as sales from newer projects start contributing meaningfully to its cash flows. Since its success in Shenzhen, CSC has been expanding into seven other provincial capital cities through collaborations with their provincial governments. CSC will be able to establish itself as a national provider of integrated trade centres if it is able to sustain its sales momentum - the company increased its contracted sales to HKD12.6bn in the first nine months of the financial year ending March 2014 (FY13: HKD8.2bn). Good Project Locations with High Profitability: Following its start in Shenzhen in December 2004, the company has developed a track record of executing large-scale integrated trade centre developments and a strong reputation, which enables it to expand into locations of its choice. All of CSC’s projects are located in provincial capitals and its large acquired land resources of 18m square metres will support the company’s development plan for the next five to eight years. The company’s cooperation with provincial governments for its projects also lowers its land costs and contributed to its high EBITDA margins (1H FY14: 39.2%). Moderate Leverage: CSC’s leverage is comparable to that at similarly rated peers in the mass-market homebuilding segment, despite lower asset churn with contracted sales/gross debt of 0.69x in FY13 and exposure to the investment property business, which has a long investment horizon. The recent proposed HKD1.5bn new share issuance to Tencent Group also provides CSC additional financial and technical resources to expand its e-commerce platform. As CSC increases its scale, Fitch estimates the company’s ratio of net debt to adjusted inventory (investment property valued at cost) to increase to around 35% over the medium term (1H FY14: 30.6%), though this would still be comparable to levels seen at its peers. Commercial Demand More Volatile: CSC’s rating is constrained by its exposure to more volatile commercial property demand. Its projects outside Shenzhen (4m sqm-18m sqm) are also of significantly larger scale than those in Shenzhen (2.6m sqm) and sales are still at initial phases, which exposes the company to considerable demand and execution risks. Competition from nearby projects may also create downward pressure on average selling prices (ASPs) and negatively impact the company’s profit margins. Fitch views CSC’s moderate leverage and completed properties in Shenzhen, valued at HKD14bn end-FY13, to provide a financial buffer in the event of a downturn in demand. Limited Geographical Diversification: While CSC has diversified out of Shenzhen by pre-selling projects in Nanchang, Nanning, Xian, Zhengzhou and Harbin in the past two years, only the Shenzhen project is currently in operation. The initial phases of its Nanchang, Nanning and Xian projects are slated to start operation in early 2014. Fitch views the ability to replicate its success in Shenzhen in these large-scale projects in Tier-2 cities to be important, particularly to sustain sales and ASPs of subsequent phases. Low Yielding Investment Property Assets: CSC generally retains around 50% of the gross floor area of its trade centres for lease (FY13: 0.52m sq m consisting of Phase 1 and Phase 2 in China South City Shenzhen) but for the medium-term, CSC will remain reliant on property sales for cash generation. Its investment property assets have long investment horizons: occupancy at China South City Shenzhen Phase 2 has only reached 60% after starting operation in 2010. Fitch expects the company’s recurring EBITDA to grow gradually but still remain small relative to its recurring EBITDA interest coverage, which would likely stay below 0.3x for the next three years. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include:- - Ability to sustain sales outside Shenzhen without dominance by any one particular project (no more than 30% of total contracted sales), with total contracted sales sustained at above CNY12bn a year - EBITDA margin sustained at above 40% - Net debt/adjusted inventory sustained at below 35% (with investment property valued at cost) - Contracted sales/total debt sustained at above 1x Failure to meet the above guidelines over the rating horizon would lead to the outlook being revised to Stable. Contact: Primary Analyst Michelle Leong Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Vanessa Chan Director +852 2263 9559 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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