RPT-Fitch Rates CNH Notes from China's Greenland 'BBB-'

Thu Jan 23, 2014 2:42am EST

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Jan 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Greenland Holding Group Company Limited (Greenland) a Long-Term Local Currency Issuer Default Rating of a€˜BBB-a€™ and its CNY1.5bn 5.5% notes due 2018 a rating of 'BBB-'.

The notes, denominated in offshore Chinese yuan, or CNH, have been issued by its subsidiary, Greenland Hong Kong Holdings Limited (Greenland HK). Greenland has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that Greenland HK has sufficient assets and liquidity to meet its debt obligations.

KEY RATING DRIVERS

Large and Diversified Homebuilder: Greenland is one of the top three homebuilders in China, with a nationwide presence. It achieved contracted sales of CNY105bn in 2012. Its size provides significant cost benefits, while its diversification mitigates risks from volatility in local markets.

Small Exposure to Energy Sector: Greenland also has non-property related businesses focused primarily on energy trading and coal mining, which accounted for 50% of 2012 revenue. However, the net debt of non-property subsidiaries accounted for only 12% of the total. Moreover, in Fitcha€™s view, the highly liquid nature of the trading inventories help to balance the high levels of short term debt in this segment. This factor, along with the managementa€™s stated goal of not investing further in these segments, has led Fitch to focus only on the property segment in its ratio analysis. The agency has also deconsolidated Shanghai Yunfeng (Group) Limited from Greenland as it is only 22.56% owned.

High Asset Turnover: Like other large homebuilders including China Vanke Co., Ltd (Vanke; BBB+/Stable) and Poly Real Estate Group Company Limited (Poly;BBB+/Stable), Greenlanda€™s business model is to make its newly acquired land bank available for sale rapidly to reduce inventory holding costs and risks.

Greenlanda€™s contracted sales/total inventory in 2012 was 69%, higher than Vankea€™s 41% and Polya€™s 67%. However, because of its higher leverage, with net debt/adjusted inventory of 44% at end-2012, its contracted sales/total debt was 1.8x, in line with the other large nationwide homebuilders.

Higher Exposure to Non-Residential Development: Over 35% of Greenlanda€™s 2012 contracted sales were from non-residential sales, primarily office and retail. This ratio is significantly higher than Vankea€™s and Polya€™s, which generate more than 85% of their contracted sales from homes. Fitch believes that residential sales in China are likely to be less affected by market cyclicality compared with commercial sales due to the greater focus on the end-user market. However, Fitch notes that a high portion of Greenlanda€™s office sales are from projects in prime locations, mitigating these risks.

Lower Margins: Greenlanda€™s estimated EBITDA margin attributable to the property segment was less than 20% in 2012, lower than Vankea€™s 28% and Polya€™s 28%, despite its higher exposure to the more profitable non-residential segments.

This is a result of its focus on lower priced housing; its 2012 residential average selling price (ASP) of CNY7,275k per square meter is materially lower than Vankea€™s CNY10,901/sqm and Polya€™s CNY11,290/sqm. However, Fitch notes that lower cost housing may be more resilient in a downturn, especially because Greenland does not focus on lower tier cities, unlike other low ASP developers like Evergrande Real Estate Group Limited (BB/Stable).

State-Owned Enterprise (SOE) Status: Greenland is majority owned by Shanghaia€™s local government Due to its SOE heritage, it has access to government-led strategic projects and strong access to domestic bank funding. This is illustrated by its cheaper funding costs compared to its peers and its landmark buildings in major cities.

Fitch also notes that the Shanghai government has directly supported Greenland with dividend reinvestment of CNY2.9bn in 2012. However, Fitch believes that this is not sufficient to warrant an explicit uplift of the rating from the standalone a€˜BBB-a€™ level. Fitch may consider providing a one-notch uplift due to linkages with the Shanghai government in the event Greenland's standalone rating is downgraded below a€˜BBB-a€™. The negative rating guidelines listed below apply only to the standalone rating.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Net debt/adjusted inventory falling below 30% on a sustained basis

- EBITDA margin higher than 25% on a sustained basis

-Contracted sales/total debt over 1.75x on a sustained basis

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Net debt/adjusted inventory rising above 50% on a sustained basis

- EBITDA margin lower than 18% on a sustained basis

- Contracted sales/total debt below 1.5x on sustained basis

- Further leverage in non-property business

- Material rise in non-residential unsold inventory

The ratios in the guidelines are attributable only to the property segment.

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