RPT-Fitch Affirms China Properties Group at 'B-'; Rates CNH Notes 'B-(EXP)'

Tue Feb 18, 2014 5:47am EST

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Feb 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed China Properties Group Limited's (CPG) Long-Term foreign currency Issuer Default Rating and senior unsecured rating at 'B-'. The Outlook is Stable. Fitch has also assigned the Chinese homebuilder a Long-Term local currency Issuer Default Rating of 'B-' with Stable Outlook, and assigned CPG's proposed senior unsecured notes denominated in offshore Chinese yuan, or CNH, an expected 'B-(EXP)' rating.

The notes are rated in line with CPG's senior unsecured rating of 'B-' as the notes will represent direct, unconditional and unsecured obligations of the company. The final rating is contingent on the receipt of final documents conforming to information already received.

The rating action on CPG's Issuer Default Ratings reflect the company's sufficient liquidity to meet its debt service obligations and operational needs in the next 12 to 18 months, after the company repaid HKD318.6m of shareholder loans and HKD251.3m of advances from a shareholder. Sources of the company's liquidity are its 2013 cash balances, development projects that have already obtained pre-sales license, and its unencumbered assets that can be pledged to obtain additional bank loans. The Stable Outlook reflects no substantial improvement in development sales; indicating that there is no upward rating pressure at the moment.

KEY RATING DRIVERS

Repayment of Shareholder Loans: The company repaid HKD251.3m of advances and HKD318.6m of loans from its managing director and 75% shareholder, Wong Sai Chung, even though operating cash flow has not substantially improved. Fitch estimates the USD250m (HKD1,947m equivalent) raised from the issue of offshore notes in October 2013 provided the company enough liquidity to repay the loan.

The repayment has not resulted in negative rating action, because CPG still has sufficient cash to repay USD103m of notes due 2014, while Mr. Wong has demonstrated his financial support for the company and CPG has HKD31bn of unpledged property assets, which will provide the company with financial flexibility.

Note Issue Improved Liquidity: The US-dollar note issue in October 2013 was the main driver of the increase in CPG's cash balance , at time when property sales remained weak at an estimate of around HKD250m in 2013. Apart from the repaying the shareholder loans, the proceeds from the note issue were also used to reduce bank debts by over HKD500m in 2H13 and to meet interest and operational expenses.

High Inventory Holding Cost: CPG's healthy leverage and liquidity may be maintained only if the company significantly ramps up sales of its development properties. While there is estimated inventory of over 600,000 sqm in gross floor area (GFA) available for sale in total, the company has had less than HKD900m of contracted sales in total in the past two years. Fitch estimates annual funding cost of total debt, excluding shareholder loans, could be as high as 12%, or over HKD800m in the next 24 months. In addition, CPG has more than 4.5 million sqm of GFA for future development, which could have construction cost of over HKD8bn in the next four years. Without sufficient operating cash flow, CPG would have to raise more debt, which would likely worsen its credit profile.

Project Concentration Risk: Over 95% of its sales in 2012 were from one project, Chongqing Manhattan. Although the project still has over 1.2 million sqm of unsold GFA and more projects are likely to contribute to sales in the future, the limited number of projects leaves CPG's cash flows vulnerable to volatility in local market demand.

Prime Locations: While its investment properties currently generate limited recurrent income, they were valued at HKD57bn at end-1H13 and are located in prime locations in downtown of Shanghai and Chongqing. Fitch expects the unique locations and large scale of the unpledged assets will provide CPG with financial flexibility.

Low Land Costs: CPG acquired much of its land bank, especially in Shanghai, more than five years ago at low cost. This is likely to allow CPG to achieve higher gross and EBITDA margins of over 50% in its future sales. It will also provide CPG with price flexibility in a market downturn.

RATING SENSITIVITIES

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

- A deterioration in CPG's liquidity position, for example, failing to refinance bank borrowings, or failing to maintain sufficient bank balances to repay maturing offshore senior notes, or from further repayment of shareholder's loan Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Attainment of contracted sales of over HKD5bn a year and recognised revenue of over HKD3bn a year (2012: HKD693m) while maintaining its current strong financial position

- Reduced concentration risk such that no single project accounts for over 70% of total sales

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