Fitch Confirms 'B(EXP)' Rating on Jingrui's Relaunched USD Bond

Thu Jul 31, 2014 11:18pm EDT

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(The following statement was released by the rating agency) HONG KONG, July 31 (Fitch) Fitch Ratings has confirmed the 'B(EXP)' expected rating that it assigned to China-based residential property developer Jingrui Holdings Limited's (Jingrui; B/Stable) proposed US dollar senior unsecured bond. This expected rating was originally assigned in May 2014 when Jingrui first proposed the bond issue. Jingrui has relaunched the bond after it earlier decided not to proceed with the issue. The notes are rated at the same level as Jingrui'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 Challenging Sales Target: Fitch expects Jingrui's sales in 2014 to increase from 2013's, although it will be challenging for the company to reach its 2014 sales target of CNY12.8bn. Jingrui achieved contracted sales of CNY3.0bn in 1H14, representing a year-on-year increase of 30%. The company's contracted sales in 1H14 was 23% of its full-year target, less than the 28% achieved in 2013. High Leverage among Peers: Jingrui's leverage is a key constraint on its ratings. We expect Jingrui's leverage, measured by net debt over adjusted inventory, to increase to nearly 55% at end-June 2014 from 44% at end-2013. The company's expenditure on land acquisitions of about CNY3bn in 1H14 was high relative to its contracted sales of CNY3bn, which contributed to the higher leverage. In comparison, most of the other residential developers rated 'B' or 'B+' had leverage of below 40%. As Jingrui is expanding, Fitch believes that its leverage will rise in 2014 but is likely to remain below 60% (above which negative rating action may be considered), unless it acquires land aggressively in 2H14. Fast Churn-Out Lowers Margins: Jingrui adopted the fast churn-out model in 2013 by starting construction and launching project presales three months and six months after land acquisitions respectively. For example, it launched the presales of a Hangzhou project in December 2013, 148 days after it purchased the land. This model helped Jingrui increase sales by a strong 76% to CNY8.3bn in 2013. However, the fast churn-out model reduces profit margins, as developers benefit less from property price appreciation and have to sell at competitive prices to ensure high sell-through rates. Fitch expects Jingrui's gross profit margin to remain low at 20%-25% in the next two to three years. Low Market Penetration: Jingrui currently has between one and three projects that mostly have less than CNY1bn in annual contracted sales in each of the 15 cities in Jiangsu and Zhejiang provinces where it has operations. Fitch believes that Jingrui could enjoy economies of scale and higher profit margins if it concentrates on building its market presence and brand name in a few of these cities. Heavy Cash Outlay: Jingrui has a small landbank of 5.5 million square metres. As such, Fitch expects Jingrui to spend significant amounts on land acquisitions and project construction in order to support its target of strong sales growth over the next few years. Jingrui relies heavily on cash flow from contracted sales and banks' construction loans to finance its operations. The ambitious expansion plan may increase the risk of liquidity crunch in times of property market slowdown or liquidity tightening. Jingrui will consider developing projects with JV partners to lower its capital outlay. Sufficient Liquidity to Repay Debt: At end-2013, Jingrui had cash of CNY3.4bn and undrawn credit facilities of CNY565m, which should be sufficient to cover short-term debt maturing in 2014 of CNY3bn. RATING SENSITIVITIES Positive: Future developments that may collectively lead to positive rating actions include: - Net debt/adjusted inventory sustained below 40% (end-2013: 44.2%); and - EBITDA margin sustained above 18% (2013: 12%); and - Maintaining its current strategy of fast churn-out model, such that contracted sales/total debt is sustained at over 1.3x (2013: 1.1x). Negative: Factors that may, individually or collectively, lead to negative rating action include: - Net debt/ adjusted inventory sustained above 60% - EBITDA margin sustained below 15% - Contracted sales/total debt sustained below 1.0x. Contact: Primary Analyst Alex Choi, CFA 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: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 28 May 2014 are available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage 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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