Fitch Rates China-based Greenland's USD Notes Final 'BBB-'

Tue Aug 12, 2014 2:24am EDT

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(The following statement was released by the rating agency) HONG KONG, August 12 (Fitch) Fitch Ratings has assigned China-based property developer Greenland Holding Group Company Limited's (Greenland; BBB-/Stable) USD500m 4.375% senior unsecured notes due 2017 a final 'BBB-' rating. The notes will be issued by its wholly owned subsidiary Greenland Hong Kong Holdings Limited (Greenland HK) under its USD2bn medium-term note programme. 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. The notes are rated at the same level as Greenland's senior unsecured rating because they constitute direct, unsubordinated and senior unsecured obligations of the company. 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 CNY162.5bn (USD26.2bn) in 2013. Its size provides significant cost benefits, while its geographic diversification mitigates risks from volatility in local markets. The company had CNY60bn of contracted sales in January-May 2014, while maintaining sufficient liquidity for its operations. Small Exposure to Non-Property Business: Greenland also has non-property related businesses that are focused on energy trading and coal mining, which accounted for around 56% of its 2013 revenue. However, non-property subsidiaries accounted for only 16.9% of its total net debt plus minority interest and 8.4% of EBITDA. The non-property businesses have limited impact on Greenland's overall credit profile. In addition, the management has said the company does not plan to invest further in the non-property segment. Therefore, Fitch focuses only on the property segment in its ratio analysis. High Asset Turnover: Like other large homebuilders in China, including China Vanke Co., Ltd (BBB+/Stable) and Poly Real Estate Group Company Limited (BBB+/Stable), Greenland's business model is to make its newly acquired land bank available for sale rapidly to reduce inventory holding costs and risks. Greenland's contracted sales/total inventory in 2013 was 62%, at the higher end of the range among peers. However, because of its higher leverage reflected by net debt/adjusted inventory of 46% at end-2013, its contracted sales/total debt was 1.6x, in line with the other large nationwide homebuilders. Lower Margins: Greenland's estimated EBITDA margin attributable to the property segment decreased further to below 15% in 2013. It was one of the lowest margins in the sector, despite Greenland's bigger exposure to the more profitable non-residential segments. While this was a result of its focus on lower priced housing, the low margin has largely offset the benefits from the expansion of its business scale, which was seen in the 55% rise in contracted sales in 2013. However, lower cost housing may be more resilient in a downturn, especially because Greenland does not focus on lower-tier cities, unlike other low average selling price developers like Evergrande Real Estate Group Limited (BB/Stable). Bigger Exposure to Non-Residential Development: Over 40% of Greenland's 2013 contracted sales were from non-residential properties, primarily office and retail. This ratio is significantly higher than Vanke's and Poly's, which generate less than 15% of their contracted sales from the commercial sector. 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, a high portion of Greenland's office sales is from projects in prime locations, mitigating these risks. State-Owned Enterprise (SOE) Status: Greenland is majority-owned by Shanghai's local government. Due to its SOE linkage, it has access to government-led strategic projects and strong access to domestic bank funding. This is illustrated by its cheaper funding costs compared with its peers and its landmark buildings in major cities. While the Shanghai government has directly supported Greenland with different resources including coordination of its plan for onshore listing, Fitch believes that this is not sufficient to warrant an explicit uplift of the rating from the standalone 'BBB-' 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 'BBB-'. 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 apply only to the property segment. Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 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 28 May 2014 are available at www.fitchratings.com. Related Research "Rating Chinese Homebuilders", dated 15 October 2012 Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Rating Chinese Homebuilders 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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