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Fitch Affirms China-based Franshion's IDR at 'BBB-' After Spin-off
June 27, 2014 / 2:26 AM / 3 years ago

Fitch Affirms China-based Franshion's IDR at 'BBB-' After Spin-off

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, June 26 (Fitch) Fitch Ratings has affirmed homebuilder Franshion Properties (China) Limited’s (Franshion) Long-Term Foreign-Currency IDR and senior unsecured rating at “BBB-”. The Outlook is Stable. Franshion faced weaker sales performance and substantial land premium in IH14. However, its ratings are supported by cash inflow from the spin-off of its hotels, which will relieve the immediate pressure on its liquidity. The company will launch more projects for sale in 2H14, avoiding a downward trend of its credit profile. KEY RATING DRIVERS Spin-off Supports Profile: The spin-off of key hotel assets through the IPO of Jinmao (China) Investments Holdings Limited (JI) will improve liquidity and lower leverage of Franshion in the short term. Franshion will receive over HKD6bn-7bn of pre-IPO dividends in the process while retaining 65.5% ownership of JI. However, the spin-off increases the structural subordination of the hotel assets. To reflect this, we will deconsolidate JI from Franshion in its analysis and treat only dividends paid by JI to Franshion as recurring income to the latter. This, along with the rise of total debt due to the fast growth of the property development business, will limit the company’s recurrent EBITDA interest coverage ratio to below 1.0x. Strong Investment Property (IP): Franshion has one of the strongest IP portfolios in China. Fitch estimates that after the spin-off, recurrent income yield is 10% based on the market value of the assets and 18% based on the cost value of the assets. However, the overall growth of recurrent income has slowed down due to the weak 3% increase in hotel business in 2013, even though rentals from IP still rose 13%. Margins Remain Strong: Overall EBITDA margin has increased to 37% in 2013 from 35% in 2012, of which Fitch estimates property development, land development, and recurrent income account for over 35%, 30%, and 40% respectively. The strong margins are rare in the current market and reflect Franshion’s solid execution, accurate product positioning and advantages as a SOE. Negative sentiment of housing buyers and fierce competition will continue to put pressure on the margins. Stable Leverage: Franshion’s net debt/net inventory including revaluation of its IP increased slightly to 27% at end-2013 from 26% at end-2012. Land premium payment of around CNY7bn in 1H14 will not likely affect leverage immediately because of the cash inflow from JI after the spin-off. We note the increased proportion of joint ventures’ contribution to Franshion’s profits, and the resultant rise in minority interest in its capital structure. However, as there is limited cash tied up in joint ventures and cash is distributed routinely, we have adjusted the calculation of the leverage ratio. Weaker sales in 1H14: While Franshion succeeded to expand its business scale in its contracted sales and land sales in 2013, the company only made CNY4.0bn in property sales, (-35% yoy) and CNY1.3bn in land sales (-53% yoy) in the first five months of 2014, which are at the lower end among peers. However, as more projects will be for sale in 2H14, the company’s sales performance and credit profile may improve. Advantage in Government Links: Franshion’s business continues to be supported by its status as a state-owned property company. This provides the company with an advantage in government-led strategic projects, and helps provide strong access to domestic bank funding. This is illustrated by the favourable locations of its investment properties and commercial development projects. RATING SENSITIVITIES The following ratios and numbers apply to Franshion after the deconsolidation of JI, unless specified. Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Net debt/adjusted inventory including investment property remaining above 35% on a sustained basis

-No substantial decrease in margin and total sales in property development and land development from 2013 -(Recurrent EBITDA + dividends from JI)/gross interest expense ratio falling below 0.5x on a sustained basis -Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group’s equity stake in Franshion to under 51% (62.87% as at end-2013), or a shift from strategic projects due to weakened relationships with local governments -Reduced access to onshore bank loans or inter-company funding support Positive: Future developments that may, individually or collectively, lead to positive rating action include:

-maintaining (recurrent EBITDA + dividends from JI)/gross interest expense above 1.5x with similar scale and healthy leverage in property development on a sustained basis, or -contracted sales from project development and land development over CNY35bn with strong margin on a sustained basis, while keeping healthy leverage and (recurrent EBITDA + dividends from JI)/gross interest expense ratio over 1.0x. Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Lim Su Aik Director +65 6796 7233 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 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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