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Jan 27 (The following statement was released by the rating agency)
Fitch Ratings has affirmed China-based Future Land Development Holdings Limited's (Future Land) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B+'. The Outlook is Stable. The agency has also affirmed the company's senior unsecured rating at 'B+' and recovery rating at a€˜RR4a€™.
Future Landa€™s overall performance in 2013 was consistent with Fitcha€™s estimates. While its leverage rose slightly, its contracted sales remained solid. Structural subordination remains the major constraint on its ratings. Fitch expects the companya€™s overall credit profile to be stable in the next 12 months.
KEY RATING DRIVERS
Significant Structural Subordination: Future Land's cash flow is significantly weakened by the fact that over 80% of its contracted sales in 2013 were generated by its 54%-owned subsidiary Jiangsu Future Land (JFL), and that 63% of Future Land's land bank at mid-2013 was owned by JFL. The presence of the significant minority interest in JFL restricts Future Land's access to the cash flow of JFL.
Limited Geographical Diversification: Over 95% of its 13.7 million square metre land bank at mid-2013 and over 85% of its CNY7.6bn of contracted sales in 1H13 were in the Yangtze River Delta and Jiangsu Province, exposing the company to uncertainties of local policies and the local economy. Local demand also limits its ability to expand its business scale to compete effectively with rivals that tap broader, nationwide demand.
Substantial Land Acquisition: Future Land in1H13 added substantially to its land bank (excluding land purchases by JFL), but contracted sales weakened to CNY7.6bn because its project launches were concentrated in 2H13. As a result, this raised its net debt/adjusted inventory rose to 42% at mid-2013 from 22% at end-2012. However, contracted sales in 2H13 improved substantially to CNY13bn and Fitch expects its leverage to have fallen back below 40% at end-2013.
Fast Sales Turnover: Future Land's business profile is supported by its rapid sales turnover, which is reflected in the estimated contracted sales/total debt ratio of 1.5x at end-2013. The company standardizes its products and targets the mass market, in particular first-time home buyers and homeowners looking to upgrade.
Strong Market Position: Its strong market position in the Yangtze River Delta gives the company insight into the local markets and helps it build relationships with local governments, which serve to facilitate its development activity in the region. This should also provide more choices of land acquisition and a stronger brand name in the local areas.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant decrease in the companya€™s contracted sales, excluding JFL, in 2014 from the CNY3.5bn achieved in 2013
- A significant decrease in the contracted sales/ total debt ratio to below 1.0x at the holding company level on a sustained basis
- Consolidated net debt/ adjusted inventory rising above 45% on a sustained basis
Positive: No positive rating action is expected over the next 12 months.
However, positive rating action may be considered upon
- A substantial increase in the scale of the companya€™s business, excluding JFL, with annual contracted sales exceeding CNY10bn
- Unrestricted access to JFL's cash flows