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May 9 (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based homebuilder Logan Property Holdings Company Limited (Logan) a Long-Term Foreign-Currency Issuer Default Rating of 'BB-' with a Stable Outlook. Fitch has also assigned Logan a senior unsecured rating of 'BB-'.
KEY RATING DRIVERS
Established Market Position: Logan's ratings reflect its established business position with contracted sales of CNY13.2bn in 2013, and strong execution ability in large-scale mass-market residential developments in key cities where it operates. About 75% of Logan's existing land bank is located in Huizhou, Nanning and Shantou, where Logan has been ranked among the top five key developers by sales value in the past three years. Logan will continue to use its strong track record in these locations to expand over the medium term. Large Land Bank Gives Flexibility: Logan's large land bank of 11 million square metres (sqm) that it purchased at an average cost of CNY1,045/sqm is sufficient for five to six years' worth of sales, assuming the company doesn't further add to its land bank. This large low-cost land reserve, with minimal land premium outstanding of CNY340m as at end-2013, gives the company operational flexibility in terms of land purchases over the medium term. The leeway is especially important at a time when land prices are rising rapidly.
Stable Margins: Logan has been generating EBITDA margins of around 30% (2013: 30.7%), driven by its low land costs, stable ASPs and savings from using its in-house construction arm. As land costs increase over time, Fitch expects the company's overall EBITDA margin to remain stable at above 25% as lower margins from fast-churn projects would be balanced by stronger profit margins from projects with low land cost.
Balance Sheet Supports Moderate Expansion: Logan's net debt/adjusted inventory is healthy at 33% as at end-2013. Fitch expects this ratio to increase as Logan takes on debt to expand, but still be sustained below 40%. Logan has set a moderate land replenishment target of around 35%-40% of its annual contracted sales, a level that is comparable to some of its peers'.
Manageable Single Project Exposure: Although plots in Huizhou make up about 50% of Logan's land bank, sales from its main project, Logan City (Huizhou), will be spread out over several years and likely remain below 25% of Logan's total annual sales. In addition, the low land cost of CNY220/sqm for Logan City (Huizhou), compared with the current average selling price (ASP) of CNY6,300/sqm, provides a comfortable buffer against price corrections and potential competition from nearby projects.
High Exposure in Guangdong: Logan's rating is constrained by its concentration in Guangdong province, which accounts for more than 70% of its sales and land bank. This increases its susceptibility to changes in the local economy and policies. Its exposure to smaller cities may leave it vulnerable to higher price volatility; however this is partially mitigated by the company's strong profit buffer due to the low cost of its land and products that target first-home buyers and upgraders. Due to its proximity to Shenzhen and to a lesser extent Guangzhou, Logan City (Huizhou) also targets end-users from these first-tier cities in Guangdong province.
Large Projects May Lengthen Cash Cycle: Logan's strategy is to secure large parcels of land outside the city centre to tap demand from urbanisation in China. The success of these projects hinges on the continuation of the urbanisation trend and demands a longer cash cycle. Low land costs for these projects, Logan's healthy leverage, and cash flow from the company's fast-churn projects will mitigate some of this risk, as demonstrated by its ability to maintain contracted sales/total debt of 1.5 times in 2013.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin sustained below 25%
- Net debt/adjusted inventory sustained above 40%
- Contracted sales / total debt sustained below 1.0x
- Sustained decline in contracted sales from current levels
Positive: No positive rating action is expected unless Logan is able to substantially increase its scale and diversify outside Guangdong province without compromising its financial metrics.