May 7, 2014 / 2:36 AM / 3 years ago

Fitch Publishes Jingrui's 'B' Rating; Rates USD Bonds 'B(EXP)'

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(The following statement was released by the rating agency) HONG KONG, May 06 (Fitch) Fitch Ratings has published China-based residential property developer Jingrui Holdings Limited's (Jingrui) Long-Term Issuer Default Rating (IDR) of 'B' with a Stable Outlook and senior unsecured rating of 'B'. Fitch has also assigned Jingrui's proposed US dollar senior unsecured notes an expected rating of 'B(EXP)'. 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. Jingrui is a pure residential developer targeting first-time homebuyers and upgraders. It initially developed projects in Shanghai in the early 2000s, but later ventured into third-tier cities in Jiangsu and Zhejiang provinces in 2006. Currently, its projects are mainly located in second- and third-tier cities in the Yangtze River Delta area. KEY RATING DRIVERS 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 recently launched the presales of a Hangzhou project 148 days after it purchased the land. This model helped Jingrui increase sales by a strong 76% to CNY8.3bn in 2013. Fitch expects Jingrui's turnover rate, measured by contracted sales over total debt, to rise from 1.1x in 2013 to more than 1.5x in 2014. 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. High Leverage among Peers: Jingrui's leverage, measured by net debt over adjusted inventory, has been at high levels in the past few years. It fell slightly to 44% at end-2013 after its IPO, from 49% at end-2012. In comparison, most of the other residential developers rated 'B' or 'B+' had leverage below 40%. Jingrui plans to spend CNY7.5bn on land purchases in 2014, much more than the CNY4.5bn cash outflow for land purchases in 2013. As Jingrui is in the expansion stage, Fitch expects its leverage to rise to close to 50% in 2014. Higher-than-expected capex or weaker-than-expected contracted sales performance may drive its leverage further above 50%. Heavy Cash Outlay: Jingrui has a small landbank of 5.0 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 a 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 Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 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: Additional information is available at Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013 are available at Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828855 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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