(Repeat for additional subscribers)
Jan 23 (The following statement was released by the rating agency)
Fitch Ratings has assigned Greenland Holding Group Company Limited (Greenland) a Long-Term
Local Currency Issuer Default Rating of a€˜BBB-a€™ and its CNY1.5bn 5.5% notes due 2018 a rating
The notes, denominated in offshore Chinese yuan, or CNH, have been issued by its
subsidiary, Greenland Hong Kong Holdings Limited (Greenland HK). 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
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 CNY105bn in 2012. Its size provides significant cost benefits, while its
diversification mitigates risks from volatility in local markets.
Small Exposure to Energy Sector: Greenland also has non-property related
businesses focused primarily on energy trading and coal mining, which accounted
for 50% of 2012 revenue. However, the net debt of non-property subsidiaries
accounted for only 12% of the total. Moreover, in Fitcha€™s view, the highly
liquid nature of the trading inventories help to balance the high levels of
short term debt in this segment. This factor, along with the managementa€™s stated
goal of not investing further in these segments, has led Fitch to focus only on
the property segment in its ratio analysis. The agency has also deconsolidated
Shanghai Yunfeng (Group) Limited from Greenland as it is only 22.56% owned.
High Asset Turnover: Like other large homebuilders including China Vanke Co.,
Ltd (Vanke; BBB+/Stable) and Poly Real Estate Group Company Limited
(Poly;BBB+/Stable), Greenlanda€™s business model is to make its newly acquired land bank
available for sale rapidly to reduce inventory holding costs and risks.
Greenlanda€™s contracted sales/total inventory in 2012 was 69%, higher than
Vankea€™s 41% and Polya€™s 67%. However, because of its higher leverage, with net
debt/adjusted inventory of 44% at end-2012, its contracted sales/total debt was
1.8x, in line with the other large nationwide homebuilders.
Higher Exposure to Non-Residential Development: Over 35% of Greenlanda€™s 2012
contracted sales were from non-residential sales, primarily office and retail.
This ratio is significantly higher than Vankea€™s and Polya€™s, which generate more
than 85% of their contracted sales from homes. 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,
Fitch notes that a high portion of Greenlanda€™s office sales are from projects in
prime locations, mitigating these risks.
Lower Margins: Greenlanda€™s estimated EBITDA margin attributable to the property
segment was less than 20% in 2012, lower than Vankea€™s 28% and Polya€™s 28%,
despite its higher exposure to the more profitable non-residential segments.
This is a result of its focus on lower priced housing; its 2012 residential
average selling price (ASP) of CNY7,275k per square meter is materially lower
than Vankea€™s CNY10,901/sqm and Polya€™s CNY11,290/sqm. However, Fitch notes that
lower cost housing may be more resilient in a downturn, especially because
Greenland does not focus on lower tier cities, unlike other low ASP developers
like Evergrande Real Estate Group Limited (BB/Stable).
State-Owned Enterprise (SOE) Status: Greenland is majority owned by Shanghaia€™s
local government Due to its SOE heritage, it has access to government-led
strategic projects and strong access to domestic bank funding. This is
illustrated by its cheaper funding costs compared to its peers and its landmark
buildings in major cities.
Fitch also notes that the Shanghai government has directly supported Greenland
with dividend reinvestment of CNY2.9bn in 2012. However, Fitch believes that
this is not sufficient to warrant an explicit uplift of the rating from the
standalone a€˜BBB-a€™ 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 a€˜BBB-a€™. The negative rating guidelines listed below apply
only to the standalone rating.
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 are attributable only to the property segment.