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July 3 (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based Greenland Holding Group Company Limited's (Greenland, BBB-/Stable) USD400m 4.375% notes due 2019 and USD600m 5.875% notes due 2024 final ratings of 'BBB-'. The notes are rated at the same level as Greenland's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. They are issued by Greenland's indirect wholly owned subsidiary, Greenland Global Investment Limited, and the company plans to use the proceeds for overseas expansion. The notes are guaranteed by Greenland with registration prescribed by China's Foreign Exchange Administration Rules.
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 CNY162.5bn (USD26.2bn) in 2013. Its size provides significant cost benefits, while its diversification mitigates risks from volatility in local markets. The company had CNY60bn of contracted sales in January-May 2014, while maintaining sufficient liquidity for its operations.
Small Exposure to Non-Property Business: Greenland also has non-property related businesses that are focused on energy trading and coal mining, which accounted for around 56% of its 2013 revenue. However, non-property subsidiaries accounted for only 16.9% of its total net debt plus minority interest and 8.4% of EBITDA. The non-property businesses have limited impact on Greenland's overall credit profile. In addition, the management has said the company does not plan to invest further in the non-property segment. Therefore, Fitch focuses only on the property segment in its ratio analysis.
High Asset Turnover: Like other large homebuilders in China, including China Vanke Co., Ltd ( BBB+/Stable) and Poly Real Estate Group Company Limited (BBB+/Stable), Greenland's business model is to make its newly acquired land bank available for sale rapidly to reduce inventory holding costs and risks. Greenland's contracted sales/total inventory in 2013 was 62%, at the higher end of the range among peers. However, because of its higher leverage reflected by net debt/adjusted inventory of 46% at end-2013, its contracted sales/total debt was 1.6x, in line with the other large nationwide homebuilders.
Lower Margins: Greenland's estimated EBITDA margin attributable to the property segment decreased further to below 15% in 2013. It was one of the lowest margins in the sector, despite Greenland's bigger exposure to the more profitable non-residential segments. While this was a result of its focus on lower priced housing, the low margin has largely offset the benefits from the expansion of its business scale, which was seen in the 55% rise in contracted sales in 2013. However, lower cost housing may be more resilient in a downturn, especially because Greenland does not focus on lower tier cities, unlike other low average selling price developers like Evergrande Real Estate Group Limited (BB/Stable). Bigger Exposure to Non-Residential Development: Over 40% of Greenland's 2013 contracted sales were from non-residential properties, primarily office and retail. This ratio is significantly higher than Vanke's and Poly's, which generate less than 15% of their contracted sales from the commercial sector. 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, a high portion of Greenland's office sales is from projects in prime locations, mitigating these risks.
State-Owned Enterprise (SOE) Status: Greenland is majority-owned by Shanghai's local government. Due to its SOE linkage, it has access to government-led strategic projects and strong access to domestic bank funding. This is illustrated by its cheaper funding costs compared with its peers and its landmark buildings in major cities.
While the Shanghai government has directly supported Greenland with different resources including coordination of its plan for onshore listing, Fitch believes that this is not sufficient to warrant an explicit uplift of the rating from the standalone 'BBB-' 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 'BBB-'. 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 apply only to the property segment.