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Fitch Rates Modern Land (China)'s USD Notes 'B(EXP)'
July 24, 2014 / 3:52 AM / 3 years ago

Fitch Rates Modern Land (China)'s USD Notes 'B(EXP)'

(The following statement was released by the rating agency) HONG KONG, July 23 (Fitch) Fitch Ratings has assigned China-based property developer Modern Land (China) Co., Limited's (Modern Land; B/Stable) proposed US dollar senior unsecured notes an expected rating of 'B(EXP)' and Recovery Rating of 'RR4'. The notes are rated at the same level as Modern Land'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. Modern Land plans to use the proceeds for refinancing of existing borrowings as well as general corporate purposes. KEY RATING DRIVERS Land Acquisition Raises Leverage: Fitch expects Modern Land's net debt to adjusted inventory to rise to over 35% by mid-2014, reversing from a net cash position at end-2013, and the company's contracted sales/gross debt to decline to around 1.3x from 2.0x over the same period. This is due to an estimated CNY3bn of payments for land acquisitions in 1H14 to expand the company's scale. However, Fitch expects a larger number of sales launches and lower land premium payments in 2H14 to improve Modern Land's credit metrics from 2H14. Limited Scale: Modern Land's limited scale in terms of land bank, contracted sales and geographical coverage leaves the company susceptible to greater volatility in earnings. Modern Land's contracted sales of CNY2.29bn for 1H14 (2013: CNY4.4bn) and its current land bank of about 2.8 million sqm (excluding presold properties) as at the end-2013 are commensurate with homebuilders rated in the 'B' category (those rated 'B+', 'B' or 'B-'). Product Mix May Dilute Margin: Modern Land has been generating strong EBITDA margin of 25%-33% over the past three years (2013: 29%), a level higher than Chinese mass market homebuilders in general. This is due to a combination of high-end products in Beijing, its product differentiation strategy and the company's comparatively lower land cost. Modern Land is likely to maintain its margin at the current level for the next two years, boosted by continuing sales of high-end products. However, the EBITDA margin would likely moderate to around 20%-25% over the medium term because of its increasing exposure to the mid-end and mass market segments in lower-tier cities as well as higher land costs (end-2013: CNY2,699/sqm versus recent land acquisition costs of CNY1,800-CNY7,388/sqm). Longer Gestation Period for Niche Product: Modern Land's market positioning as a niche homebuilder that provides energy-efficient homes needs a longer gestation period because it will take time for the company to make its products known, particularly in the second- and third-tier cities that the company has recently entered. Gross profit margins for initial launches are likely to be lower (20%-30%) and the company is only likely to be able to raise prices in subsequent launches after obtaining market acceptance following the handover of the initial projects. Sales Geographically Concentrated: Modern Land currently has six projects under development in six cities across five provinces. While the majority of its land bank is in lower-tier cities such as Xiantao and Changsha, the company's contracted sales for the next two years would likely be still driven by projects in Beijing and Taiyuan, which have higher value and margins. In Fitch's view, meaningful geographical diversification will occur when Modern Land's operations in lower-tier cities mature and it is able to sustain its profit margins over the medium term even though a smaller proportion of sales come from Beijing and Taiyuan. RATING SENSITIVITIES Positive rating action is not expected in the next 18-24 months due to Modern Land's small operational scale. However, future developments that may, individually or collectively, lead to positive rating action include: - Contracted sales sustained above CNY7bn without compromising leverage - EBITDA margin sustained above 25% Negative: Future developments that may, individually or collectively, lead to negative rating action include - EBITDA margin sustained below 20% - Contracted sales/gross debt sustained below 1.0x - Net debt/adjusted inventory sustained above 40% Contact: Primary Analyst Michelle Leong Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andy Chang Associate Director +852 2263 9914 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 28 May 2014, are available at Related Research: "Rating Chinese Homebuilders", dated 15 October 2012 Applicable Criteria and Related Research: Rating Chinese Homebuilders here Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here 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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