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Jan 21 (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based property developer Shimao Property Holdings Limitedâ€™s (Shimao; BB+/Stable) USD600m 8.125% senior unsecured notes due 2021 a final rating of 'BB+'.
The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 13 January 2014.
KEY RATING DRIVERS
Strategic Focus Improves Performance: Shimao has refocused on key regions and cities where it has operational advantages. Its expansion into new cities and third- and fourth-tier cities remains selective. Improved internal management in eight key regions allows better day-to- day management of regional operations and sales. For the 11 months ended 30 November 2013, the group realized contracted sales of CNY61.3bn, exceeding its 2013 sales target of CNY55bn by 11.4%. Fitch expects contracted sales to continue to grow in 2014.
Shift in Product Mix: To raise contracted sales, Shimao adjusted its residential property development mix to focus on first-time home buyers and buyers upgrading their homes, as well as improved the quality of its housing stock. Shimao continues to focus on small-to-medium sized units of 90sqm-140sqm, which account for around 75%-80% of its units available for sale for 2013 and 2014. Shimao has one of the highest recurring rental income streams and the highest rental income to EBITDA ratio among Chinese property companies rated by Fitch in the â€˜BBâ€™ category.
Delivery of Prudent Financial Strategy: During the challenging operating environment in 2011, Shimao demonstrated operational flexibility and prudent financial management. It slowed down land acquisition to conserve cash. The company continues to have strong financial support from over 10 onshore and offshore banks. Management's focus on maintaining ample liquidity and ready access to various funding channels further supports its ratings.
Solid Recurring Income: The companyâ€™s 64%-owned Shanghai Shimao provides rental income while Shimaoâ€™s hotel operations are another source of recurring income. Management expects to continue investing in commercial and retail properties and hotels. Fitch believes this will offer additional financial flexibility for the group if required. However, over the past three years, more than 90% of Shimaoâ€™s revenue was from property sales.
Stable Operating Performance: Fitch expects Shimao to maintain a stable operating performance and prudent financial policies in the short-to-medium term and to continue to increase its contracted sales in 2014 to more than CNY70bn. A large and well-located land bank of 37.2 million sqm across China as of 30 June 2013 and its proven track record in selective expansion to third and fourth-tier cities will also underpin its stable performance.
Sufficient Liquidity: At June 2013 Shimao had CNY18.9bn in cash (of which CNY2.1bn was restricted cash) and CNY20bn in unused bank credit facilities. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2013-2015, based on its diversified funding channels and flexible land acquisition strategy.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-continued weakening of the operating environment, leading to EBITDA margin erosion below 20% (1H 2013: 28%)
-aggressive debt-funded expansion leading to net debt-to-inventory exceeding 40% (1H 2013: 51.4%)
-Contracted sales/gross debt below 1.25x (1H 2013: 1.3x) on a sustained basis
-Tightening liquidity due to a sustained fall in free cash flows, or weakened access to financing channels
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Longer track record of stable business growth
-Expansion, improved scale and cash efficiency without impact on profitability, with EBITDA margin above 20% on sustained basis
-Demonstrated leverage flexibility, with debt-funded expansion leading to net debt-to-inventory below 35% on a sustained basis
-Contracted sales/gross debt above 1.25x on a sustained basis