(The following statement was released by the rating agency)
Jan 18 -
Summary analysis -- SPG Land Holdings Ltd. ------------------------ 18-Jan-2013
CREDIT RATING: B-/Negative/-- Country: China
Credit Rating History:
Local currency Foreign currency
10-Jul-2012 B-/-- B-/--
16-Jan-2012 B/-- B/--
29-Sep-2011 B+/-- B+/--
07-Mar-2011 BB-/-- BB-/--
The rating on China-based real estate developer SPG Land Holdings Ltd. reflects the company’s weak property sales execution, high refinancing risks, small operating scale, and high project concentration. SPG Land’s established market position and brand recognition in its core markets, and some geographic and product diversity temper the above weaknesses. In our view, the company’s business risk profile is “weak” and its financial risk profile is “highly leveraged.”
SPG Land is unlikely to materially improve its sales execution in the next 12 months, in our opinion. We attribute the company’s weak sales performance over the past two years to its execution risks outside its home market of Shanghai and its small scale and high project concentration. SPG Land’s contract sales in 2012 should be merely about Chinese renminbi (RMB) 3 billion, a 6.2% drop from 2011. Policy tightening has affected SPG Land significantly more than similarly rated peers. This is largely due to the company’s concentration in high-end projects and in cities with purchase restrictions, its limited scale, and execution risks.
We expect SPG Land’s financial performance to remain weak over the next 12 months. The company’s financial performance has been volatile and has been declining over the past three years. Its financial risk profile is comparable with that of most ‘B-’ rated peers. We expect SPG Land’s profitability and leverage to have deteriorated further in 2012, reflecting the company’s weak execution of its expansion and its project concentration.
SPG Land’s capital structure will likely remain under pressure in the next two years due to weak property sales and revenue recognition. However, the company seems to have controlled its total debt level through asset disposals. In our base-case scenario, we expect SPG Land’s overall borrowings to be less than RMB7 billion at the end of 2012, 5% lower than six months earlier. Revenue recognized should be about RMB1.7 billion in 2012. At the same time, EBITDA margin is likely to have dropped materially to below 10% in 2012 (26.6% in 2011), reflecting the company’s price-cutting to promote sales. We expect SPG Land’s EBITDA interest coverage to be less than 0.5x (2.4x in 2011) and the ratio of total debt to EBITDA to be significantly higher in 2012 (4.4x in 2011).
We expect SPG Land to continue to dispose of assets to increase its liquidity buffer if sales do not pick up significantly. The company sold a project in Wuxi to Evergrande Real Estate Group Ltd. for RMB966 million in 2012. In addition, SPG Land recently announced that it would reduce its shareholding in another project in Wuxi for about RMB1.1 billion. The move will further shrink the company’s attributable land bank.
SPG Land has expanded outside Shanghai after launching several major projects in recent years. The company now also has a presence in eight second- or third-tier cities, mainly in the Yangtze River Delta region. It has certain brand recognition in Shanghai and nearby markets through the development of high-end and large-scale residential property projects. As of the end of 2012, SPG Land has two high-end hotels in Shanghai and one high-end service apartment in Suzhou. However, these properties provide limited recurring income.
SPG Land’s liquidity is “weak,” as defined by our criteria. We believe the company’s liquidity sources will not cover its liquidity uses in the next six to 12 months. Our view is based on the following factors and assumptions:
-- SPG Land’s contract sales will be RMB2.5 billion-RMB3 billion in 2013.
-- As of the end of 2012, the company should have about RMB800 million in unrestricted cash, against about RMB3.8 billion in borrowings due in 12 months. As far as we know, a portion of the restricted cash balance was pledged against short-term debt.
-- SPG Land is likely to prepay an offshore bank loan by January 2013, given that it once again breached a covenant on this loan in 2012.
-- The company has limited committed land premiums payable in 2013.
-- We have taken into account the proceeds that SPG Land has received from asset sales (e.g. investment properties and land plots) or refinancing.
-- The company has some room to cut its budgeted costs for construction and land acquisitions.
We understand that SPG Land also has undrawn and uncommitted banking facilities of RMB16.4 billion as of the end of 2012. Nevertheless, these facilities may not provide timely liquidity support because they depend on credit availability and case-by-case approvals.
The negative outlook reflects our view that SPG Land’s liquidity could deteriorate if sales remain weak. The outlook also reflects the fact that asset disposals are a major source of SPG Land’s cash flow to meet obligations. We expect the company to repay its covenant-breached offshore loan soon and keep its access to bank loans in a moderated credit environment in China.
We may lower the rating if SPG Land’s liquidity deteriorates. This could happen if contract sales are materially below our expectation or the company can’t meet its short-term obligations
Conversely, we could revise the outlook to stable if SPG Land’s liquidity position improves. This could happen if property sales improve significantly, asset sales materialize, and the company’s financial flexibility improves.