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Fitch Affirms Shimao Property at 'BB+'; Outlook Stable
August 11, 2014 / 9:22 AM / 3 years ago

Fitch Affirms Shimao Property at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, August 11 (Fitch) Fitch Ratings has affirmed Shimao Property Holdings Limited's (Shimao) Long-Term Issuer Default Rating (IDR) at 'BB+' with Stable Outlook and its foreign-currency senior unsecured rating at 'BB+'. The affirmation reflects Shimao's strong contracted sales of CNY67bn in 2013 and its ability to maintain a stronger EBITDA margin of 29%. The China-based developer continued to keep its leadership position as one of the top ten players in the Chinese Property sector with strong operational and executional capabilities and a prudent financial position. KEY RATING DRIVERS Contracted Sales increased: Shimao's contracted sales grew 46% to CNY67bn in 2013 from CNY46bn in 2012. This exceeded the original target of CNY55bn by 22%. Shimao is on track to meet its 2014 contracted sales target of CNY80bn despite weak market conditions in H12014. Fitch believes the improved internal management through eight key regions and the implementation of a SAP IT system allow better day-to-day management of regional operations and sales. Region-focused player: Shimao has transformed itself from a national player to a leading player in the Yangtze River Delta region. Shimao continued to focus on key cities such as Hangzhou, Shanghai, Ningbo and Jiangsu province, as well as on tourism property. These accounted for 83% of contracted sales in 2013, compared with 64% in 2012. Fitch believes Shimao can leverage on market leadership, brand reputation, local knowhow and operational efficiency in these regions. In 2013, 70% of its 36 million sqm land bank was in the above cities. Shift of Product Mix: To improve contracted sales Shimao adjusted its residential property development mix to focus on first-time home buyers and upgraded the quality of housing stock. Shimao continues to focus on small- to medium- sized units of 90sqm to 140sqm, which account for 75% to 80% of their units available for sale in 2012 and 2013. Stable EBITDA margins: Shimao had EBITDA margins of 29% for 2012 and 2013. This is lower compared with its historical margins of above 30%, as Shimao shifted its product mix to first-time buyers and upgraders. However, the current EBITDA margin of 29% is still higher than its BB-rated peers which have 20% to 25% EBITDA margins. Fitch expects Shimao to maintain its EBITDA margin around the current level for the next two years, but it may decline as competition intensifies in the sector. Delivery of prudent financial strategy: During the challenging operating environment in 2011, Shimao demonstrated operational flexibility and prudent financial management. Land acquisitions were slowed down to conserve cash and the company continues to have strong support from over 10 onshore and offshore banks. In 2013 and 2014, Shimao was actively managing its offshore debt maturity profile by refinancing its debt earlier. This has resulted in lower interest costs to around 7.4% in 2013 from over 8% in 2012. Management's focus on maintaining both ample liquidity and ready access to various funding channels further supports its ratings. Stable Operating Performance: Fitch expects Shimao to maintain a stable operating performance and prudent financial policies in the short to medium term. A large and well-located land bank of 36 million sqm across China and its proven track record in selective expansion in third-tier cities and tourism property also support Shimao's rating. RATING SENSITIVITIES 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% (29.0% at end-2013) -aggressive debt-funded expansion leading to net debt-to-inventory sustained above 40% (39.4% at end-2013) -Contracted sales/gross debt below 1.25x (1.3x at end-2013) on a sustained basis -Increased leverage with debt-funded expansion leading to net debt-to-inventory exceeding 40% on a sustainable 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 operating as a nationwide leader with leadership in multiple cities with a sound financial profile Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 2801, 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 Applicable Criteria and Related Research: 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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