July 4, 2017 / 9:59 AM / 2 years ago

Fitch Assigns China's Shimao USD Notes Final 'BBB-'

(The following statement was released by the rating agency) HONG KONG, July 04 (Fitch) Fitch Ratings has assigned China-based property developer Shimao Property Holdings Limited's (BBB-/Stable) USD600 million 4.75% senior notes due 2022 a final rating of 'BBB-'. The notes are rated at the same level as Shimao's senior unsecured rating as they constitute its direct and senior unsecured obligations. The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 21 June 2017. Shimao's ratings are supported by its focus on maintaining high margins from its high quality and well-located land bank rather than building contracted sales. Its contracted sales have been stable at around CNY67 billion each year for the last four years, while its cash collection of contracted sales was a healthy 80%-88%. The homebuilder maintained an EBITDA margin of 26%-27% in 2015-2016, which is comparable with other 'BBB' to 'BBB+' rated peers. Fitch expects Shimao's cash flow from operations (CFO) to remain neutral to positive in the next year or two, after achieving positive CFO of CNY2.2 billion in 2015, including capex on property construction. The ratings are also supported by the homebuilder's strong execution record and leadership in key regions. KEY RATING DRIVERS Well-Positioned in Lower-Tier Cities: Shimao is well-positioned to capture market growth in weaker tier 2 and stronger tier 3 and 4 cities and has increased its 2017 target for the share of contracted sales from these cities to 40% of total contracted sales, from a Fitch estimate of 23%-25% in 2016. We expect stronger growth from these cities in 2017 due to limited supply and strict policies to rein in property price increases in tier 1 cities. High-Quality Inventory: Shimao re-established its focus on higher-tier cities in 2014, when the average land cost was around CNY3,000-4,000 per square metre (sq m). Fitch expects average selling prices for these projects to be as high as CNY14,000/sq m subject to location, allowing Shimao to maintain its margin-focused business model for the next year or two. Tighter Operational Control: Fitch believes Shimao's efforts to improve its sales efficiency, cash flow cycle, operations and financing costs have created a sound base to maintain its stable business profile for the next year or two. Shimao improved its sell-through rate for new supply to 74% in 2017, from 60% in 2014, and its cash collection rate increased to 88%, from 80%. Selling, general and administrative expenses also improved to around 7% of recognised revenue, from over 8% historically, and Shimao reported that its finance costs decreased to around 5.8% at end-2016, from 6.9% at end-2015. The homebuilder has also moved with the market towards upgrader and larger units and expects these products to make up 72% of its 2017 saleable resources, from 66% in 2014 and 2013. It continued to clear inventory in more remote lower-tier cities that have not benefited from growth in upper-tier cities and increased the proportion of products targeting buyers in tier 1 and 2 cities. Expansion into Hotel and Investment Properties: Shimao forecasts annual hotel income growth of 20% to CNY4 billion by 2021 and an expansion of its commercial investment properties to more than 2 million sq m gross floor area (GFA), with rental income of CNY3 billion. Fitch estimates that Shimao has a GFA of more than 1 million sq m in commercial and office building resources in its pipeline to support its five-year plan. We do not expect the homebuilder's expansion into hotels and investment properties to affect its property development business, as its CFO is close to neutral and it has significantly improved its homebuilding operations. Shimao's hotel and rental segment had revenue of CNY3 billion and an EBITDA margin of around 65%-70% in 2016. Fitch will monitor the development of Shimao's investment-property operation and may consider positive rating action if Shimao's investment-property business stabilises at a larger scale that generates substantially higher recurring income. Healthy Financial Profile: Fitch expects Shimao to maintain its EBITDA margin at above 25% and its leverage below 30%-32% for the next two years, although this may narrow thereafter as sector competition intensifies. Shimao has a well-located land bank and products in higher-tier cities that will support wider margins than those of peers. DERIVATION SUMMARY Shimao has elevated itself to a margin-focused homebuilder by moving away from a contracted sales model. It is well-positioned among peers. Its contracted sales of around CNY68 billion a year are comparable with peers rated 'BBB-' to 'BB+' and its EBITDA margin of 26%-27% in 2015-2016 are comparable with 'BBB' to 'BBB+' rated peers, such as China Overseas Land & Investment Limited (A-/Stable) and China Resources Land Ltd (BBB+/Stable). Shimao's leverage of around 30%-32% is comparable with that of Longfor Properties Co. Ltd. (BBB-/Stable). No Country Ceiling or parent/subsidiary aspects affect Shimao's rating. Operating environment risks make it difficult for companies in this sector to be rated above 'BBB+'. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Contracted sales by GFA to increase by 7%-8% over 2017-2018. - Average selling prices for contracted sales to increase by 5% in 2017-2018. - An EBITDA margin of around 25%-27% in 2017-2018. - Land premium of CNY40 billion in 2017-2018. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action: -sustained strong positive cash flow from operations (CFO); -stronger position in metropolitan cities in northern and southern China without significant deterioration in its financial profile; -net debt/adjusted inventory sustained below 25% (2016: 32%, 2015: 31%); and -investment property operations stabilising at a larger scale and generating substantially higher recurring income. Developments that May, Individually or Collectively, Lead to Negative Rating Action: - negative CFO for a prolonged period; - net debt/adjusted inventory at above 35% for a prolonged period; - an EBITDA margin below 22% for a prolonged period (2016: 27%. 2015: 27%); and - contracted sales/total debt at below 1.0x for a prolonged period (2016: 1.0x, 2015: 0.9x). LIQUIDITY Sufficient Liquidity: Shimao had CNY22.2 billion in cash, of which CNY2.9 billion was restricted, and CNY22 billion in unused bank credit facilities as of end-2016. This easily covers its short-term borrowings of CNY17.8 billion. Diversified Funding Channels: Shimao has many financing options, including equity issuance, perpetual capital securities, offshore notes, onshore debentures and bank borrowings. Its weighted-average borrowing cost was 5.8% in 2016. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 3 April 2017 Summary of Financial Statement Adjustments - Capitalised interest is adjusted for cost of goods sold, as disclosed by the issuer. Hybrid perpetual securities are treated as debt. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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