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Fitch Assigns Sunshine 100 'B-' Rating; Rates USD Bonds
July 18, 2014 / 2:17 AM / 3 years ago

Fitch Assigns Sunshine 100 'B-' Rating; Rates USD Bonds

(The following statement was released by the rating agency) HONG KONG, July 17 (Fitch) Fitch Ratings has assigned Sunshine 100 China Holdings Ltd (Sunshine) a Long-Term Issuer Default Rating (IDR) of 'B-' with a Stable Outlook, a senior unsecured rating of 'B-' and Recovery Rating of 'RR4'. Fitch has also assigned the China-based residential property developer's 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 Sunshine'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. Sunshine's ratings are supported by its adequate land bank, low land bank cost and improving land bank values in second- and third-tier cities after years of city development. The ratings are constrained by its high leverage level, low turnover rate, tight liquidity and higher volatility in commercial property strata-title sales as the company shifts gradually towards developing "street-community type" projects. KEY RATING DRIVERS Increasing Commercial Property Sales: Sunshine had about 85% of its contracted sales from residential property in 2011-2013, but it plans to increase sales of commercial property in street-community type projects. These projects, which mainly target investors, are located at large residential communities or near city-centres with cultural or tourism themes. As the average selling price (ASP) of commercial property is much higher than residential units, the profit margin is higher. However, Sunshine may face higher volatility in demand. We believe many of the buyers are speculators, who focus on price appreciation rather than rental yields of the shops. Although Sunshine completed its first street-community project in Yangshuo in 2004, it did not actively expand this product line later on. Sunshine has yet to establish a track record that proves this business model would be successful. Consistently High Leverage: Sunshine has high leverage compared with similarly rated peers. Its leverage, measured by net debt divided by adjusted inventory, was consistently above 60% in 2010-2013. Although Sunshine made limited land purchases in the past few years, its inventory turnover slowed, which led to negative operating cash flows for most of the time. Hefty interest expenses due to rising debt further drained Sunshine's cash. As a result, Sunshine's net debt level is much higher than its peers'. Slow Turnover Rate: Sunshine's ratings are constrained by its slow inventory turnover. The company's turnover rate, measured by contracted sales divided by gross debt, stayed at 0.4x-0.5x in 2011-2013. This is very low compared with most of its 'B'-rated peers, which had turnover of over 1.0x. Many of Sunshine's projects are sizable with GFA of 500,000 sqm or above and were acquired a number of years ago. Sunshine has no urgency to offload them quickly since the land cost is low. The slow turnover did not translate into high gross profit margin, which remained at around 30% in the past three years. Improving Land Bank Values: Over half of Sunshine's projects in terms of GFA are in third-tier cities. Some of the projects in Sunshine's land bank were acquired more than five years ago when the land parcels were located in suburban areas. As the cities grew over time, the surroundings of these projects have developed and hence land values have improved. For example, the place in which Sunshine's Chongqing project is situated has become a medium- to high-end residential area facing the new CBD area at the intersection of Changjiang River and Jialing River. Sunshine's projects in Yantai and Liuzhou, which are third-tier cities, are also located near city centres now. Adequate Land Bank: Sunshine had an adequate land bank of 11.2 million sqm in over 20 projects at end-2013, enough for more than 10 years of sales based on 2013's contracted sales GFA. Sunshine's projects are in second- and third-tier cities in the Bohai Rim and Midwest region in China. It benefits from low average land cost of CNY734/sqm, which was 10% of its ASP in 2013. It has no urgent need to replenish its land bank at the much higher current market prices. Tight Liquidity for Refinancing: Sunshine's freely available cash and restricted cash pledged for loans was CNY2.8bn at end-2013. This is less than the short-term debt of CNY5.1bn. Sunshine has to rely on lenders rolling over the expiring debt or using its contracted sales proceeds to pay off the debt. Sunshine also has high exposure to non-bank funding (60% of total debt at end-2013), which includes trust loans, loans from asset management companies and loans from third parties. We expect the proportion of non-bank funding to drop to 50% after Sunshine utilises half of the bond proceeds to refinance its existing debt. RATING SENSITIVITIES Positive: Future developments that may collectively lead to positive rating actions include: - Net debt/adjusted inventory sustained below 55% (End-2013: 66%); and - EBITDA margin sustained above 15% (2013: 19%); and - Contracted sales/total debt sustained above 0.8x (2013: 0.4x); and - Contracted sales sustained above CNY7.5bn (2013: CNY5.4bn). Negative: Factors that may, individually or collectively, lead to negative rating action include: - A deterioration in Sunshine's liquidity position, for example, failure to refinance bank borrowings. Contact: Primary Analyst Alex Choi Associate Director +852 2263 9969 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 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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