August 25, 2017 / 6:51 AM / a year ago

Fitch: China Resources Land's Lower Profit Has No Rating Impact

(The following statement was released by the rating agency) HONG KONG, August 25 (Fitch) The decline in China Resources Land Ltd's (CR Land, BBB+/Stable) core profit in 1H17 has no impact on its ratings, Fitch Ratings says. The 48% fall in the company's profit was caused by a 21% decline in (development) revenue that stemmed from fewer development properties delivered and recognised in 1H17. In addition, the company booked a higher foreign-exchange loss in its yuan-denominated borrowings as the yuan strengthened against its reporting currency, the Hong Kong dollar. Fitch does not consider the timing of recognition of accounting profit, upon project delivery, as an important factor in our ratings for Chinese homebuilders because almost all project cash flows would have occurred before the properties are delivered. We track contracted sales instead because it is a more timely measure. CR Land's contracted sales rose 16% to CNY73.9 billion in January-July 2017 and the company raised its contracted sales target for the full year to CNY132 billion from CNY100 billion previously, reflecting the improving operations. CR Land's contracted selling price also rose 4% yoy in 1H17, even though first-tier cities made up less of the sales. CR Land's leverage (measured by net debt/adjusted inventory) increased to 27.4% in 1H17 from 18.2% in 2016 due to more aggressive land acquisitions. Attributable land acquisitions picked up to roughly 60% of sales from 51% in 2016. However, Fitch expects CR Land's 2017 leverage to moderate to below 25% as it generates more contracted sales in 2H17 and its land acquisition pace slows. This leverage is still healthy and falls within the range expected for a 'BBB+' rated Chinese homebuilder. One of CR Land's key rating drivers is its ability to increase recurring income and sustain recurring EBITDA interest coverage above 0.5x as it expands its development business scale, which drives up its interest expenses. Fitch estimates the company's recurring EBITDA interest coverage at 0.6x at end-1H17, which is unchanged from the end-2016 level. CR Land also maintained a healthy development-property margin of 26% (Fitch estimated) in 1H17, which is similar to the 2016 level and well above 20%, the threshold at which Fitch may consider taking negative rating action. CR Land's investment property business performed strongly in 1H17, with rental income rising 13.2% to HKD4.0 billion and gross margin widening by 130bp to 62.3%. The occupancy rate for malls and offices improved to 94.2% and 87.6%, respectively, in 1H17 from 92.7% and 85.9% in 1H16, due to strong retail sales and leasing activities. Same-store sales at CR Land's malls rose by 27.8% in 1H17. Contact: Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Winnie Guo Associate Director +852 2263 9969 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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