June 14, 2017 / 9:17 AM / 2 years ago

Fitch Downgrades Greenland to 'BB'; Outlook Negative

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, June 14 (Fitch) Fitch Ratings has downgraded Chinese homebuilder Greenland Holding Group Company Limited's (Greenland) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BB' from 'BB+', with a Negative Outlook. Fitch has also downgraded Greenland's senior unsecured rating and the ratings of all outstanding bonds to 'BB'. The downgrade of the IDR follows the downgrade of Greenland's standalone rating to 'BB-' from 'BB' and the incorporation of a one-notch uplift reflecting its moderate linkage with its parent, the State-owned Assets Supervision and Administration Commission (SASAC) of Shanghai Municipality, in line with Fitch's Parent and Subsidiary Linkage criteria. The downgrade of the standalone rating is driven by Greenland's persistent high leverage of above 60% as the company remained aggressive in expanding its land bank in 2016. Leverage, as measured by net debt-to-adjusted inventory, had reached 67% by end-2016. The Negative Outlook reflects our view that Greenland's cash collection of its pre-sold commercial properties in 2017 is likely be below our previous understanding, and this may keep leverage sustained above 65% - the level at which we may consider further negative rating action. KEY RATING DRIVERS Hard to Deleverage: Fitch's expectation that leverage may exceed 65% in 2017 and 2018 is due to construction expenditure likely to remain high even as the company slowed down its attributable land acquisition to about CNY8 billion in 5M17. Greenland has been reducing the proportion of commercial property sales, which came down to 36% in 2016 from 49% in 2015. The cash-collection ratio also improved to 79% from 59% in 2015, though it is still behind the industry average of 90% in 2016. The low cash-collection rate is a result of its high exposure to sales of commercial property development that has a slower sales collection rate than for residential property sales. Large Construction Expenditure Commitment: Fitch believes Greenland's rapid construction pace will continue to pressure leverage. Greenland's new construction start gross floor area (GFA) totalled 19.3 million square metres (sqm) in 2016, and this outpaced its land-acquisition GFA of 14.9 million sqm. The 2016 completed GFA of 22.7 million sqm was faster than both construction starts and new land added. Greenland's aggressive pace of construction resulted in completed properties available for sale growing significantly in 2016 to CNY93 billion from CNY49 billion in 2015. The build-up of unsold completed properties can be a cash drain, and a persistent rising trend of unsold completed properties may also reflect uncertainties of its property sales. Contracted Sales Growth to Slow: Fitch expects Greenland's contracted sales to be sustained at around CNY280 billion in 2017, slowing down in 2H17 as the Chinese authorities continue to implement increasingly stricter measures to curb property prices and restrict residential property transactions. Contracted sales rose by 11% to CNY255 billion in 2016. This trend had maintained its momentum earlier in 2017, with contracted sales growing by 17.9% yoy in 1Q17. Non-Property Adds to Leverage Pressure: Fitch believes that Greenland's non-property businesses are still immature and will need to be funded with cash flow generated from the property business. Greenland has made extensive investments in the financial institutions (FI), consumer goods and infrastructure industries. All these have contributed to the increase in leverage. Benefits of Large Scale: Greenland is one of the top property developers in China as measured by contracted sales. Its property-development business is well diversified in over 40 cities in China and overseas. The company intends to sustain contracted sales of over CNY200 billion in the next few years. One-Notch Parental Support: Greenland has moderately strong linkages with the Shanghai government. It will continue to be one of the major contributors to Shanghai's tax revenue among Shanghai SASAC-owned enterprises, and remain the largest Shanghai-based property company. Fitch believes the Shanghai SASAC, which owns 46% of Greenland, will continue to be the biggest shareholder and exert influence on Greenland's ability to acquire quality sites for development. DERIVATION SUMMARY Greenland's rating is supported by its business profile - including scale as measured by contracted sales and EBITDA, and its market position. However, its rating is constrained by higher leverage than most of the 'BB' category peers and relatively low contracted sales efficiencies (measured by contracted sales/gross debt) - due to its higher exposure to the commercial property segments. Greenland's peers, like China Evergrande Group (B+/Stable) and Sunac China Holdings Limited (BB/Negative), are similarly aggressive in expanding their scale, and are among the 10 largest Chinese homebuilders. Greenland's leverage is as high as that of Evergrande, but Greenland has a large level of uncollected sales to mitigate its high leverage. Greenland, as a state-owned enterprise, has a stronger position in acquiring land at low costs, especially for new city districts that local governments are keen to develop. This enhances Greenland's business profile over that of Evergrande and Sunac. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales to increase by 13% in 2017 and slow to 5% in 2018. - Sales of commercial property to form 40% of total sales, and residential sales to make up the remainder in 2017-2019 - Land premium of around CNY75 billion-90 billion in 2017-2019. RATING SENSITIVITIES Positive: Future Developments That May, Individually or Collectively, Lead to Negative Rating Action on the Ratings Include: The Outlook on the standalone ratings may be revised to Stable if the negative guidelines are not met in the next 12 months. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: Net debt/adjusted inventory sustained above 65% (Fitch estimate for 2016: 67%) Property EBITDA margin sustained below 15% (Fitch estimate for 2016: 16%) Contracted sales/total debt sustained below 0.8x (Fitch estimate for 2016: 0.9x) Evidence of weakening support from parent. LIQUIDITY Greenland had cash of CNY60 billion at end-2016, which is not sufficient to cover its short-term debt of CNY96 billion. However, the company had CNY105 billion of available bank facilities and the capability to raise funds through multiple channels domestically. FULL LIST OF RATING ACTIONS Greenland Holding Group Company Limited - Long-Term Foreign-Currency IDR downgraded to 'BB'/Negative from 'BB+'/Negative - Long-Term Local-Currency IDR downgraded to 'BB'/Negative from 'BB+'/Negative - Senior unsecured rating downgraded to 'BB' from 'BB+' - USD3 billion medium-term note programme downgraded to 'BB' from 'BB+' - USD2 billion medium-term note programme downgraded to 'BB' from 'BB+' Issued by Greenland Hong Kong Holdings Limited with Keepwell from Greenland Holding Group Company Limited - USD450 million 3.875% senior notes due 2019 downgraded to 'BB' from 'BB+' - USD500 million 4.375% senior notes due 2017 downgraded to 'BB' from 'BB+' - CNY1.5 billion 5.5% senior notes due 2018 downgraded to 'BB' from 'BB+' Issued by Greenland Global Investment Limited and Guaranteed by Greenland Holding Group Company Limited - USD500 million 3.5% senior notes due 2017 downgraded to 'BB' from 'BB+' - USD400 million 3.75% senior notes due 2019 downgraded to 'BB' from 'BB+' - USD300 million 3.5% senior notes due 2019 downgraded to 'BB' from 'BB+' - USD600 million 5.875% senior notes due 2024 downgraded to 'BB' from 'BB+' 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 Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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