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Fitch Rates Guorui Properties' USD Notes Final 'B'
March 21, 2017 / 3:04 AM / 8 months ago

Fitch Rates Guorui Properties' USD Notes Final 'B'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, March 20 (Fitch) Fitch Ratings has assigned Guorui Properties Limited's (B/Stable) USD300 million 7% senior notes due 2020 a final 'B' rating and Recovery Rating of 'RR4'. 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 7 March 2017. The notes are rated at the same level as Guorui's senior unsecured rating because they represent its direct and senior unsecured obligations. Guorui's rating is supported by a healthy EBITDA margin, stable investment-property rental income and a quality landbank that is large enough to support sustained improvement in its contracted sales. However, the rating is constrained by its high leverage, as measured by net debt/adjusted inventory, of 55.1% at end-1H16, and Fitch estimates leverage will hover at around 60% in the next 18 months. KEY RATING DRIVERS Small to Mid-Sized Developer: Fitch expects Guorui to be able to expand to contracted sales of more than CNY15 billion in the next 18 months. The company had CNY11.1 billion in contracted sales in 2016 from projects in eight cities, compared with CNY6.2 billion in 2014, after new projects helped diversify its sources of sales. It has a landbank of 7.7 million square metres (sq m), of which just 1.6 million sq m was under construction at end-June 2016. However, the company is still concentrated geographically, with four cities - Langfang, Shenyang, Beijing and Haikou - accounting for about 60% of its total sellable resources. This constrains the rating on the company. Landbanking Drives High Leverage: Guorui started to acquire new sites aggressively in 2015. The land premium paid amounted to 79% and 69% of total contracted sales in 2015 and 2016, respectively. The debt-funded expansion drove a jump in total debt to CNY16.5 billion at end- June 2016, from CNY10.8 billion at end-2014, pushing leverage up to 55.1%, from 44.2%, over the same period. Fitch expects Guorui's aggressive landbanking strategy to keep its operating cash flow negative and drive leverage higher to around 60%. However, the company does have the capacity to deleverage, as it has accumulated a sufficiently large landbank and has a modest growth target. Healthy Margin: Fitch expects Guorui to be able to maintain a gross profit margin close to 30% over next 24 months. Its EBITDA margin of above 30% historically is higher than that of most of its peers in the same rating category. Guorui's margins are likely to be sustainable because of its low land cost - the average unit cost of its landbank was CNY2,600 per sq m at end-June 2016. Guorui has been able to keep land cost low at between 20%-30% of its average selling prices because it establishes sound relationships with local government and acquires land at lower cost through participation in primary land development. In addition, it had 7.7 million sq m of land reserve in Beijing, Shantou and Chaozhou for primary development and urban redevelopment projects as at end-June 2016. Stronger Rental Income: Guorui holds seven investment properties with total gross floor area of about 800,000 sq m, which generated CNY280 million in rental income in 2015. The company's two properties in Beijing accounted for more than 90% of its investment-property rental income. We expect Beijing Glory City's rental income to remain stable in 2017 given its prime location within the Second Ring Road in the capital. The new Hademen Center, located one kilometre from the landmark Tiananmen Square in Beijing, started to generate rental income from 2H16 and the company expects it will contribute CNY400 million of rental income a year. Guorui also expects the South Levee Bay in Foshan in southern China to start contributing CNY100 million in rental income in 2017. Fitch expects the company's recurring EBITDA/gross interest coverage to reach 0.2x in 2016 and gradually improve to around 0.3x in the next 24 months due to expansion of the investment-property portfolio and lower funding cost. Improving Capital Structure: Guorui has been optimising its capital structure since 2014 by diversifying funding channels and lowering effective borrowing costs. Fitch estimates the company's funding cost fell to 6.5% in 2016, from 7.2% in 2015. The company repaid most of its trust loans that had higher interest costs and issued longer-tenor onshore bonds at lower rates. The US dollar bonds will mark the company's debut in the offshore bond market and help to further diversify its funding channels. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Guorui include: - Contracted sales of CNY14-18 billion during 2017-2019. - Land premium/contracted sales still high at 60% in 2017, but gradually falling to 30% in 2019. - Land replenishment ratio (land acquisition gross floor area/contracted sales gross floor area) at 1.0x in 2017 and gradually falling to 0.5x in 2019 (2016: 1.1x). - Cash collection ratio remaining healthy at 83%-90% during 2017-2019 (2016: 80%). - Funding cost for new borrowing of around 6%. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - Contracted sales sustained above CNY10 billion. - Net debt/adjusted inventory sustained below 50% (1H16: 55.1%). - EBITDA margin sustained above 30% (1H16: 35.6%). - Contracted sales/gross debt sustained above 0.6x (1H16: 0.6x). Negative: Developments that may, individually or collectively, lead to negative rating action include: - Net debt/adjusted inventory sustained above 60%. - EBITDA margin sustained below 25%. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 7 March 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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