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Fitch Upgrades CIFI to 'BB' from 'BB-'; Outlook Stable
September 15, 2017 / 12:32 AM / 3 months ago

Fitch Upgrades CIFI to 'BB' from 'BB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, September 14 (Fitch) Fitch Ratings has upgraded China-based property developer CIFI Holdings (Group) Co. Ltd.'s Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating to 'BB' from 'BB-'. The Outlook on the IDR is Stable. A full list of rating action is at the end of this commentary. CIFI's attributable contracted sales have continued to increase strongly since Fitch placed the rating on Positive Outlook in October 2016. Sales growth has been supported by the company's execution of its fast-churn strategy and stable operating efficiency, while keeping land acquisitions steady and maintaining a healthy financial profile. CIFI's enlarged scale and enhanced credit profile make it more comparable with 'BB' rated China homebuilders and we expect its credit profile to remain healthy in the next 18 months. KEY RATING DRIVERS Larger Scale: Fitch expects CIFI's attributable contracted sales to quadruple from 2014 levels to reach CNY45 billion in 2017 and CNY60 billion in 2018 based on its project-launch pipeline and strong land bank. Total contracted sales for January 2017 to August 2017 rose by 68% yoy to CNY61 billion - of which about 55% were attributable sales - after CIFI increased the number of ready-for-sale properties and project selling prices. CIFI achieved a slight enhancement in the average selling price (ASP) of contracted sales year-to-date amid strict pricing control, with ASPs rising to CNY17,900 per square metre (sq m), from CNY17,800/sq m in the same period during 2016 (2015: CNY12,700/sq m). The larger scale gives CIFI a more stable sales base and greater financial flexibility for land acquisitions. Leverage to Remain Stable: CIFI's net leverage, as measured by net debt/adjusted inventory with proportionate consolidation of joint ventures (JV) and associates, was 36.1% at end-June 2017. This was higher than the 29.5% recorded at end-2016, but lower than that of most 'BB' rated Chinese homebuilders. The low leverage was due to CIFI's prudent land acquisition strategy and adoption of the JV model, which helps it improve operational efficiency as well as lower its land acquisition and funding cost. Fitch expects leverage to remain stable for the next 12-18 months as CIFI's accelerated 1H17 land acquisition pace has prepared it with abundant land resources for 2018. The HKD2.4 billion share placement at end July 2017 will also help ease CIFI's leverage. Healthy Margin: CIFI's EBITDA margin, excluding the effect of acquisition revaluation, has been consistently above 25% and further increased to 28.4% in 1H17, from 25.5% in 1H16. Fitch expects the margin to continue widening to 30% by 2018 due to its resilient ASPs and low land bank costs, which Fitch estimates at 30% of the contracted ASP. CIFI's large portfolio of projects in tier 1 and 2 cities and its shift to offer products that appeal to upgraders rather than the mass market have enhanced its profit structure. Focus on Tier 1 and 2 Cities: CIFI has a diversified presence in the Yangtze River Delta, Pan Bohai Rim, Central Western Region and Guangdong Province, reducing its exposure to uncertainty in local policies and economies while providing room to expand. More than 90% of the company's attributable land bank at mid-2017 was in tier 1 and 2 cities, which means CIFI is less exposed to the oversupply plaguing lower-tier cities. In addition, its projects are spread over 29 cities, helping mitigate risks arising from policy intervention in individual cities. Nevertheless, strong and widespread implementation of home-purchase restrictions by the authorities may slow CIFI's growth. Lower Funding Costs: CIFI has developed diversified funding channels, including onshore bonds and offshore bank loans. The company sold USD285 million in five-year 5.5% bonds in January 2017 and signed a USD303 million four-year offshore club-loan facility to redeem 8.875% USD400 million bonds due 2019. It also issued USD300 million of senior perpetual debt at 5.375% in August 2017. The proceeds will be used to refinance its existing borrowings. The company reduced its average funding cost to 5.0% in 1H17, from 5.5% in 2016. Fitch expects its funding cost to decline further to below 5% in 2018 due to its active debt structure management. DERIVATION SUMMARY CIFI is the closest peer to Sino-Ocean Group Holding Limited (BBB-/Stable: standalone rating: BB/Stable) in terms of contracted sales, land bank size and geographic focus on first and affluent tier-2 cities. CIFI's leverage of around 35% is lower than the 40% leverage Fitch expects for Sino-Ocean in 2018 and significantly lower than the above 60% leverage of 'BB' peers, such as Guangzhou R&F Properties Co. Ltd. (BB/RWN) and Beijing Capital Development Holding (Group) Co., Ltd. (BBB-/Stable, standalone rating: BB/Stable). CIFI's EBITDA margin of above 25% is also slightly higher than Sino-Ocean's 23%-25%, but in line with Guangzhou R&F and Beijing Capital Development. However, its nil recurring EBITDA interest coverage is inferior to Sino-Ocean's 0.4x and GZ Guangzhou R&F 0.2x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - attributable contracted sales of close to CNY45 billion in 2017 and CNY60 billion in 2018 - attributable land acquisition increasing to 70% of contracted sales in 2017 then slowing to 55% in 2018 (2016: 45%) - adjusted EBITDA margin improving to around 30% by 2018 - flattish average land cost in 2018 compared with 2017 year-to-date acquisition costs - 30% dividend payout RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - leverage, measured by net debt/adjusted inventory, sustained below 30% - EBITDA margin, excluding the effect of acquisition revaluations, of over 30% on a sustained basis - maintaining high cash flow turnover despite the JV business model and consolidated contracted sales/debt at over 1.2x (1H17: 1.0x) Developments that May, Individually or Collectively, Lead to Negative Rating Action - substantial decrease in contracted sales - EBITDA margin, excluding the effect of acquisition revaluation, below 25% for a sustained period (1H17: 28.4%) - net debt/adjusted inventory above 45% for a sustained period (1H17: 36.1%) LIQUIDITY Ample Liquidity: CIFI had unrestricted cash of CNY25.0 billion at end-June 2017, enough to cover short-term debt of CNY6.5 billion. The company issued CNY4 billion in domestic bonds in March 2017 and had approved but unutilised facilities of CNY4.5 billion at end-June 2017. This will be sufficient to fund development costs, land premium payments and debt obligations for the next 18 months. FULL LIST OF RATING ACTIONS Long-Term Foreign-Currency IDR upgraded to 'BB' from 'BB-'; Outlook revised to Stable from Positive Senior unsecured rating upgraded to 'BB' from 'BB-' USD400 million 7.75% senior unsecured notes due 2020 upgraded to 'BB' from 'BB-' Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Rebecca Tang Associate Director +852 2263 9933 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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