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Fitch Rates Yuzhou Properties' Proposed USD Notes 'BB-(EXP)'
October 18, 2016 / 2:26 AM / a year ago

Fitch Rates Yuzhou Properties' Proposed USD Notes 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG, October 17 (Fitch) Fitch Ratings has assigned Yuzhou Properties Company Limited's (Yuzhou; BB-/Stable) proposed US dollar senior notes a 'BB-(EXP)' expected rating. The notes are rated at the same level as Yuzhou's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received. The company's management says it plans to use most of the net proceeds from the note issue to refinance its existing indebtedness. The China homebuilder's ratings are supported by its strong contracted sales growth, region diversification, and favourable margin compared with its peers. Its recent expansion into the Yangtze River Delta will increase its leverage, but Fitch believes a rise to around 40% of net debt-to-adjusted inventory in the next 12 months will be reasonable as it has acquired good quality sites and achieved a much larger operating scale. KEY RATING DRIVERS Expansion On Track: Fitch believes Yuzhou's recent expansion in Shanghai, Nanjing and Hangzhou will help it set up core markets in two regions - the West Strait Economic Zone and the Yangtze River Delta - improve the company's inventory quality, and diversify its portfolio. Yuzhou is a leading property developer in Fujian province and Hefei, but has acquired eight land parcels in Shanghai and Nanjing since 2015. Contracted sales in the latter two cities reached CNY5.3bn in January-September 2016, or 28% of total contracted sales, compared with CNY1bn, or 7% of total contracted sales, in 2015. Yuzhou has also acquired sites in Hangzhou through the purchase of a company for CNY4.1bn in July 2016. Fitch expects the company's operation scale to continue increasing in the Yangtze River Delta. Leverage Increase to be Reasonable: Fitch expects Yuzhou's leverage, measured by net debt-to-adjusted inventory, to increase to 35%-40% by the end of 2016 (1H16: 35%). The increase will be driven by the high land premiums as the company expands. The attributable land cost-to-contract sales ratio was over 65% in 1H16, which was higher than its peers' average of 40%-50%. However, a rise in leverage to about 40% by end-2016 would still be reasonable because of the good quality of its recent land purchases and Yuzhou's enlarged scale. Yuzhou's contracted sales jumped 116% yoy to CNY18.7bn in January-September 2016. Margin Under Pressure; Still Robust: Yuzhou's consistently high EBITDA margin of over 30% is likely to come under pressure due to the significant rise in land costs. However, Fitch expects the company to maintain a robust margin because most of the land purchased are in major cities in the Yangtze River Delta and have high sales potential; the company has a record of achieving higher-than-average selling prices, and it has low selling, general and administrative expenses. Yuzhou's margin has been high mainly because of its low unit land costs, of about 22% of average selling price in 2014. However, this ratio quickly increased to 30% in 2015 as land costs climbed, and it is likely to rise further in 2016. Healthy Liquidity: Yuzhou had total cash of CNY15.7bn at end-1H16, which is more than enough to cover its short-term debt of CNY5.7bn, and support its planned expansion. The company has diversified funding channels to ensure the sustainability of its liquidity. Besides bank loans, it has established channels for both onshore and offshore bond issuance, as well as equity placement. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales to increase by around 50% in 2016 as Yuzhou continues its expansion into the Yangtze River Delta and West Strait Economic Zone - Higher average selling prices and unit land costs as Yuzhou increases exposure in Tier 1 and Tier 2 cities like Shanghai, Nanjing and Hangzhou - Land acquisitions in line with contracted sales growth in 2016, and account for around 60% of total contract sales RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Net debt/adjusted inventory sustained above 45% (1H16: 35%) - Contracted sales / net inventory sustained below 0.6x (1H16: 0.8x) - EBITDA margin sustained below 20% (1H16: 33%) - Significant drop in contracted sales from current scale (9M 16: CNY18.7bn) Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Sustaining a leading status in core markets of both the West Strait Economic Zone and the Yangtze River Delta - Net debt/adjusted inventory sustained below 40% - Contracted sales / net inventory sustained above 0.8x - EBITDA margin sustained above 25% Contact: Primary Analyst Jenny WJ Huang Associate Director +852 2263 9922 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 Date of Relevant Rating Committee: 29 July 2016 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 - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here Endorsement Policy 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 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. 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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