June 23, 2017 / 8:26 AM / a month ago

Fitch Affirms China Jinmao at 'BBB-'; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG, June 23 (Fitch) Fitch Ratings has affirmed homebuilder China Jinmao Holdings Group Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. The affirmation reflects Jinmao's continued strong performance in its property development business, which is driven by its good quality land bank and strong positioning in Tier-1 and 2 cities. The rating is also supported by Jinmao's recovery in recurring EBITDA interest coverage, primary land sales strength and moderate leverage. KEY RATING DRIVERS Strong Property Sales: Jinmao's total sales from property development rose 35% to CNY37.5 billion in 2016 and gained another 38% to CNY14.9 billion in the first five months in 2017 amid tighter property market regulations. Fitch expects Jinmao to maintain robust sales growth in the next 18 months, supported by CNY85 billion of saleable resources in 2017, of which 40% will come from Tier 1 cities. Jinmao's cash collection is also healthy at above 90%. Jinmao's landbank quality is strong - it had 12.5 million square metres (sqm) of land on an attributable basis at end-2016, most of which is in Tier 1 and 2 cities. Temporary Higher Leverage: Fitch expects Jinmao's net leverage, measured by net debt/adjusted inventory, to temporarily edge above 35% by end-2017 as Jinmao's land acquisition didn't slow down in 1H17 and the company also has to pay the CNY10 billion land premium from 2016. Jinmao acquired land through auctions in Tier 1 and 2 cities worth a total of CNY31.2 billion in 2016 and CNY20.2 billion in 1H17. The attributable land premium was as high as 90% of total attributable sales in 2016. However, Fitch does not expect Jinmao to continue buying land aggressively in 2018 after two years landbanking as its landbank is already sufficient for about 10 years' of development. However, any continued aggressive acquisitions may result in sustaining leverage at high levels, although the increase in risks may be mitigated if they are accompanied by a substantial rise in contracted sales. Net leverage increased to 32.5% from 27.6% at end-2015 on a deconsolidated basis. Recurring Interest Coverage to Improve: Fitch expects Jinmao's recurring interest coverage to bottom out after the negative impact of the Chinese yuan's sharp depreciation and a one-off tenant withdrawal from Jinmao's key investment property in Shanghai in 2016. The occupancy rate in Jinmao Tower recovered to 95.2% in May 2017 from a historical low of 90.3% last year and the rental rate increased by 4.7% in May 2017 yoy. Furthermore, Fitch expects CNY770 million in rental income to be generated from five new investment properties to be added by end-2017. This 30% increase of recurrent income will help Jinmao's recurring EBITDA coverage to substantially improve to 0.6x in 2018 from 0.4x in 2016 given a more stable Chinese yuan. Jinmao has about 50% of borrowings denominated in US dollars or HK dollars and to date has hedged 6% of its total foreign currency borrowings. Land Development to Stabilise Risks: Jinmao sold five land parcels for CNY11.1 billion in Changsha and Nanjing at a gross margin of as high as 64% in 2016, smoothing out the leverage effect from aggressive landbanking in 2016. The unsold primary land in Meixi Lake Phase 1 would be a stable source of cash for Jinmao as land costs have already been paid and it does not need to incur further development expenditure. Fitch estimates Jinmao can generate another CNY6 billion of cash from selling the rest of Meixi Lake Phase 1. The unsold primary land in Changsha and Nanjing amounted to about 14.4 million sqm at end-2016. Furthermore, the high margins from land sales could offset the potential margin erosion from property development due to the costly land Jinmao bought in the past 12 months. Advantage in Government Linkage: Jinmao's business continues to be supported by its status as a state-owned property company. This provides the company with an advantage in government-led strategic projects, and helps provide strong access to domestic bank funding. This is illustrated by the favourable locations of its investment properties and commercial development projects. DERIVATION SUMMARY Jinmao's scale is similar to other Fitch-rated homebuilders such as Beijing Capital Development Holding (Group) Co., Ltd. (BCDH, BBB-/Stable, standalone profile BB/Stable), Sino-Ocean Group Holding Limited (BBB-/Stable, standalone BB/Stable) and Yuexiu Property Company Limited (BBB-/Stable; standalone profile BB/Stable). Jinmao has product and market diversification that are comparable to these homebuilders, given its attributable contracted sales of CNY34.3 billion and landbank of 12.5m sqm for secondary development. Jinmao exceeds its peers in its higher recurring interest coverage of 0.5x and EBITDA margin above 30%. BCDH has no recurring EBITDA, and Sino-Ocean and Yuexiu have coverage of 0.2x-0.3x. Jinmao's high EBITDA margin also reflects its pricing premium and good quality land bank. BCDH's EBITDA margin is in the high twenties because the majority of its land is concentrated in Beijing while Sino-Ocean and Yuexiu's EBITDA margin is only 20%. In term of leverage, Jinmao is closer to Yuexiu and Sino-Ocean, but much lower compared with BCDH, whose net leverage is as high as 60%. No Country Ceiling or parent/subsidiary linkage aspects affect Jinmao's rating. Companies in this sector are unlikely to be rated above 'BBB+' due to operating environment risks. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - contracted sales (including primary land sales) to increase by 19% to reach CNY58 billion in 2017 and grow in the low teens in 2018 and 2019 - Gross profit margin of property development to remain above 30% in the next 24 months but decrease to around 20% in 2019 and 2020. - Gross profit margin of land development to remain at 55% in the next 24 months - Investment property and hotel revenue to rise by single digits and EBITDA margin of 40% in the next 24 months RATING SENSITIVITIES The following ratios and numbers apply to Jinmao after the deconsolidation of Jinmao Hotel and Jinmao (China) Hotel Investments and Management Limited (JH), unless specified otherwise. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Net debt/adjusted inventory, including investment property, remaining above 35% on a sustained basis (2016: 32.5%) - Substantial decrease in margins and total sales in property development and land development from 2016 - (Recurrent EBITDA + dividends from JH)/gross interest expense falling below 0.5x on a sustained basis (2016: 0.3x) - Reduced ties with state-owned majority stakeholder Sinochem Group Positive: Future developments that may, individually or collectively, lead to positive rating action include: Attributable contracted sales from project development and land development of over CNY50 billion with strong margins on a sustained basis, while keeping healthy leverage and (recurrent EBITDA + dividends from JH)/gross interest expense at over 1.0x LIQUIDITY Ample Liquidity: The company had CNY18 billion in unrestricted cash and CNY27.4 billion in unused banking facilities as of end-2016.This is enough to cover its CNY12.9 billion in short-term debt. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2017-2019 due to its diversified funding channels from both onshore and offshore capital markets, long-term relationships with onshore and offshore banks and flexible land acquisition strategy. FULL LIST OF RATING ACTIONS China Jinmao Holdings Group Limited --Long-Term IDR affirmed at 'BBB-', Outlook Stable --Senior Unsecured at 'BBB-' Franshion Brilliant Limited -- USD300m 5.375% senior unsecured notes due 2018 affirmed at 'BBB-' -- USD500m 5.75% senior unsecured notes due 2019 affirmed at 'BBB-' -- USD200m 6.4% senior unsecured notes due 2022 affirmed at 'BBB-' -- USD500m 3.6% senior unsecured notes due 2022 affirmed at 'BBB-' Franshion Development Limited -- USD500m 6.75% senior unsecured notes due 2021 affirmed at 'BBB-' Franshion Investment Limited -- USD500m 4.7% senior unsecured notes due 2017 affirmed at 'BBB-' 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 Winnie Guo Associate Director +852 2263 9969 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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