February 21, 2017 / 3:49 AM / 5 months ago

Fitch Rates Jinmao's Proposed USD Senior Notes 'BBB-(EXP)'

15 Min Read

(The following statement was released by the rating agency) HONG KONG, February 20 (Fitch) Fitch Ratings has assigned China Jinmao Holdings Group Limited's (Jinmao; BBB-/Stable) proposed US dollar senior notes a 'BBB-(EXP)' expected rating. The notes are issued by Franshion Brilliant Limited, a subsidiary of Jinmao, and are rated at the same level as Jinmao's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received. The ratings are supported by Jinmao's continued strong property development business, which is driven by its good-quality land bank and strong position in Tier 1 and 2 cities. The rating is also supported by Jinmao's stable recurring income and recovery in its primary-land sales. However, its aggressive land banking since mid-2016 may result in leverage sustained at current high levels, although the associated increase in risks may be mitigated by bringing in partners for its new projects and the stronger contracted sales in 2H16. KEY RATING DRIVERS Strong Property Sales: Jinmao's sales from property development rose 35% to CNY37.5bn in 2016, beating the company guidance of CNY30bn. Fitch expects Jinmao to maintain the strong sales growth in the next 18 months, supported by CNY75bn of saleable resources in 2017. The company estimated 50% of 2016 contracted sales came from Tier 1 cities, with Shanghai making up 27% of the total. The increasing sales from Tier 1 and affluent Tier 2 cities would support margin expansion. The quality of Jinmao's land bank is strong - it had 13 million square metres (sq m) of land at end-2015, most of which is in Tier 1 and Tier 2 cities. Jinmao has a strong cash-collection ratio of around 84% in 2016, higher than in 2015, which was below 80%. Strong Land Development Sales: Jinmao's primary-land sales more than tripled to CNY11bn in 2016 from a year earlier. In the meantime, the average land selling price almost doubled. For example, one parcel in the Changsha Meixi Lake project was sold at CNY9,241 per sq m in November 2016 compared with less than CNY4,000 for other parcels in the same project a year ago. A plot in its Nanjing project sold for CNY19,476 per sq m, compared with CNY10,462 in a similar site last year. Therefore we expect profit margin for the company's land development segment to exceed 50% 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 CNY10bn of cash from selling the rest of Meixi Lake Phase 1. The unsold primary land in the Meixi Lake Phase 2 and Nanjing Qinglong Mountain projects amounted to about 16 million sq m at end-June 2016, which will sustain more than 10 years of development to support land sales. Land Banking May Pressure Leverage: Jinmao's leverage, as measured by net debt/adjusted inventory, including the investment property business, was flat at 35.4% at end-1H16 (2015: 35.9%) on a deconsolidated basis. Jinmao has been aggressively acquiring land in Tier 1 and 2 cities through land auctions since mid-2016 but it has also sought partners for some of the projects. This reduced the final attributable land premium to CNY11bn-12bn from what would otherwise have been a substantially higher amount. Jinmao continues to aggressively add land, but should it slow down its cooperation with other developers, this may raise the company's leverage and put pressure on its ratings. Stable Recurring EBITDA: The company's recurring income from the investment property and hotel businesses on a consolidated basis was stable in 1H16, with an improved gross profit margin of 65.6% (2015: 63.6%). Four new offices and one new hotel will start operating in 2017, therefore Fitch expects Jinmao's recurring EBITDA to interest coverage to slowly improve to 0.5x in the next 18 months from 0.4x in 2015 on a deconsolidated basis. However, 87% of the recurring income from investment properties (excluding hotels) in 1H16 still came from the company's two main office buildings in Shanghai and Beijing. 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. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales (including primary land sales) to increase in the low teens to exceed CNY50bn in 2017 - Gross profit margin of property development remains above 40% in the next 24 months - Gross profit margin of land development remains at 50% in the next 24 months - Investment property and hotel revenue rises in the single digits and EBITDA margin at 60% in the next 24 months RATING SENSITIVITIES The following ratios and numbers apply to Jinmao after the deconsolidation of Jinmao Investment Holdings (JI), unless specified. Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Net debt/adjusted inventory, including investment property business, remaining above 35% on a sustained basis -Substantial decrease in margin and total sales in property development and land development from 2015 -(Recurring EBITDA + dividends from JI)/gross interest expense ratio falling below 0.5x on a sustained basis (2015: 0.42x) -Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group's equity stake in Jinmao to under 51% (53.97% as at end-2015), or a shift from strategic projects due to weaker relationships with local governments -Reduced access to onshore bank loans or inter-company funding support Positive: Future developments that may, individually or collectively, lead to positive rating action include: -maintaining (recurring EBITDA + dividends from JI)/gross interest expense above 1.5x with similar scale and healthy leverage in property development on a sustained basis, or -contracted sales from project development and land development of over CNY35bn with strong margin on a sustained basis, while keeping healthy leverage and (recurrent EBITDA + dividends from JI)/gross interest expense ratio over 1.0x 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 Date of Relevant Rating Committee: 23 June 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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