April 19, 2017 / 2:25 AM / 3 months ago

Fitch Rates Times Property's Proposed USD Notes 'B+(EXP)'

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(The following statement was released by the rating agency) HONG KONG/SHANGHAI, April 18 (Fitch) Fitch Ratings has assigned Times Property Holdings Limited's (Times Property; B+/Positive) proposed US dollar senior notes a 'B+(EXP)' expected rating and Recovery Rating of 'RR4'. The notes are rated at the same level as Times Property'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. Fitch revised the Outlook on Times Property to Positive from Stable on 11 January 2017, and we may take further positive rating action if the company can maintain leverage below 45% and keep its landbank sufficient for three years of development. The China homebuilder's ratings are supported by its execution track record but constrained by the need to consistently replenish its land bank with quality sites, which results in a fluctuation in leverage. KEY RATING DRIVERS Larger Scale, Strong Sales: Times Property's contracted sales rose 50% in 2016 to CNY29.3 billion, beating its annual target of CNY21.5 billion by more than 35%. The average selling price (ASP) for contracted sales climbed to CNY11,860/square metre (sq m) from CNY9,010/sq m in 2015, due mainly to better market performance in Foshan and Zhuhai. Times Property managed to maintain high sales efficiency, with contracted sales/total debt at 1.4x (1.2x at end-2015). Times Property is targeting sales of CNY32.5 billion in 2017, representing 11% growth over 2016. The company will be able to retrieve around CNY28 billion from the sales proceeds, assuming a historical cash-collection rate of 86%. January-March 2017 sales have increased by 21% to CNY6.7 billion, with an ASP of CNY14,800/sq m. Fitch believes that Times Property's strong cash collection from larger sales will continue to support expansion in the next three years. Better Land Bank Quality: Times Property reported 13.1 million sq m of land as of end-2016, with 17% located in Guangzhou, 35% in Guangdong's Tier 2 cities (Foshan, Zhuhai and Zhongshan), and the rest in less-developed noncore cities - Qingyuan, Dongguan, Changsha and Huizhou. Fitch estimates that the company had increased its land bank in its core markets (Guangzhou, Foshan and Zhuhai) to 3.8 years of development activity by end-2016 from 2.9 years at end-2015. High-Cost Acquisitions: Times Property started to acquire higher-priced land parcels in its core markets from 2015 to expand the share of products that appeal to upgraders and to solidify its foothold in Guangzhou and core Tier 2 cities such as Foshan and Zhuhai. It bought several land parcels in Foshan and Zhuhai at above CNY12,000/sq m, resulting in an weighted-average land-acquisition cost of more than CNY8,500/sq m in 2016, compared with around CNY6,000/sq m in 2015 and less than CN3,000/sq m before 2014. However, Fitch expects Times Property to add two to three projects from urban redevelopment sites annually, to complement high-cost land acquisitions from public auctions. Stable Leverage: Times Property's leverage, measured by net debt/adjusted inventory, was maintained at 33% at end-2016 compared with 35% at end-2015. Fitch expects leverage to fluctuate while Times Property expands, particularly as the government has implemented a series of policies since October 2016 to curb excessive increases in housing prices. The company's sustainable sales at current levels would be key to managing the fluctuation in leverage. Fitch will consider taking positive rating action if Times Property is able to maintain its leverage below 45%. Concentration in Guangdong Province: Times Property is a regional property developer focused on Guangdong Province in Southern China. Guangzhou, Foshan and Zhuhai together accounted for more than 85% of the total contracted sales in the past three years. We believe that Times Property will focus on expanding within Guangdong Province, and is unlikely to expand into other provinces in the near term. DERIVATION SUMMARY Times Property expanded by about 50% in 2016 to reach a contracted sales scale similar to 'BB' category peers - such as Yuzhou Properties Company Limited's (BB-/Stable)'s CNY23 billion and China Aoyuan Property Group Limited's (BB-/Stable) CNY26 billion. Times Property had previously been constrained by relatively high leverage (around 40%) compared with its small scale, due to constant pressure to increase its land bank in its core markets in Guangdong province. The company has managed to maintain its leverage stable while significantly boosting scale and saleable resources during the past two years to support future growth. Fitch revised the Outlook to Positive from Stable in January 2017, and will take further positive action if Times Property is able to meet positive rating sensitivities on a sustainable basis in the next 12 months. KEY ASSUMPTIONS - Contracted sales sustain above CNY30 billion in the next three years - Gross profit margin (including capitalised interests) maintain at 20%-25% over 2017-2019 - Attributable land premium around 45% of total contracted sales in the next three years. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Net debt/adjusted inventory sustained below 45% - Contracted sales/total debt sustained above 1.5x - EBITDA margin sustained above 20%. (2016: 19.4%) - Land bank sufficient for three years of development Negative: Future developments that may lead to the Outlook reverting to Stable: - Failing to maintain the positive guidelines LIQUIDITY Sufficient Liquidity: Times Property had cash and cash equivalent of CNY11.9 billion (including restricted cash) as of end-2016, compared with its CNY2 billion short-term debt. The company also took advantage of the offshore debt-financing window in the beginning of 2017 by issuing a USD375 million 6.25% bond due 2020 to refinance the USD305 million 12.625% bond due 2019 (already redeemed in February 2017) and the CNY1.5 billion 10.375% bond due 2017. The average funding cost had dropped to 8.3% by end-2016 from 9.6% at end-2015, and Fitch expects this to drop further to below 8% in 2017 Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19F, 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: 11 January, 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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