December 22, 2016 / 6:17 AM / 8 months ago

Fitch Rates Logan's Proposed USD Senior Notes 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG, December 22 (Fitch) Fitch Ratings has assigned Logan Property Holdings Company Limited's (BB-/Stable) proposed US dollar senior notes a 'BB-(EXP)' expected rating. The notes are rated at the same level as Logan'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 China homebuilder's ratings are supported by strong contracted sales growth, improving financial metrics, lower leverage, and stable profitability with Fitch calculated EBITDA margin of 28.6% at 1H16. Its current scale of CNY20bn in contracted sales and geographic concentration in Guangdong province constrain its ratings. KEY RATING DRIVERS Re-Focus on Shenzhen: The Shenzhen region in China's southern Guangdong province accounted for over 40% of Logan's 2015 contracted sales, and more than 70% of its land investment was in this area. Fitch believes that Logan's addition of land in Shenzhen enhances its land bank quality, reduces sales risk and improves its overall operational flexibility, although margins remain uncertain because of the high costs for the land and potential for government policy changes, such as the imposition of home purchasing curbs. We expect the Shenzhen region to continue to be Logan's main focus. The company's land bank was previously mainly in Shantou in Guangdong, and Nanning and Fongshing in Guangxi province, which are all Tier-2 or Tier-3 cities. Strong 2015 Performance: Logan's contracted sales rose 54% to CNY20.5bn in 2015, above its revised sales target of CNY18bn. The company expects contracted sales to continue increasing in 2016. Logan had contracted sales of CNY26.9bn in January-November 2016, which was 51% higher than in the same period in 2015. Its leverage, measured by net debt/adjusted inventory, increased to 41% at end-June 2016 from 32% at end-2015 due to increased land bank acquisitions in 2016. The high sales turnover also helped Logan to maintain a healthy financial profile. Stable Margin and Strong Liquidity: Logan's Fitch calculated EBITDA margin rose slightly to 28.6% in 1H16 from 27.4% in 2015 and 26.2% in 2014. Fitch expects the margin to remain stable at above 25% in 2016. The company's strong cash position with readily available cash of CNY10.1bn at end-June 2016 is enough to cover its short-term debt of CNY5.6bn. Fitch believes Logan's liquidity will remain healthy in the next 12-18 months, underpinned by its strong contracted sales and high cash collection rate. Limited Geographical Diversification: More than 80% of Logan's contracted sales in 2015 were from Guangdong province, with the remaining mainly from Guangxi province. Furthermore, more than 50% of the Guangdong contracted sales were from the Shenzhen region. The company's geographic concentration is likely to continue in 2016, based on its existing land bank and expansion strategy. This concentration leaves Logan more vulnerable to economic volatility and policy changes in these regions compared with developers that are more geographically diversified across China. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales continue to grow in 2016 but at a slower pace compared with 2015 - Land acquisitions increase in line with sales growth in 2016 - Higher average selling prices and unit land costs as the company becomes more focused in the Shenzhen region RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Fitch calculated EBITDA margin sustained below 25% (2015:27%) - Net debt/adjusted inventory sustained above 40% (2015: 32%) - Contracted sales / total debt sustained below 1.0x (2015: 1.0x) Positive: No positive rating action is expected unless Logan is able to substantially increase its scale and diversify outside Guangdong province without compromising its financial metrics. This is not expected over the next 12-18 months. Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 5 May 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com 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. 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