(The following statement was released by the rating agency)
May 30 -
Summary analysis -- Renhe Commercial Holdings Co. Ltd. ------------ 30-May-2012
CREDIT RATING: B/Watch Neg/-- Country: China
Primary SIC: Operative
Mult. CUSIP6: 75972C
Credit Rating History:
Local currency Foreign currency
28-Mar-2012 B/-- B/--
15-Mar-2012 B+/-- B+/--
23-May-2011 BB-/-- BB-/--
27-Apr-2010 BB/-- BB/--
The rating on Renhe Commercial Holdings Co. Ltd. reflects the company’s deteriorating liquidity, vulnerable business model, and high regulatory risk. The Chinese underground shopping mall developer and operator’s prime location of projects and low land cost due to its unusual business model temper these weaknesses. We assess Renhe’s business risk profile to be “vulnerable” and its financial risk profile to be “highly leveraged”.
In our opinion, Renhe’s property sales and liquidity in 2012 could be significantly weaker than our base-case assumption. Our view reflects the company’s property sales target of Chinese renminbi (RMB) 3.0 billion-RMB4.0 billion for 2012. The target is 50% lower than our base-case assumption. We also expect Renhe’s cash collections to be much lower than we previously anticipated for 2012, due to canceled property sales in 2011. In our opinion, the company has limited funding channels to restore its financial strength against a weak property sales outlook.
We believe that Renhe’s business model is vulnerable to tight credit conditions, the company’s limited access to bank borrowings, and generally anemic investment demand. Regulations governing projects that Renhe developed from underground civil air defense facilities are ambiguous in many areas. Any changes in these regulations could raise questions about the sustainability of the company’s business model. In particular, the lack of well-defined land use rights is an obstacle to securing construction loans or mortgage loans onshore. These rights are typically required for collateral. Renhe has very limited access to banking facilities because it does not hold titles to the properties it has developed. The company has made little progress in securing bank loans from financial institutions in the past two years. In addition, regulations on project tendering processes are not transparent, lowering the visibility of Renhe’s future project reserves.
In our view, Renhe has limited flexibility to scale back construction spending on presold but incomplete projects. The company canceled presales of RMB3 billion at its project in Humen, Dongguan, last year. This reduced its 2011 presales to RMB4.0 billion--about 50% lower than our expectation. In addition, Renhe’s collection period for sales proceeds has increased significantly due to tight bank credit.
In our view, Renhe’s liquidity is “less than adequate,” as defined in our criteria. We expect the company’s liquidity sources to cover its uses by about 1.0x in 2012. However, its liquidity is highly sensitive to property sales, cash collection, and construction spending. The company’s receivables that are more than six months past due increased to RMB1,224.7 million at the end of 2011, from RMB12.5 million a year earlier. Renhe has short-term onshore debt of RMB555.3 million and interest expenses of about RMB800 million (on both its offshore notes and onshore debt) due in 2012.
We placed the ratings on CreditWatch with negative implications because we believe Renhe’s liquidity could deteriorate to “weak” from “less than adequate” in 2012.
We aim to resolve the CreditWatch action by the end of June 2012. We may lower the rating on Renhe by at least one notch if we assess that the company’s liquidity will deteriorate to “weak”. This means that the company’s sources of liquidity will be lower than its uses over the next 12 months.
Related Criteria And Research
-- Renhe Commercial Holdings Co. Ltd. Ratings Lowered To ‘B’ And Placed On CreditWatch Negative On Deteriorating Liquidity, March 28, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008