(The following statement was released by the rating agency)
Dec 10 -
Summary analysis -- Glorious Property Holdings Ltd. --------------- 10-Dec-2012
CREDIT RATING: B/Negative/-- Country: China
Primary SIC: Real estate
Mult. CUSIP6: 37960R
Credit Rating History:
Local currency Foreign currency
03-Apr-2012 B/-- B/--
14-Apr-2010 B+/-- B+/--
The rating on Chinese real estate developer Glorious Property Holdings Ltd. reflects our view that the company has "less than adequate" liquidity, a weak capital structure due to weaker-than-expected sales and debt-funded expansion, and weak execution. Glorious' low land costs, improving geographic diversity, and established presence in Shanghai and nearby cities temper these weaknesses.
In our view, refinancing risk associated with Glorious' short-term debt has declined thanks to improving credit conditions in China since mid-year 2012. The company has refinanced some significant short-term borrowings in the second half of the year. We estimate its short-term debt will decline to Chinese renminbi (RMB) 6.0 billion-RMB7.0 billion at the end of 2012 from RMB10.0 billion on June 30, 2012. Nevertheless, we believe liquidity will remain tight due to weaker-than-expected property sales. The company's unrestricted cash stood at a low RMB1.0 billion at mid-year 2012.
We now expect Glorious' contract sales in 2012 to drop by 18% year on year to about RMB11 billion, which is less than our original base-case estimate of RMB12 billion. The company has high exposure to cities affected by government restrictions on home purchases, despite improving geographic diversity. In addition, sales execution has been weak in 2012, in our view. Glorious generated RMB10.3 billion in contract sales in the first 11 months of the year.
We expect Glorious' leverage to rise moderately by the end of 2012 due to weak cash flows from property sales and continued high financing needs to expand construction. We also anticipate that the company's profitability will weaken as it cuts prices to move inventory and shifts its product mix to second- and third-tier cities, where average selling prices are lower. We expect Glorious' ratio of adjusted debt to EBITDA to rise to about 5.7x from 4.7x in 2011. EBITDA interest coverage could remain weak at 1.7x due to high debt and high funding costs. The company's average borrowing cost was high at an average of about 11% in the first half of 2012.
Nevertheless, we believe Glorious' profitability will remain above average compared with similarly rated peers due to the company's low land costs. The company's average land costs stood at RMB1,339 per square meter on June 30, 2012, about 15% of the average selling price of its properties. In the past two years, Glorious has extended its presence beyond the Shanghai area into north China and the Bohai Rim region and established some track record.
In our view, the recent resignation of Mr. Zhang Zhi Rong as the chairman of the board has a limited impact on the company's operations. We believe the management team has an established operating capability and record. We expect Mr. Zhang to remain the controlling shareholder.
In our view, Glorious' liquidity is "less than adequate," as defined in our criteria. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions:
-- Liquidity sources will amount to about 1.0x liquidity uses over the next 12 months. Liquidity coverage could be insufficient if property sales are materially below our expectations.
-- Major sources of liquidity in the 12 months ending June 30, 2013, included unrestricted cash holdings of RMB1.0 billion as of June 30, 2012, estimated new loan drawdowns of RMB4.0 billion in the second half of 2012, and contract sales of RMB11.0 billion. We also assume that a portion of construction spending can be funded by on-shore project loans.
-- Major uses of liquidity in the same period include short-term debt of RMB10.0 billion as of June 30, 2012, land premiums of about RMB1.2 billion, construction costs of RMB4.0 billion, interest expenses of RMB1.6 billion, sales and administration costs, and tax payments.
The company has no offshore bank loan financial covenants.
The negative outlook reflects our view that Glorious' liquidity could deteriorate if the company's property sales slip further or it has difficulty refinancing its short-term borrowings.
We could lower the rating if Glorious' liquidity deteriorates to "weak," which means sources of liquidity would be less than uses over the next six to 12 months. This could happen if the company's property sales are materially below our expectations or if it fails to roll over a significant amount of its borrowings.
We could revise the outlook to stable if Glorious improves its liquidity position. This could happen if the company improves its property sales, reduces short-term debt, and cautiously manages its expansion and leverage.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria | Corporates | Industrials: Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008