March 23, 2017 / 8:24 AM / 8 months ago

Fitch Affirms China Resources Land at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, March 23 (Fitch) Fitch Ratings has affirmed China Resources Land Ltd's (CR Land) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the Chinese homebuilder's foreign-currency senior unsecured ratings and its rated issues at 'BBB+'. The affirmation reflects CR Land's stable financial profile, which is based on a business model of maximising operating cash flow from development properties to support stable investment property (IP) portfolio expansion. The rating is also supported by CR Land's strong market position in tier 1 and 2 cities and strong IP portfolio with healthy recurring interest coverage. KEY RATING DRIVERS Stable 2016 Performance: CR Land's strong cash generation is supported by 27% contracted sales growth to CNY108 billion in 2016 and high cash collection of 100.6%. CR Land's cash flow from operation (CFO) is likely to remain positive even though its land acquisition pace sped up to 51% of sales, versus a five-year average of 37%. Its churn ratio improved to 1.4x, from 1.1x in 2015, leaving net leverage, as measured by net debt/adjusted inventory, stable at 18.7% (2015: 18.6%). Recurring rental income from IPs increased by 9.6% to HKD6.3 billion and we expect recurring income interest coverage, as measured by recurring rental income EBITDA/gross interest paid, to gradually improve to closer to 1.0x by 2019, from our estimated 0.6x in 2016. Steady Development Property Growth: CR Land continued to generate CFO in its development business over the past five years, even though its development landbank expanded by 53% over the same time. Fitch expects its 2016 CFO to exceed HKD10 billion, with IP land acquisitions treated as capex. CR Land will continue to adopt a prudent land acquisition strategy, targeting quality locations in tier 1 and 2 cities and maximising operating cash flow from its property development business to expand its IP portfolio and deleverage. CR Land's attributable landbank reached 37.7 million square metres (sq m) as of end-2016 following a fast land replenishment pace in 2016, which will be enough to support the expected increase in contracted sales and IP expansion. More than 70% of the homebuilder's landbank is in tier 1 and 2 cities, which enjoy better demand and stronger pricing. Leading High-End Mall Operator: Recurring rental income increased by 9.6% to HKD6.3 billion in 2016. CR Land is taking the lead in becoming China's largest high-end shopping mall operator, with 22 malls of 3.2 million sq m gross floor area under operation. The company plans to open 22 new malls with total gross floor area of no more than 5.5 million sq m during 2017-2019. At this pace, annual Fitch-estimated capex of CNY10 billion can be fully funded by internally generated cash flow from the sale of development properties and rental income. CR Land's assets are well managed and provide steady rental income. The adequate asset quality is reflected in a stable gross rental yield of 7%-8%; higher than the average of 5%-6% among large Chinese property companies. Continued Parental Support: CR Land's business profile is strengthened by the operational benefits it enjoys as a core subsidiary of China Resources Holdings (CRH). The parent provides CR Land with land incubation support in preparing prime land and large parcels for development. CR Land acquired a high-end residential complex in Shenzhen Bay and 23 car parks across tier 2 cities in August 2016 from CRH at a 30.3% discount to the adjusted net asset value, which dovetails with CRH's continued support. In the current high land-cost environment, CR Land's ability to secure sites in city centres outside of government land auctions, where prices tend to be high due to fierce competition, demonstrates the benefits of being a state-owned company. IP Portfolio Still Small: Fitch believes that for CR Land's ratings to be upgraded, the stable recurring income from its IP business will need to offset the risks of its development business, which is subjected to market volatility and government policy risk. CR Land's IP EBITDA/gross interest coverage of 0.6x remains low compared with over 4x for Hong Kong-based IP companies rated in the 'A' category. Furthermore, its IP portfolio only accounted for less than 10% of total group EBITDA in 2016, even though the segment's rental revenue rose at a three-year compound annual growth rate of 16.5% to HKD6.3 billion in 2016. DERIVATION SUMMARY CR Land's scale, with contracted sales of CNY108 billion, and nationwide presence gives it product and market diversification similar to most leading homebuilders rated at around 'BBB+', including China Overseas Land & Investment Limited (COLI; A-/Stable; standalone profile BBB+/Stable), China Vanke Co., Ltd. (BBB+/Stable) and Poly Real Estate Group Company Limited (BBB+/Stable; standalone profile BBB/Negative). CR Land's leverage may not be as low that of COLI or Vanke, but its high recurring EBITDA/gross interest coverage, which is likely to be closer to 1.0x over the next two to three years, provides high debt service visibility and is less affected by business cycles. CR Land's EBITDA margin is slightly ahead of Vanke, however, its property sales churn is slower. Poly's standalone rating is one notch lower than that of CR Land, reflecting its higher leverage of around 45%, compared with below 30% for the 'BBB+' rated peers. No Country Ceiling or parent/subsidiary linkage aspects affect CR Land's rating. Companies in this sector are unlikely to be rated above 'BBB+' due to operating environment risks. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for CR Land include: - housing sales volume to slow in higher-tier cities in 2017, with a fall of 10% in gross floor area sold and a decline of 5% in contracted sales, followed by 11% growth in contracted sales after 2017; - cash collection rate at 90% in 2017 and 2018, lower than the high of 100.6% in 2016; - rental income growth of around 20% between 2017 and 2019, supported by IP project completion schedule; and - land replenishment pace in line with project sales and IP completion to keep attributable landbank at 35 million sq m. RATING SENSITIVITIES Positive rating action is not probable in the next 12 to 18 months due to the small scale of CR Land's investment property (IP) operation. Positive rating action may result over the loner-term if the IP segment becomes a more significant EBITDA contributor and IP EBITDA/gross interest expenses is sustained above 2.0x. Negative: Developments that may individually or collectively, lead to negative rating action include: - aggressive landbank acquisition strategy; - decline in the EBITDA margin of the development business to less than 20% (2016 estimated: 26%); and - deterioration in IP EBITDA/gross interest coverage to below 0.5x over a long period (2016 estimated: 0.6x). LIQUIDITY Healthy Liquidity, Long-Maturity Debt: CR Land's available cash of HKD46.7 billion at end-2016 was sufficient to meet its short-term debt repayments of HKD12.0 billion. Its liquidity is also supported by strong CFO generated from its development property business, which cover capex of its IP business. This has helped keep CRL's FCF positive in three of the past four years; generating a total HKD9 billion in FCF after acquisitions and divestitures. Around 70% of the homebuilder's debts have a maturity of more than two years, limiting near-term liquidity pressure and better-matching its asset structure; close to half of its 2016 adjusted inventory is in IP and hotel assets, which have long asset lives. FULL LIST OF RATING ACTIONS China Resources Land Ltd - Long-Term IDR affirmed at 'BBB+'; Outlook Stable - Foreign-currency senior unsecured rating affirmed at 'BBB+' - USD800 million 4.375% senior unsecured notes due 2019 affirmed at 'BBB+' - USD700 million 6.000% senior unsecured notes due 2024 affirmed at 'BBB+' - US dollar medium-term note programme affirmed at 'BBB+' Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F., Man Yee Building 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 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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