April 24, 2017 / 9:34 AM / 7 months ago

Fitch Affirms Golden Wheel Tiandi at 'B'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, April 24 (Fitch) Fitch Ratings has affirmed China-based homebuilder Golden Wheel Tiandi Holdings Company Limited's (GWTH) Long-Term Foreign and Local Currency Issuer Default Ratings at 'B'. The Outlook is Stable. Fitch has also affirmed GWTH's senior unsecured rating at 'B', with Recovery Rating at 'RR4'. The rating affirmation is premised on GWTH's good quality metro-linked property development portfolio, moderate leverage compared with its 'B'-rated peers and healthy margins. Its small scale and rising leverage mainly due to increasing demand for land replenishment and rising development property exposure continue to constrain its ratings. Fitch has also assigned its USD200m 8.25% senior unsecured notes due 2019 a final 'B' rating and a Recovery Rating of 'RR4'. This is a tap of an earlier issuance of USD100m and carries the same terms and conditions. The notes are rated at the same level as GWTH's senior unsecured rating because they constitute the company's direct and senior unsecured obligations. The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 11 April 2017. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Niche Positioning: GWTH is focused on developing small commercial and residential projects linked to metro stations. The company had six projects under development as of end-March 2017, including a 33%-owned project in Nanjing. Its projects usually fetch higher average selling prices because of their convenient locations and better foot traffic for the commercial-property components. Potential competition from large national developers for metro-linked projects may squeeze GWTH's margin over the longer term, although volume-driven developers are less likely to participate in small niche projects. Leverage to Rise: Fitch expects GWTH's leverage, as measured by net debt/adjusted inventory, to trend towards 40% in the next one to three years, due to faster land acquisitions. The company did not acquire any land between February 2014 and October 2016, resulting in land bank life dropping to around three years at end-2016, from 11 years at end-2015. GWTH is starting a new phase of expansion and Fitch estimates it will pay at least CNY1.2 billion for land in 2017, which will drive up leverage to above 35% in 2017. GWTH's leverage rose to 29% as at end-2016, from 27% at end-2015, mainly due to high construction expenditure during the year. Margin Recovery: Fitch expects GWTH's margins to stay at around 25% in the medium term, supported by existing integrated projects connected to metro stations, which have gross margins of around 40%, especially those in Nanjing. The company's margin recovered to 28% in 2016, from -4% in 2015, with the completion and delivery of three projects during the year. GWTH may face margin pressure from 2019 as well-located metro-linked land sites are usually expensive. Rising Recurring Income: Fitch expects GWTH's investment property and metro-leasing divisions to expand steadily over the medium term, with new investment properties coming into operation each year, and the business of leasing out spaces in metro stations contributing profit. These divisions will provide recurring income for interest servicing, which will mitigate cash flow volatility in the property development business. GWTH had completed investment property with total gross floor area of around 135,000 square metres as of end-2016. Most of its investment properties enjoy prime locations with convenient transportation access, translating into high average occupancy rate of around 90% in past five years and stable annual recurring income of around CNY100 million. Metro Leasing Turned Profitable: The metro-leasing division's gross profit margin rose to 14% in 2016 (2015: -19%; 2014: 27%; 2013: 44%), beating Fitch's expectation of breakeven. We think the company's metro leasing business will expand more slowly than the company's initial plan to open four to five metro malls annually, given limited supply of metro stations that are suitable for malls and the slower-than-expected construction of the metro stations where the company has secured leases to operate malls. However, profitability will improve as the existing malls mature and are able to achieve occupancy rate of above 90% after two years of operation. DERIVATION SUMMARY GWTH's contracted sales of CNY2.3bn in 2016 was smaller than those of most of its 'B' rated peers, such as Xinyuan Real Estate Co., Ltd. (B/Stable), which generate around CNY10 billion in contracted sales annually. GWTH's land bank of 0.4 million square metres for development and sale as of end-2016 is also smaller than that of peers. However, GWTH's low leverage, healthy margin and substantial interest coverage from recurring income supports its ratings at 'B'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Annual contracted sales (excluding JVs and associates) of around CNY1 billion-2 billion during 2017-2019; - Construction expenditure accounts for 50% of contracted sales in 2017, and around 20% in 2018-2019; - Land replenishment ratio, measured by gross floor area acquired to gross floor area presold in the same year, at 1.0x-1.7x during 2017-2019; - Cash collection ratio at 85% during 2017-2019 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action include: - Net debt/ adjusted inventory rising above 40% on a sustained basis (end-2016: 28.7%; end-2015: 26.8%) - Deviation from the current focus on metro-linked projects - EBITDA margin falling below 25% on a sustained basis (2016: 27.8%; 2015: -4%) No positive rating action is expected over the next 12-18 months given the company's current small scale. However, in the longer term, positive rating action may result from: - Investment properties' value exceeding CNY5 billion (2016: CNY5 billion; 2015: CNY4.6 billion) and annual development property sales sustained above CNY3 billion (2016: CNY2.3 billion; 2015: CNY923 million); and - Recurring gross profit/interest coverage rising over 1.0x on a sustained basis (2016: 0.5x; 2015: 0.6x). LIQUIDITY Adequate Liquidity: GWTH had CNY1.8 billion in cash on hand, including restricted cash, as of end-2016, and unused bank facilities of CNY1.2 billion, which are adequate to cover its short-term debt of CNY1.8 billion. FULL LIST OF RATING ACTIONS - Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable - Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable - Senior unsecured rating affirmed at 'B' and Recovery Rating at 'RR4' - USD100m 9.5% senior unsecured notes due 2017 affirmed at 'B' and Recovery Rating at 'RR4' - USD100m 8.25% senior unsecured notes due 2019 affirmed at 'B' and Recovery Rating at 'RR4' - USD200m 8.25% senior unsecured notes due 2019 assigned final rating of 'B' and Recovery Rating at 'RR4' Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Summary of Financial Statement Adjustments - EBITDA adjusted for capitalised interest Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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