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Fitch Affirms Modern Land at 'B+'; Outlook Stable
April 12, 2017 / 10:10 AM / 8 months ago

Fitch Affirms Modern Land at 'B+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, April 12 (Fitch) Fitch Ratings has affirmed Modern Land (China) Co., Limited's Long-Term Foreign- and Local-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. Fitch has also affirmed Modern Land's senior unsecured rating and the ratings on all outstanding bonds at 'B+' with a Recovery Rating at 'RR4'. The full list of rating action is at the end of this commentary. The affirmation reflects Modern Land's weaker margin and higher leverage being offset by a stronger business profile. Its ratings are supported by improving landbank quality after the company repositioned its business towards tier 1 and 2 cities, which have higher land prices, to support contracted sales growth. KEY RATING DRIVERS Limited Margin Improvement: Fitch expects Modern Land's gross profit margin (GPM) to remain around 20.0%, compared with 41.0% in 2014 and 31% in 2015. Elevated land cost and the company's high-churn business model will limit Modern Land's GPM expansion. Its 2016 full year GPM edged up to 19.5%, after 2H16 GPM reverted to around 20%, as the company started to recognise better-margin projects presold in the past 12 months. The lower GPM was due to low-margin and social housing projects delivered in the cities of Beijing, Nanchang and Changsha. Fair-value acquisitions of the remaining equity interest in the company's joint venture projects have also exacerbated margin pressure. Leverage Increase Moderating: Modern Land's leverage remained controlled at end-2016 and was comparable with that of 'B+' rated peers. Fitch estimates that leverage - measured by net debt/adjusted inventory, including joint venture proportionate consolidation - rose to 34% at end-2016, from 23% at end-2015, after the company spent around CNY7 billion, or a little less than half of its presale proceeds, on land acquisitions and joint venture investments to increase its landbank in higher-tier cities. Fitch expects Modern Land's leverage to remain below 40% until the company substantially increases its land reserves relative to sales. Larger Scale: Modern Land's reported and attributable contracted sales increased by about 47% to CNY16.6 billion and CNY10.6 billion in 2016, respectively. Sales for January-March 2017 are also on track, having increased by 14% yoy to CNY3.4 billion, despite a series of government measures to rein in property prices since October 2016. We expect the company to achieve its reported contracted sales target of CNY22 billion in 2017, based on CNY36 billion of saleable resources. Improving Landbank: Fitch estimates the company's landbank is enough for around three years of sales, having improved from about two years of sales in 2015. Modern Land's attributable available-for-sale landbank was 2.8 million square metres (sq m) in gross floor area (GFA) at end-2016, compared with attributable sales GFA of around 1 million sq m in 2016. Modern Land's landbank quality also strengthened after it extended coverage to more tier 1 and 2 cities since 2014. Its attributable unsold landbank by area in Xiantao and Dongdaihe, two tier 4 Chinese cities, accounted for around 25% of the total at end-2016, down from 35% at end-June 2016 and 38% at end-2015. Fitch estimates that tier 1 cities, like Beijing and Shanghai, and tier 2 cities, like Hefei, Changsha and Suzhou, now account for about 70% of Modern Land's existing saleable resources by value. DERIVATION SUMMARY Modern Land's contracted sales increased by more than 40% each year between 2013-2016, faster than that of most peers in the 'B' rating category. Its reported contracted sales of CNY16.6 billion in 2016 were also higher than most 'B' rated companies, such as Redco Properties Group Ltd's (B/Stable) CNY10 billion and Guorui Properties Limited's (B/Stable) CNY11 billion. Modern Land's sales scale, however, is lower than that of higher-rated companies, including Yuzhou Properties Company Limited's (BB-/Stable) CNY23 billion and China Aoyuan Property Group Limited's (BB-/Stable) CNY26 billion. Modern Land's low leverage of 30%-40%, driven by its disciplined financial policy and low land cost, is also lower than that of most companies in the 'B' rating category, which have leverage of 40%-50%. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales of CNY15 billion in 2017 and CNY16 billion in 2018. - Attributable land investment accounting for 45%-55% of attributable contracted sales each year. - Average selling price to increase to above CNY15,000/sq m in 2017 and above CNY17,000/sq m in 2018 to reflect the higher cost of recently acquired land. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: -Attributable contracted sales sustained above CNY20 billion. -Net debt/adjusted inventory sustained below 30%. -Sufficient landbank for three years of development Negative: Developments that may, individually or collectively, lead to negative rating action include: -Insufficient landbank for two years of development. -Attributable contracted sales declining below CNY10 billion. -EBITDA margin below 20% for a sustained period. -Net debt/adjusted inventory above 40% for a sustained period. LIQUIDITY Sufficient Liquidity, Lower Funding Cost: Modern Land's liquidity remains healthy, with total cash of CNY6.8 billion, including restricted cash, compared with short-term debt of CNY2.5 billion at end 2016. Modern Land managed to significantly lower its funding cost to 8.1% in 2016, from 10.5% in 2015 and 11% in 2014. Fitch expects the lower borrowing cost to partially offset lower GPM and strengthen Modern Land's credit profile. FULL LIST OF RATING ACTIONS Modern Land (China) Co., Limited Long-Term Foreign- and Local-Currency IDR affirmed at 'B+'; Outlook Stable Senior unsecured rating affirmed at 'B+', Recovery Rating at 'RR4' USD500 million 6.875% senior unsecured notes due 2019 affirmed at 'B+', Recovery Rating at 'RR4' USD125 million 12.75% senior unsecured notes due 2019 affirmed at 'B+', Recovery Rating at 'RR4' Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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