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Fitch Affirms Wanda at 'BBB', Maintains Negative Outlook
August 30, 2017 / 11:59 AM / 23 days ago

Fitch Affirms Wanda at 'BBB', Maintains Negative Outlook

(The following statement was released by the rating agency) HONG KONG, August 30 (Fitch) Fitch Ratings has affirmed Dalian Wanda Commercial Property Co. Ltd.'s (Wanda) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' and the Outlook remains Negative. A full list of rating actions is at the end of this commentary. The rating affirmation reflects Fitch's expectation that Wanda's credit profile will show greater improvement as a result of the group's ongoing execution of its asset-light strategy that includes its asset sales to Sunac China Holdings Limited (Sunac, BB-/RWN) and Guangzhou R&F Properties Co. Ltd. (GZRF, BB/RWN). Fitch believes Wanda is committed to implementing these asset sales and expects its leverage to materially decline by end-2017 or early 2018 when these transactions are completed. Wanda's funding outlay has also been lower than we previously anticipated as it has managed to obtain more projects using third-party funding or through co-funding schemes. Almost all of Wanda's new investment property (IP) projects in 1H17 were obtained through this strategy. Wanda's rating Outlook remains Negative as the asset disposals have not been completed. Failure to complete the asset sales will mean that Wanda's financial profile will be weak for its current rating. The weaker financial profile of its parent, Dalian Wanda Group Co., Limited (Wanda Group) may also constrain Wanda's rating. KEY RATING DRIVERS Potential Disposals Credit Positive: Wanda plans to sell a 91% stake in 13 tourism projects to Sunac and 77 hotels to GZRF for CNY43.8 billion and CNY19.9 billion, respectively. Sunac will also assume the subsidiaries' net debt of CNY15 billion, which would reduce Wanda's net debt by a total of CNY83 billion. For simplicity, we have assumed the transactions to be completed in 2017 in our analysis, although the GZRF transaction may only be completed in January 2018. According to Mr. Wang Jianlin's public speech, its net debt can be reduced to CNY30 billion after the transaction. However, this does not take into account capex and ongoing development expenditures that need to be paid as the sales scale of its development properties shrinks and operating cash flow from the segment will decline to a level insufficient to fund its still-substantial capex in 2017. We believe Wanda will still have net debt of over CNY100 billion at end-2017 compared with CNY148 billion at end-1H17 and CNY132 billion at end-2016. Strong IP Portfolio: Wanda is China's largest shopping-mall operator by the number of properties it owns and its recurring income scale. Wanda has 211 Wanda Plazas in operation, with another 13 million sq m under construction that will add close to 100 Wanda Plazas. Compared with global peers, Wanda's 2016 rental EBITDA of CNY12.2 billion (USD1.8 billion) ranks it second behind only Simon Property Group, Inc. (A/Stable), and is higher than the USD1.6 billion EBITDA of Unibail-Rodamco SE (A/Stable) and Swire Properties Limited's (A/Stable) USD1.2 billion. Wanda enjoys low land costs because of its strong IP platform that is welcomed by most local governments especially in low-tier Chinese cities. The company's long-term relationships with over 2,000 brands give it the operational flexibility to maintain the right tenant mix targeting the growing middle class in China. This is difficult for other landlords to replicate. The strong foot traffic of 1.46 billion in 1H17 drives the consistent positive rental reversion at Wanda's malls. We believe there is good potential for rental growth as most of the malls are still in the early stages of operations with a portfolio average rent of only CNY97/sq m/month in 2016. Robust Execution Ability: Wanda's track record of timely project delivery, high occupancy rates and continued rental rate growth reflect management's strong execution capabilities. It has a well-established brand that allows it to pick choice locations for new projects, partner with high-quality tenants and attract buyers' interest. Wanda's strong execution has allowed it to push forward with its asset-light strategy to build Wanda Plazas with third-party capital or co-investment. Wanda had 90 such projects by the end of 2016 and it added another 26 projects in 1H17. Parent's Poor Transparency Constrains Ratings: Fitch believes Wanda's ratings will be constrained at 'BBB' because of the lack of financial transparency of its parent Wanda Group, which is likely to have a materially weaker credit profile than Wanda. Wanda Group has disclosed publicly that its 1H17 total assets amounted to CNY883 billion, which is only CNY60 billion more than Wanda's total assets. The small scale of Wanda Group's non-property businesses may suggest that its non-property indebtedness may not be very material relative to Wanda. However, we believe Wanda Group's contingent liabilities are substantial. Wanda Group's contingent liabilities are mostly in the form of the investment agreements it has with co-investors of its overseas investments that totalled USD5.3 billion in 2016, and the agreement with onshore investors that Wanda Group enlisted to help it fund the delisting of Wanda from the Hong Kong Exchange in 2016. Wanda Group has given commitments to its business partners to buy back the investments they co-invested with the group. Wanda, being the cash cow of Wanda Group, will likely have to upstream substantial dividends to its parent to help the latter meet its obligations. DERIVATION SUMMARY Wanda's IP scale is comparable to major global investment properties companies like Simon Property (A/Stable), Unibail (A/Stable), and Swire Properties (A/Stable). Wanda operates in the less mature Chinese market with shorter-dated lease terms compared to the stable and mature markets in the US, Europe, and Hong Kong, respectively for the three peers. Wanda's investment property portfolio of 211 retails malls is more comparable with Simon Property that also has more than 200 retail outlets. Wanda's retail malls, however, lack the strong rental rates and capital values enjoyed by Unibail's retail malls and are also not as diversified as Swire Properties'. Wanda bears a higher borrowing cost than these peers and needs to maintain high liquidity, which adds to its funding costs. Wanda's credit metrics are weaker than all three as its recurring EBITDA/gross interest of less than 2.0x is lower than its peers' average of more than 5.5x. Its net debt/recurring EBITDA is weaker than Simon Property's and Swire Properties', but stronger than Unibail's. Wanda's multiple-notch rating difference with these peers reflects its slightly weaker business and financial profile, in addition to the rating constraint that its parent exerts on its ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Transaction with Sunac and GZRF is completed in 2017 - 6% positive rental reversion each year - Balance of Wanda Plaza development land bank to be sold by 2020 - Trade payable to decline 55% by 2019 - Dividend paid to average CNY5 billion in 2017 and 2018, and increase to more than CNY14 billion in 2019 to keep post-dividend free cash flow marginally negative RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Outlook Reverting to Stable - Wanda managing to execute its asset-light strategy on a sustained basis and avoid the negative sensitivity factors listed below - Wanda Group executing a capital recycling process to support its business expansion Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - recurring EBITDA/gross-interest sustained below 1.5x from 2018 (1.3x in 2016) - net-debt/investment properties sustained above 40% (36.8% in 1H17) - failure to complete its asset disposal plan - aggressive acquisitions by parent or unlisted fellow subsidiaries - any indication that Wanda is not adhering to the same level of corporate governance before its delisting from Hong Kong Exchange - Unsecured-assets/unsecured-debt sustained below 2.5x (2.8x in 2016) may lead to negative rating action on the senior unsecured debt LIQUIDITY Adequate Liquidity: Wanda had more than of CNY100 billion in available cash at end-1H17 while its short-term debt was under CNY30 billion. The total receipts of CNY68 billion if Wanda follows through with its asset disposal plan will add to its cash pool. This will give Wanda sufficient liquidity to cover all of its bank loans, leaving sufficient cash for its capex and to repay the USD600 million in offshore bonds due 2018. Wanda's liquidity remains adequate for the next 18 months. FULL LIST OF RATING ACTIONS Dalian Wanda Commercial Property Co. Ltd. -- Long-Term Foreign-Currency IDR affirmed at 'BBB'; Maintain Negative Outlook; -- Senior unsecured rating affirmed at 'BBB' Wanda Properties International Co. Limited -- USD600mln 7.25% notes due 29 Jan 2024 affirmed at 'BBB' Wanda Properties Overseas Limited -- USD600mln 4.875% notes due 21 Nov 2018 affirmed at 'BBB' Contact: Primary Analyst Su Aik Lim Senior Director +852 2263 9914 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Not material Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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