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Fitch Assigns Xinhu Zhongbao's USD Notes Final 'B'
March 1, 2017 / 6:24 AM / 9 months ago

Fitch Assigns Xinhu Zhongbao's USD Notes Final 'B'

(The following statement was released by the rating agency) HONG KONG, March 01 (Fitch) Fitch Ratings has assigned Xinhu (BVI) Holding Company Limited's proposed USD700m 6% senior notes due 2020 a final rating of 'B' and a Recovery Rating of 'RR4'. Xinhu (BVI) is a fully owned subsidiary of Xinhu Zhongbao Co., Ltd., which will unconditionally and irrevocably guarantee the notes. The notes are rated at the same level as Xinhu Zhongbao'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 17 February 2017. KEY RATING DRIVERS High Leverage Constrains Ratings: Xinhu Zhongbao has reported persistently high leverage of 60%-70%, as measured by net debt/adjusted inventory, if including financial joint venture investments. However, the high leverage is due to its 'primary land development and secondary property development' business model, which helps keep land costs low. This gives the company room to deleverage by lowering pressure for new land acquisitions or by introducing partners to its existing Shanghai projects. Furthermore, Xinhu Zhongbao's significant investment in financial institutions means its leverage is higher than most other homebuilders that solely focus on the property development business. Slower Turnover than Peers: Xinhu Zhongbao's project churn of 0.3x in 2015, as measured by contracted sales/net inventory, is low compared with the 0.6x average of 'B' rated peers. We expect most of the primary land development costs to occur in the next year or two, which will push up inventory levels, while contracted sales will kick in and cover property development costs from late 2018. Quality Land Bank: The majority of the land Xinhu Zhongbao has for secondary developments are in key cities around the Yangtze River Delta, with 25% of its sellable resources by value located within the Shanghai inner-ring that benefits from limited supply. This supports an increase of Xinhu Zhongbao's future average selling prices (ASP) by more than 50% when the Shanghai projects are launched in 2018 or 2019, from CNY11,061 per square metre in 2015. Sales Growth and Margin Improvement: We expect Xinhu Zhongbao's high land quality to support robust contracted sales growth and higher margins. Our forecast increase in ASP will drive the company's gross profit margin above 30% when the Shanghai project sales are recognised in 2019, from its 2015 EBITDA margin of 23%. However, we foresee a lower EBITDA margin for 2016 and 2017 due to higher construction, land and selling, general and administrative expenses, as the economies of scale arising from increased sales from its better-quality projects will not kick in until 2018. Financial Investments Given Credit: Xinhu Zhongbao has been building up its portfolio of long-term equity investments in financial institutions, mainly in Xiangcai Securities Co., Ltd., Shengjing Bank, Bank of Wenzhou Co Ltd and China CITIC Bank Corporation Limited (BBB/Stable). We have included these long-term investments into our leverage calculation as part of adjusted inventories. We also adjusted Xinhu Zhongbao's net debt to include a cash credit from its marketable equity investments. The company has consistently made large marketable equity investments in the Chinese and Hong Kong equity markets. DERIVATION SUMMARY Xinhu Zhongbao's ratings are supported by its high land quality, which will drive robust contracted sales growth and higher margins. Its ratings are mainly constrained by high leverage. Xinhu Zhongbao has a similar business model and contracted sales scale to Oceanwide Holdings Co. Ltd. (B/Stable). Both companies have slow churn as measured by contracted sales/total debt. Xinhu Zhongbao has lower leverage, while Oceanwide has a stronger EBITDA margin and higher equity investment in financial intuitions. Xinhu Zhongbao has a larger and better-quality land bank compared with Chinese property peers rated at 'B-', such as Jingrui Holdings Limited (B-/Negative) and Sunshine 100 China Holdings Ltd (B-/Negative). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - No new land acquisitions in 2017 or 2018 and limited new land acquisition thereafter. - Contracted sales in terms of gross floor area increasing by 20% in 2016-2017, then slowing once sales from the new Shanghai projects begin in 2018-2019. - A mild increase in ASPs in 2016-2017, then sharp increase in 2018-2019 as the contribution of contracted sales from Shanghai increases. - A 90% cash collection ratio for property contracted sales. - A lower EBITDA margin in 2016-2017 due to higher construction and land costs, followed by a margin rebound in 2018 when better-quality projects are recognised. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - contracted sales/net inventory sustained below 0.3x or contracted sales sustained below CNY10bn and failing to support property business expansion and lower debt repayment capacity; and - EBITDA margin sustained below 20%. Positive: Developments that may, individually or collectively, lead to positive rating action include: - net debt/adjusted inventory, including financial joint venture assets, sustained below 50%; - contracted sales/net inventory sustained above 0.5x; and - EBITDA margin sustained above 30%. LIQUIDITY Xinhu Zhongbao has tight liquidity, but we do not foresee a liquidity shortage in 2017. The company's cash and marketable securities totalled CNY20bn in 1H16 after Fitch's took a 60% haircut to its CNY9bn marketable equity investments based on the agency's rating methodology. Xinhu Zhongbao can cover short-term debt of around CNY22bn plus the CNY6bn negative FCF forecast, with support from the CNY9bn available from an undrawn bank facility. In addition, the company's high quality and sufficient land reserve provides an adequate pledge for financing if necessary. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 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 Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 16 February 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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