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Fitch: Guangzhou R&F's Results Demonstrates Deleveraging
March 14, 2017 / 6:32 AM / 9 months ago

Fitch: Guangzhou R&F's Results Demonstrates Deleveraging

(The following statement was released by the rating agency) HONG KONG, March 14 (Fitch) Fitch Ratings says Guangzhou R&F Properties Co. Ltd.'s (Guangzhou R&F, BB/Stable) leverage has fallen below the agency's expectations, according to the 2016 annual results. Leverage, as measured by net debt/adjusted net inventories, had improved to around 50% by December 2016 from 57% in June 2016 and 60% in December 2015. The level is high for its rating, but is sufficiently mitigated by a strong business profile commensurate with a 'BB' to 'BB+' rating. Fitch expects leverage to stabilise at around 55%-60% and to stay within the negative rating triggers of 60% for the next two years. Total debt/contracted sales was at 0.5x, similar to the 0.6x in 2015. Fitch expects this ratio to remain stable at around 0.5x-0.6x. The EBITDA margin dropped to around 22%-23% from 26% in 2015 and 31% in H116. This was due to a lower contribution from the higher-margin projects in Beijing and Guangzhou. The revenue from Beijing and Guangzhou was CNY14.4bn (which accounts for 29% of total revenue) compared with CNY22.3bn in 2015 (55% of total revenue). Fitch expects the EBITDA margin to remain stable at around 23%-25%, given its well-positioned land bank in Tier 1 and 2 cities - which represented 77% of the total land bank as of December 2016. Guangzhou R&F has become more selective and careful on its criteria for buying land than had applied in 2014-2015. It focused on Tier 1 cities and Tier 2 cities around the Yangtze River Delta and Beijing-Tianjin regions, and moved away from Tier 3 cities and over-supplied Tier 2 cities. In 2016, the company acquired 5 million square metres (sq m) of land at an average cost of CNY5,041 per sq m, with a total land cost of CNY17.5bn. The land cost/contracted sales ratio was around 28%, within the industry norm of 20%-50%. We believe the more carefully selected land purchased from 2014-2016 will provide better margins and cash flows in 2017-2018. Guangzhou R&F is actively managing its debt-maturity profile and replacing its high-cost borrowings - including its offshore notes, perpetual capital securities and trust loans - which bear interest rates of around 10%, with lower-cost domestic borrowing. It issued several onshore bonds that raised CNY49bn in total at an interest cost of 3.48%-5.20% between July 2015 to June 2016, and issued offshore bonds of USD725m at 5.75% in December 2016. This has extended its debt maturity profile further out to 2022 and beyond. In 2016, the effective cost of all borrowings (including perpetuals) was at 6.30%% compared with 8.13% in 2015. Fitch expects the company to maintain low interest costs in the next 12-24 months. Its plans for 'A' share sales in China have been delayed, but this is not putting pressure on the ratings. Contact: Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Vicki Shen Director +852 2263 9918 . 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