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Fitch Rates Guangzhou R&F's USD Senior Notes Final 'BB'; on RWN
November 22, 2017 / 4:13 AM / a month ago

Fitch Rates Guangzhou R&F's USD Senior Notes Final 'BB'; on RWN

(The following statement was released by the rating agency) HONG KONG, November 21 (Fitch) Fitch Ratings has assigned Guangzhou R&F Properties Co. Ltd.'s (BB/Rating Watch Negative (RWN)) USD500 million 5.875% senior notes due 2023 a final 'BB' rating and placed the notes on RWN. The notes are issued by Easy Tactic Limited, a subsidiary of Guangzhou R&F, and are rated at the same level as Guangzhou R&F's senior unsecured rating because they constitute its direct and senior unsecured obligations. The assignment of the final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 13 November 2017. Guangzhou R&F's leverage, as measured by net debt/adjusted inventory, weakened to 69% at end-1H17, from 63% at end-2016, following aggressive expansion. Fitch believes its land bank of 49 million square metres (sq m) is now sufficient for more than six years of sales and, therefore, Guangzhou R&F is likely to slow land acquisition in 2H17. However, the weakened credit metrics have made it more probable that the RWN will be resolved with, at best, a Negative Outlook on Guangzhou R&F's 'BB' ratings, if affirmed. Guangzhou R&F's ratings were put on RWN following its plan to acquire Dalian Wanda Commercial Property Co. Ltd.'s (BBB/RWN) hotel assets for CNY19 billion. Fitch believes the acquisition will push up Guangzhou R&F's total debt level and keep its leverage above Fitch's 60% threshold for negative rating action. The company's churn rate, as measured by contracted sales/gross debt, is likely to fall below 0.6x and may stay below this level, which will breach Fitch's threshold and may result in a rating downgrade if recurring EBITDA does not increase sufficiently to provide an offset. KEY RATING DRIVERS Aggressive 1H17 Expansion: Guangzhou R&F's 1H17 expansion was its fastest pace in the previous five years. Contracted sales gross floor area (GFA) increased by 21% in 7M17, compared with a CAGR of 12% between 2012 and 2016. We expect GFA sales growth of 28% for full-year 2017. Guangzhou R&F expanded its land bank even more aggressively, adding 11.4 million sq m in 1H17, against 2.9 million sq m sold. This was due to a rapid expansion outside tier 1 cities, with exposure increasing to 66% as at end-1H17, from 51% at end-2016. A more diversified geographical mix is sensible, as restrictive home-purchase policies affect each city's housing market differently. Acquisition Weakens Churn Rate: The hotel acquisition, if fully funded by debt, is likely to increase Guangzhou R&F's gross debt to above CNY145 billion based on pro forma 1H17 numbers and keep its churn rate below 0.6x, even if it achieves its contracted sales target of CNY80 billion in 2017. Guangzhou R&F's 2016 pre-acquisition churn rate of 0.5x would have improved above 0.6x following strong contracted sales growth, which was up by 30% in 1H17. Higher Recurring EBITDA: Fitch expects Guangzhou R&F's post-acquisition hotel revenue to climb to more than CNY7.0 billion in 2017, from CNY1.4 billion in 2016. Its hotel EBITDA is likely to reach CNY1.5 billion and, together with rental EBITDA of CNY0.7 billion, see recurring EBITDA rise to CNY2.2 billion (2016: around CNY1.0 billion). We expect recurring EBITDA/gross interest to improve above 0.3x post acquisition, from 0.2x in 2016. An improvement in Guangzhou R&F's post-acquisition hotel-business EBITDA margin is possible, as around 40% of the portfolio consists of hotels with less than three years of operation. Stronger hotel performance could offset credit-metric deterioration if interest coverage can improve to above 0.5x, which would be comparable with that of higher-rated peers, such as Longfor Properties Co. Ltd. (BBB-/Stable) and Shimao Property Holdings Limited (BBB-/Stable). Post-Acquisition Credit Profile: The resolution of the RWN will depend on whether the transaction is completed, and if so, how Guangzhou R&F's business and financial profile evolves in the following year or two. Possible outcomes are discussed in the rating sensitivities below. DERIVATION SUMMARY Guangzhou R&F's business profile is comparable with 'BB+' and 'BBB-' rated peers, but its financial profile is comparable with 'BB-' and 'B+' rated peers. Its homebuilding scale, geographical diversification and project profitability is comparable with Shimao, but Shimao had a higher churn rate of 1.0x and lower leverage of 32% at end-2016. Shimao's recurring EBITDA/interest coverage was also lower because of its lower indebtedness, as both companies generated similar rental and hotel revenue of around CNY2.3 billion in 2016. Guangzhou R&F has a superior EBITDA margin against that of highly leveraged peers, such as Greenland Holding Group Company Limited (BB/Negative, standalone assessment BB-/Negative), Sunac China Holdings Limited (BB-/Negative) and China Evergrande Group (B+/Stable). Guangzhou R&F's leverage has also been stable compared with the more volatile leverage of these peers, which is close to 60% or higher, and has a stronger business profile despite its smaller scale. This is because of the company's larger land bank, which can last for more than six years, compared with around four years for the peers. Guangzhou R&F also has meaningful recurring EBITDA/gross interest coverage of 0.2x (before the acquisition), whereas the peers have minimal coverage. No Country Ceiling, parent/subsidiary or operating environment aspects impact the rating KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales growth sustained at 10% per annum - Land bank life reduced to and sustained at 5.5 years, from a high of almost eight years at end-1H17 - Rental rates for its investment properties remaining unchanged - Completing the acquisition of 77 hotels in 2017, with the hotels generating full-year contributions from 2018 - Dividend pay-out ratio of at least 20%, which is maintained year-on-year - Investment property capex of CNY1.5 billion per annum RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - If the transaction takes place, the ratings may be affirmed with a Negative Outlook if contracted sales/total debt remains below 0.6x over the next 12 months, but Fitch expects the ratio to be sustained above 0.6x thereafter - If the transaction takes place, the ratings may be affirmed with a Stable Outlook if contracted sales/total debt is sustained between 0.5x and 0.6x, but Fitch expects recurring income/gross interest expenses to be sustained above 0.5x from 2018 - If the transaction does not take place and contracted sales/total debt is sustained above 0.6x, the ratings may be affirmed with a Stable Outlook Developments that May, Individually or Collectively, Lead to Negative Rating Action - If the transaction takes place, the ratings may be downgraded if contracted sales/total debt remains below 0.6x for a sustained period and recurring income/gross interest expenses remain below 0.5x for a sustained period - Net debt/adjusted inventory over 60% for a sustained period Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Andrew Shingfun Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 31 August 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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