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Fitch Rates KWG's Proposed USD Senior Notes 'BB-(EXP)'
November 7, 2017 / 8:33 AM / a month ago

Fitch Rates KWG's Proposed USD Senior Notes 'BB-(EXP)'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 07 (Fitch) Fitch Ratings has assigned KWG Property Holding Limited's (BB-/Stable) proposed US dollar senior notes a 'BB-(EXP)' expected rating. The notes are rated at the same level as KWG's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received. China-based KWG's ratings are supported by its established homebuilding operations in Guangzhou, strong brand recognition in higher-tier cities across China, consistently high margin, strong liquidity and healthy maturity profile. KWG's ratings are constrained by the small scale of its development and investment property business, as well as the higher leverage after its land purchases in 2016. KEY RATING DRIVERS Established in Guangzhou, Diverse Coverage: KWG's land bank is diversified across China's Greater Bay Area - which includes Guangzhou, Foshan and Hong Kong - as well as eastern and northern China. In 2016, the company ranked among the top 10 homebuilders by sales in Guangzhou, the capital of China's southern Guangdong province. KWG had 11.85 million square metres (sqm) of attributable land at end-June 2017 that was spread across 18 cities in mainland China and Hong Kong. The land bank had an average land cost of CNY4,515/sqm at end-2016 and is sufficient for four to five years of development. KWG takes a prudent approach when entering new cities - it conducts due diligence for around three years before entering, usually with one or two projects in partnership with reputable local developers. Strong Brand Name: KWG has established strong brand recognition in its core cities by focusing on first-time buyers and upgraders, and appeals to these segments by engaging international architects and designers, and setting high building standards. KWG's January-July 2017 pre-sales rose 29% yoy to CNY16.9 billion after a 10% yoy increase in 2016 to CNY22.3 billion. Guangzhou, Beijing and Shanghai accounted for 45% of KWG's pre-sales in both 2016 and 1H17. High Margin through Cycles: KWG's EBITDA margin has remained at 30%-35% through different business cycles, and is one of the highest among Chinese homebuilders. The company has made protecting the margin one of its key business objectives. To this end, KWG strives to maintain higher-than-average selling prices through its consistent, high-quality products. Its experienced project teams also ensure strong execution capability and strict cost controls. Moreover, KWG has low unit land cost of 20%-25% of its average selling price due to its strong foothold in Guangzhou, where land prices have not increased as much as in other Tier 1 cities. KWG's EBITDA margin was 31%-32% in 2016, and we expect the margin to be maintained at 30%-35% in the next two years. Leverage Improvement Temporary: KWG's leverage on an attributable basis - as measured by net debt/adjusted net inventories - improved to around 28% by December 2016 from 39% in December 2015. Leverage is below the 35% level at which Fitch may consider taking positive rating action. However, Fitch expects leverage to stabilise at 30%-40% for the next two years as KWG's leverage is correlated with its contracted sales growth rate and its land-bank replenishment strategy. JVs with Leading Industry Peers: As a result of KWG's prudent expansion strategy, it has a long record of partnership with leading industry peers, including Sun Hung Kai Properties Limited (A/Stable), Hongkong Land Holdings Limited (A/Stable), Shimao Property Holdings Limited (BBB-/Stable), China Vanke Co., Ltd. (BBB+/Stable), China Resources Land Ltd (BBB+/Stable) and Guangzhou R&F Properties Co. Ltd. (BB/RWN). These partnerships helped KWG achieve lower financing costs for its projects, reduce competition in land bidding and improve operational efficiency. JV presales made up 47% and 32% of KWG's total attributable presales in 2016 and 1H17, respectively. JV cash flows are well-managed, and investments in new JV projects are mainly funded by excess cash from mature JVs. Leverage is also lower at the JV level because land premiums are usually funded at the holding company level and KWG pays construction costs only after cash is collected from presales. DERIVATION SUMMARY KWG is well positioned among its peers with 'BB-' ratings. KWG's contracted sales of CNY20 billion-25 billion are comparable with Logan Property Holdings Company Limited's (BB-/Stable) around CNY28.7 billion, Yuzhou Properties Company Limited's (BB-/Stable) around CNY23 billion and China Aoyuan Property Group Limited's (BB-/Stable) around CNY26 billion. However, KWG's EBITDA margin of over 35% is one of the best within the 'BB-' peer group, and is better than that of 'BB' rated companies such as Guangzhou R&F and Sunac China Holdings Limited (BB-/Negative). This is offset by KWG's slower churn of around 0.5x-0.7x, compared with above 1.5x for CIFI Holdings (Group) Co. Ltd. (BB/Stable) and Future Land Development Holdings Limited (BB-/Positive), both of which have lower EBITDA margins of around 25% and 19%, respectively. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - EBITDA margin (excluding capitalised interest) to slowly trend down from 35% to 32% for 2017-2019 - Land replenishment rate at 0.8x contracted sales GFA (attributable), assuming KWG maintains a land bank at about five years of development activity - Land-acquisition cost (attributable) at 40%-45% of sales proceeds from 2017 - Leverage to improve, but remain at about 40%-45% for 2017-2019 RATING SENSITIVITIES Developments that may individually or collectively, lead to positive rating action include: - EBITDA margin sustained above 30%; - Net debt/adjusted inventory sustained below 35%; - Attributable contracted sales sustained above CNY30 billion (2016: CNY22 billion) Developments that may individually or collectively, lead to negative rating action include: - EBITDA margin sustained below 25%; - Net debt/adjusted inventory sustained above 45% LIQUIDITY KWG has well-established diversified funding channels, and strong relationships with most foreign, Hong Kong and Chinese banks. KWG has strong access to both domestic and offshore bond markets, and was among the first few companies to issue panda bonds. At end-June 2017, KWG had available cash of CNY30.6 billion including restricted cash, which was enough to cover the repayment of its short-term borrowing (CNY2.3 billion) and outstanding land premium. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2017-2018 due to its diversified funding channels, healthy maturity profile and flexible land acquisition strategy. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Andrew Chan Director +852 2263 9559 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 29 December 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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