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Fitch Rates Sunac's USD Notes Final 'BB-'; Watch Negative
September 14, 2017 / 8:55 AM / 6 days ago

Fitch Rates Sunac's USD Notes Final 'BB-'; Watch Negative

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 14 (Fitch) Fitch Ratings has assigned Sunac China Holdings Limited's (BB-/Rating Watch Negative (RWN)) USD400 million 6.875% senior notes and USD600 million 7.95% senior notes a final rating of 'BB-' on RWN. The notes are rated at the same level as Sunac's senior unsecured rating because they represent the company's direct and senior unsecured obligations. The final rating is in line with the expected rating assigned on 1 August 2017. Sunac's rating is supported by its large scale and position among the top-10 Chinese homebuilders by contracted sales as well as its fast-churn business model. Its ratings are constrained by rapidly rising leverage due to its acquisitions, which have made its financial profile volatile. The RWN reflects the risk of further rating downgrades because Sunac's plan to acquire some assets of Dalian Wanda Commercial Property Co. Ltd. (BBB/Negative) will pressure its leverage over the next year and it is unclear if stronger contracted sales from Sunac's aggressive expansion can help it deleverage sufficiently over this period. KEY RATING DRIVERS Leverage to Stay High: Fitch believes Sunac's leverage, as measured by net debt/adjusted inventory, will stay above 50% in 2017, after jumping to 60% as at end-2016, from 26% at end-2015 and 19% at end-2014. This is despite trimming its planned acquisition of Wanda's projects to CNY44 billion from CNY63 billion by dropping 76 hotel assets and the 24 July 2017 share placement that raised net proceeds of CNY3.4 billion. Sunac reported that its 1H17 land acquisitions, including that of its joint ventures and associates, totalled 24 million square metres (sq m) in gross floor area (GFA), against sales of 6 million sq m. We believe the 1H17 land acquisitions will not generate sales immediately and will be at a lower profit margin than what is achievable from the Wanda projects. This will pressure Sunac's leverage, although we expect its land acquisition pace to slow after the company significantly increases its land bank with the Wanda acquisition. Mixed Impact from Wanda Deal: Fitch expects Sunac's acquisition of Wanda's projects to result in a leverage spike at end-2017. However, Fitch expects lower leverage thereafter along with enhanced profit margins as Sunac strengthens its homebuilding business with additional land bank and entry into new high-tier cities. We estimate the average land cost of the Wanda projects is less than CNY1,500 per sq m, based on the total acquisition costs of just under CNY60 billion, including CNY15 billion of net debt. This compares favourably with our estimated selling price of more than CNY12,000 per sq m for completed properties. The stronger profitability and faster cash generation from property sales will be partly offset by the capex to build the theme parks, hotels and shopping malls that form part of the projects, though the impact of the high capex will be moderated by Sunac's enlarged scale. Diversification and Business Synergies: Sunac's property development business may benefit from the planned Wanda transaction by increasing Sunac's land bank by more than 80%, or 46 million sq m in GFA, by our estimate. Sunac's geographical diversification will also improve, as the majority of the Wanda City projects are in the provincial capitals of new Tier 2 cities. The projects will also bring in recurring rental income that will increase steadily over the next five years. Strong Contracted Sales: Sunac reported a 107% yoy increase in attributable contracted sales in 1H17, following a 139% increase over 2016, reflecting its high sales efficiency and supplementing the company's cash position. Contracted sales GFA increased by 102% and average selling prices fell by 6% in 1H17, against a backdrop of slowing property sales nationwide. Post-Acquisition Financial Profile: The RWN will be resolved after Fitch evaluates how Sunac's financial profile will develop after the Wanda acquisition is completed. The possible outcomes following the resolution of the RWN are discussed in "Rating Sensitivities". DERIVATION SUMMARY Sunac's homebuilding business scale, geographical diversification, project execution record and churn rates are comparable with those of Country Garden Holdings Co. Ltd. (BB+/Stable) and superior to those of Beijing Capital Development Holding (Group) Co., Ltd. (BBB-/Stable; standalone BB/Stable) and Guangzhou R&F Properties Co. Ltd. (BB/RWN). However, Sunac has a more volatile financial profile, which is more comparable with that of lower-rated issuers like Greenland Holding Group Company Limited (BB/Negative; standalone BB-/Negative) and China Evergrande Group (B+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - maintaining a land replenishment rate (GFA acquired/GFA sold) of around 1.5x-2.0x for long-term development - increasing margin pressure from 2018, with EBITDA margin dropping to between 15% and 20% RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action; - If the transaction takes place and after reviewing the transaction information, Fitch may downgrade Sunac's rating if net debt/adjusted inventory exceeds 50% for a sustained period and attributable contracted sales/total adjusted debt falls below 0.8x for a sustained period. Developments that May, Individually or Collectively, Lead to Positive Rating Action; - If the transaction takes place and after reviewing transaction information, Fitch may affirm the rating with a Negative Outlook if net debt/adjusted inventory exceeds 50% over the next 12 months but we expect the ratio to be sustained below 50% thereafter. - If the transaction does not take place, the ratings may be affirmed with a Stable Outlook. LIQUIDITY Liquidity to Remain Adequate: Fitch believes Sunac had sufficient cash of CNY91 billion at end-1H17 to purchase the Wanda assets following strong contracted sales in 1H17, when its attributable contracted sales rose to CNY75 billion. Fitch expects the HKD4 billion new share placement and strong increase in contracted sales in 2H17 following the Wanda City acquisition to further improve its 2017 liquidity position. 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 Laura Long Analyst +86 21 5097 3019 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 11 July 2017 Summary of Financial Statement Adjustments - The CNY21 billion Sunac has yet to pay for equity acquisitions is treated as debt - CNY10 billion in perpetual capital securities are treated as 100% debt Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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