(The following statement was released by the rating agency)
HONG KONG, September 02 (Fitch) Fitch Ratings has affirmed
R&F Properties Co. Ltd.'s (Guangzhou R&F) Long-Term Foreign- and
Issuer Default Ratings (IDRs) at 'BB'. The Outlook is revised to
Negative. Fitch has also affirmed Guangzhou R&F's senior
unsecured rating, the
ratings on its outstanding notes and ratings on notes issued by
'BB'. The full list of rating actions is at the end of this
KEY RATING DRIVERS
Outlook Revised to Stable: The revision reflects Fitch's view
R&F's leverage, as measured by net debt/adjusted inventory, is
past its peak and
will stabilise at around 55%-60% in 2016-2017. It leverage of
57.4% at end-1H16,
although high for its rating, was lower than 60.5% in end-2015.
leverage is the key weakness of its credit profile, but is
mitigated by a strong business profile commensurate with a 'BB'
to 'BB+' rating.
Guangzhou R&F's scale in terms of land bank, contracted sales
and margins are
comparable to 'BB+' peers. It also has the highest EBITDA margin
rating category peers. Its recurring income to interest expense
at 0.16x also
supports its rating.
Leverage Still High: Guangzhou R&F's leverage peaked at 61.3% at
aggressive land banking of CNY43.4bn in 2013 and has since been
in the range of
57%-61%. This continued high leverage was partly a result of the
delay of its
A-share listing. The company expects leverage to remain stable.
about half of the saleable area attributable to Guangzhou R&F in
acquired in 2013 are located in less attractive cities, such as
Harbin, Datong and Xian, and are in slow-moving projects with
that are still in negative cash flow. This type of land cost
CNY22.8bn, which was 68% of the CNY33.7b land premium paid for
land in China in
Better Selection of Land: Guangzhou R&F has turned more
selective and careful on
its criteria for buying land in 2014-2015. It focused in 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. We
believe the more
carefully selected land purchased from 2014-2015 will provide
better margins and
cash flows to the company in 2016-2018.
The two plots acquired via redevelopment in Shenzhen in 1H16,
which had land
cost of CNY7300-8300 per square metre demonstrated the company's
land acquisitions. Guangzhou R&F slowed down acquisitions in
2014 to 2015
following the sharp rise in leverage that stemmed from its
acquisitions in 2013. Land premium dropped to CNY5.3bn and
CNY4.6bn in 2014 and
2015, respectively, from CNY43.4bn in 2013.
Superior EBITDA Margins: Guangzhou R&F's EBITDA margin exceeds
those of its 'BB'
category peers, which ranged from 20% to 25%. Guangzhou R&F's
widened to 31.1% in 1H16 from a low of 26.11% in 2015 and
33%-36% in 2011-2013.
EBITDA margin improved due to better market conditions in 2H15
and a larger
share of commercial property sales, which are more profitable.
Margin shrank in
2014 because commercial property sales accounted for just 6% of
compared with 33% and 15% in 2013 and 2012, respectively.
Improving Recurring Income: Guangzhou R&F's recurring income
hotel and rental income) increased to CNY958m in 2015, Fitch
estimated. This is
a CAGR of 10.6% since 2012. Its recurring income interest
expense coverage was
at 0.16x at end-2015, and Fitch expects this to improve to 0.20x
in the next two
years. This is due to an increase in gross rentable floor area
and the number of
hotel rooms in operation, and a likely decline in funding cost.
recurring income interest expense coverage supports its 'BB'
Reducing Funding Costs: Guangzhou R&F is replacing its high-cost
including its offshore notes, perpetual capital securities and
which bear interest rates of around 10%, with lower-cost
domestic borrowing. It
issued several onshore bonds that raised CNY43.3bn in total at
interest cost of
3.48%-5.20% in July 2015 and 1H16. It also repaid CNY23.2bn of
expensive borrowings. In 1H16, the weighted average cost of
6%-6.57% compared with 8.22% in 2014 and 7.83% in 2015. Fitch
company to maintain low interest costs in the next 12-24 months.
plans for a share sale in China have been delayed, but this is
pressure on its ratings.
Fitch's key assumptions within the rating case for the issuer
- Contracted sales to increase 9% in 2016
- Contracted sales by gross floor area to increase by 2%-3% over
- Average selling price for contracted sales to increase by
2%-3% for 2016-2018
- EBITDA margin at 26%-27% in 2016-2018
- Slower land bank acquisition in 2016-2018 with land premium
- Net debt including perpetual securities to be around
CNY65bn-70bn in 2016-2018
Negative: Future developments that may, individually or
collectively, lead to
negative rating action include:
- EBITDA margin below 25% on a sustained basis. (2015: 26%,
- Net debt/adjusted inventory over 60% on a sustained basis.
(2015: 60.5%, 1H16:
- Contracted sales/gross debt below 0.6x on a sustained basis.
Positive: Future developments that may, individually or
collectively, lead to
positive rating action include:
-Net debt/adjusted inventory below 40% on a sustained basis.
-Contracted sales/gross debt above 0.8x on a sustained basis,
its current scale
FULL LIST OF RATING ACTIONS
Guangzhou R&F Properties Co. Ltd
- Long-Term Foreign-Currency IDR rating affirmed at 'BB',
Outlook revised to
- Long-Term Local-Currency IDR rating affirmed at 'BB', Outlook
- Senior unsecured rating affirmed at 'BB'
Caifu Holdings Limited
- USD600m 8.75% senior unsecured notes due 2020 affirmed at 'BB'
Trillion Chance Limited
- USD1bn 8.5% senior unsecured notes due 2019 affirmed at 'BB'
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