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7 months ago
Fitch Rates KWG's USD Senior Notes Final 'BB-'
January 12, 2017 / 2:26 AM / 7 months ago

Fitch Rates KWG's USD Senior Notes Final 'BB-'

(The following statement was released by the rating agency) HONG KONG, January 11 (Fitch) Fitch Ratings has assigned KWG Property Holding Limited's (KWG, BB-/Stable) USD250m 6.00% senior notes due 2022 a final rating of 'BB-'. The notes are rated at the same level as KWG'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. The final rating is in line with the expected rating assigned on 29 December 2016. 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 the Pearl River Delta, Yangtze River Delta, Bohai Rim and southern China. The company ranked among the top 10 homebuilders by sales in 2015 in Guangzhou, the capital of China's southern Guangdong province. KWG had 10.4 million square metres (sq m) of good-quality land at end-June 2016 that was spread across 11 cities in China. The land bank had average land cost of CNY3,470/sq m and is sufficient for 4-5 years of development. Sites in Tier-1 cities made up 53% of the land bank by area, or 58% by value; while sites in Tier-1 cities and upper Tier-2 cities made up 70% of the land bank by area or 73% by value. KWG has 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 high-quality products enable it to attract affluent purchasers, and command higher pricing than some nearby projects by reputable developers. The company's sell-through rate has been high at 60%-68% since 2012. Diverse Property Products: KWG develops both residential and commercial properties to meet demand from the market and respond to changes in the property sector. Commercial properties accounted for about 32% of its pre-sales in 1H16, with about one third of the sales from office and retail units, and the remainder from serviced apartments. 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. KWG's selling, general and administrative expenses cost is lower than peers' at 6% of revenue. 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 over the years. However, KWG's EBITDA margin may decline from the high 30% range to lower 30% from 2H17 if growth in selling prices lags the land price surge in 2016 in KWG's core cities. Land Costs Drive Up Leverage: Fitch expects KWG's proportionate consolidated leverage, measured by net debt-to-adjusted inventory, to increase to 43% by the end of 2016 (2015: 35%, 1H16: 29%). The increase will be driven by the high land premiums, with around CNY10bn scheduled to be paid in 2H16. The attributable cost of land purchased in 2016 is 54% of its 2016 presales target of CNY22bn. KWG acquired 14 land parcels in 2016 with attributable gross floor area (GFA) of 2.32 million sq m and land premium of CNY18.4bn. Some of the parcels were in Shanghai, Hangzhou and Tianjin, where land costs have surged, resulting an increase in land cost to CNY4,030/sq m, compared with CNY3,819/sq m in 2015 and CNY3,300/sq m in 2014. Leverage Reasonable, To Improve: The rise in KWG's leverage is mitigated by the good quality of the recent land purchases and that the acquisitions maintain its land bank at 4-5 years of development activity. Fitch expects leverage to gradually trend down to 40% in 2017-2019, as KWG's presales grow and land acquisition in higher-tier cities slows down. 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, Hongkong Land, Shimao Property, China Vanke, China Resources Land and Guangzhou R&F. These partnerships helped KWG achieve lower financing costs, reduce competition in land bidding, and improve operational efficiency. JV presales made up 48% and 45% of KWG's total attributable presales in 2015 and 1H16, respectively. JV cash flows are well-managed, and investments in new JV investments 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. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales GFA to grow at 0% in 2016, 5% in 2017 and 8% in 2018 - Average selling price to increase 10% a year in 2016 and 2017, and 1% a year from 2018 - EBITDA margin (excluding capitalised interest) to slowly trend down from 35% to 32% for 2016-2019 - Land replenishment rate at 0.8x contracted sales GFA (attributable), assuming KWG maintains land bank at about 5 years of development activity - Land acquisition cost (attributable) budget at 60% of contracted sales in 2016, 40%-45% from 2017 - Leverage to improve, but remain at about 40%-45% for 2016-2019 RATING SENSITIVITIES Future 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 CNY30bn (2015: CNY20bn) Negative: Future 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 Diversified Funding Sources: KWG has well-established diversified funding channels, and has 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. KWG's funding cost fell to 6.8% in 1H16 from 7.4% in 2015 following a series of refinancing activities. Sufficient Liquidity: At end-June 2016, KWG had available cash of CNY20.5bn and unutilised credit facilities (uncommitted) of CNY16bn, which were enough to cover the repayment of its short-term borrowing (CNY5.5bn) and outstanding land premium. The company repaid most of its US dollar debt financing when the opportunity arose. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2016-2018 due to its diversified funding channels, healthy maturity profile and flexible land acquisition strategy. Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central, Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 29 December 2016 Media Relations: 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 (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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