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Fitch Rates Guangzhou R&F's USD Senior Notes Final 'BB'
January 13, 2017 / 10:57 AM / 8 months ago

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

(The following statement was released by the rating agency) HONG KONG, January 13 (Fitch) Fitch Ratings has assigned Guangzhou R&F Properties Co. Ltd's (BB/Stable) USD725m 5.75% senior notes due in 2022 a final rating of 'BB'. 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. The final rating is in line with the expected rating assigned on 30 December 2016. The ratings are supported by Guangzhou R&F's scale in terms of land bank and contracted sales with margins that are comparable to 'BB+' peers. It also has the highest EBITDA margin among 'BB' rating category peers. Its recurring income to interest expense at 0.16x also supports its rating. KEY RATING DRIVERS Leverage Still High: Fitch expects Guangzhou R&F's leverage to stabilise at around 55%-60% in 2016-2017 after peaking at 61.3% at end-2014 following aggressive land banking. Its leverage of 57.4% at end-1H16, although high for its rating, was lower than 60.5% in end-2015. The continued high leverage was partly a result of the delay of its A-share listing. The company expects leverage to remain stable. This high leverage is the key weakness of its credit profile, but is sufficiently mitigated by a strong business profile commensurate with a 'BB' to 'BB+' rating. 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 CNY7,300-8,300 per square metre demonstrated the company's direction for land acquisitions. Guangzhou R&F slowed down acquisitions in 2014 to 2015 following the sharp rise in leverage that stemmed from its aggressive land 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 EBITDA margin widened to 31.1% in 1H16 from a low of 26.11% in 2015, and compared with 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 total revenue, compared with 33% and 15% in 2013 and 2012, respectively. Improving Recurring Income: Guangzhou R&F's recurring income EBITDA (including 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. Its improving recurring income interest expense coverage supports its 'BB' ratings. Reducing Funding Costs: Guangzhou R&F is replacing its high-cost borrowings, including its offshore notes, perpetual capital securities and trust loans, 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 its more expensive borrowings. In 1H16, the weighted average cost of financing was 6%-6.57% compared with 8.22% in 2014 and 7.83% in 2015. Fitch expects the company to maintain low interest costs in the next 12-24 months. The company's plans for a share sale in China have been delayed, but this is not putting pressure on its ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales to increase 9% in 2016 - Contracted sales by gross floor area to increase by 2%-3% over 2016-2018 - 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 around CNY7bn-10bn a year - Net debt including perpetual securities to be around CNY65bn-70bn in 2016-2018 RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - EBITDA margin below 25% on a sustained basis. (2015: 26%, 1H16: 31.1%) - Net debt/adjusted inventory over 60% on a sustained basis. (2015: 60.5%, 1H16: 57.4%) - Contracted sales/gross debt below 0.6x on a sustained basis. (2015: 0.6x) 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, while maintaining its current scale Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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