(The following was released by the rating agency)
-- Yuzhou’s financial management has been consistent and its sales execution has improved over the past 12 months.
-- We are revising the rating outlook on Yuzhou to stable from negative to reflect our expectation that the company’s improving property sales will strengthen its cash flow and financial performance.
-- We are affirming our ‘B+’ long-term corporate credit rating on the China-based property developer and our ‘B’ issue rating on its senior unsecured notes.
-- We are also raising our Greater China regional scale rating on the company to ‘cnBB’ from ‘cnBB-’ and that on the notes to ‘cnBB-’ from ‘cnB+'.
On Sept. 13, 2012, Standard & Poor’s Ratings Services revised the rating outlook on China-based property developer Yuzhou Properties Co. Ltd. to stable from negative. At the same time, we affirmed our ‘B+’ long-term corporate credit rating on the company and the ‘B’ issue rating on its outstanding senior unsecured notes. As a result of the outlook revision, we raised our Greater China regional scale rating on Yuzhou to ‘cnBB’ from ‘cnBB-’ and on the notes to ‘cnBB-’ from ‘cnB+'.
The outlook revision reflects our expectation that Yuzhou’s improving property sales are likely to strengthen its cash flow and financial performance over the next 12 months. The company’s financial management has been consistent and its sales execution has improved over the past year. We believe Yuzhou will continue to benefit from a more stable outlook for the property market in China over the next 12 months as first-time buyers reenter the market.
We expect Yuzhou to continue to improve its sales execution and product mix over the next 12 months. The company’s property sales in the first eight months of 2012 were better than we expected as it cut prices moderately and adjusted its product mix to cater more to first-time home buyers. Yuzhou’s contracted sales were Chinese renminbi (RMB) 4.5 billion, or 90% of the full-year target. The company’s sales execution improved as contributions from new markets outside of Xiamen increased.
Yuzhou’s profitability is likely to weaken as the company expands outside of its home market and adopts a more flexible pricing strategy. Nevertheless, we believe Yuzhou’s profitability will continue to be good, compared with peers’ in the same rating level. The company’s low-cost land bank in good locations supports its profitability, in our view. We expect Yuzhou’s EBITDA margin to remain satisfactory at about 35% in the next one to two years.
We expect the company’s financial performance to improve moderately in 2012 compared with 2011. In our base-case scenario, we expect Yuzhou’s 2012 credit metrics to improve as higher property sales offset lower margins and stronger cash flows result in a more stable leverage. Our key forecast assumptions for the year are that: (1) Yuzhou’s contracted sales will reach RMB5 billion compared with RMB4.3 billion in 2011; (2) its EBITDA margins will weaken to about 35% from 42%; and (3) its borrowings will increase moderately to RMB6.5 billion to fund working capital and capital spending. As a result, we expect Yuzhou’s adjusted debt-to-EBITDA ratio to be 4x and EBITDA interest coverage 3x by the end of this year.
We affirmed the rating on Yuzhou to reflect the company’s limited operating flexibility due to its small scale of operations and high geographic concentration. Yuzhou’s limited record and expansion into new markets could also heighten its business and execution risks, in our view. The company’s leading market position in Xiamen, its low-cost land bank, and above-average profitability compared with that of peers with a similar rating temper the above weaknesses. We view Yuzhou’s business risk profile as “weak” and its financial risk profile as “aggressive,” as our criteria define the terms.
Yuzhou’s liquidity is “adequate,” as defined in our criteria. We estimate that the company’s liquidity sources will exceed uses by 1.2x or more in 2012. Our liquidity assessment incorporates the following expectations and assumptions:
-- Liquidity sources for 2012 include an unrestricted cash balance of RMB1.4 billion (as of Dec. 31, 2011), new loan drawdowns of RMB1.5 billion in the first half of 2012, and expected cash proceeds of RMB5.3 billion from property sales.
-- Liquidity uses include short-term debt of RMB1.3 billion, land premiums payable of RMB1.3 billion, and estimated construction costs, working capital needs, and dividend distributions of RMB4 billion.
-- We expect net sources of liquidity to remain positive even if EBITDA declines by 15%.
-- As of Dec. 31, 2011, the company is in compliance with financial covenants on its outstanding bonds and notes. In our view, Yuzhou has limited headroom to increase its offshore debt against the EBITDA interest coverage covenant of 3.0x on its US$200 million senior unsecured notes due 2015.
We understand that Yuzhou has undrawn onshore banking facilities of RMB2.9 billion (as of June 30, 2012). Nevertheless, we do not include these facilities in our liquidity assessment because they may not provide timely liquidity support. This is because loan drawdowns depend on credit availability and case-by-case approval.
The stable outlook reflects our expectation that Yuzhou will maintain satisfactory property sales and consistent financial management for the next 12 months at least. We also expect the company to have adequate liquidity while expanding outside of its home market.
We could lower the rating if Yuzhou’s property sales and profitability in the next 12 months are significantly weaker than we expected or its debt-funded expansion is more aggressive than we anticipated. This could lead to a more leveraged capital structure and weaker credit metrics than we expected. We consider total debt to total capitalization of more than 60% and EBITDA interest coverage of less than 2x as indicators of such weakness.
The upside to the rating is limited until the company improves its operating scale and project diversity, and maintains satisfactory profit margins. Further, we may raise the rating if Yuzhou shows financial discipline and a record of prudent expansion.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; Outlook Action
Yuzhou Properties Co. Ltd.
Corporate Credit Rating B+/Stable/-- B+/Negative/--
Senior Unsecured B
Corporate Credit Rating
Greater China Regional Scale cnBB/--/-- cnBB-/--/--
Senior Unsecured cnBB- cnB+