October 26, 2017 / 9:42 AM / 2 years ago

Fitch Affirms Beijing Capital Land at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, October 26 (Fitch) Fitch Ratings has affirmed Beijing Capital Land Ltd.'s (BCL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+' with a Stable Outlook. Fitch has also affirmed BCL's senior unsecured rating at 'BB+'. A full list of rating actions is at the end of this commentary. Fitch assesses BCL's standalone rating at 'B+', which is mainly constrained by its high leverage. The rating is supported by its 'BB' category business profile, given its business scale and quality land bank. BCL's rating incorporates a three-notch uplift due to its strong linkage with its parent, Beijing Capital Group Company Limited (BCG; BBB/Negative), in line with Fitch's Parent and Subsidiary Rating Linkage criteria. BCL's ratings are constrained by its aggressive financial profile as it rapidly expanded its contracted sales by a CAGR of 36% between 2012 and 2016. Although BCL has a 'BB' category business profile, its high leverage, as measure by net debt/adjusted inventory, of 65% and its low contracted sales/gross debt of 0.7x in 2016 are more comparable with mid-to-low 'B' category Chinese homebuilders. We expect BCL's growth pace to moderate to the teens after it achieves its targeted sales of CNY50 billion in 2017. BCL's land replenishment pace has slowed to around 50% of contracted sales compared with 70% in 2014 and 2015. This more sustainable pace of land acquisition has allowed its financial profile to stabilise, supporting its Stable Outlook. KEY RATING DRIVERS High Leverage Constrains Ratings: Fitch expects BCL's leverage to stay around 65% as it continues to build up its land bank in its core markets of Beijing, Tianjin, Shanghai, Chengdu, Chongqing and Shenzhen. BCL's land restructuring over the past three years has added new land of around CNY20 billion a year from 2014 to 2016, mainly in these markets. BCL's land acquisition pace, which was 1.3x the gross floor area (GFA) sold by the company in the first nine months of 2017, will likely exceed the past years' as its contracted sales grow. This will limit BCL's scope to deleverage. Restrictive Policy Slows Growth: In January-September 2017, BCL's contracted sales rose 8% yoy compared with 70% growth a year earlier. BCL's sales growth is slowing as its average selling price (ASP) was little changed from last year, a result of government curbs to limit home price increases. BCL's GFA sold remained in the range of 2.2 million square metres (sq m) to 2.8 million sq m between 2014 and 2016. This year will likely be no different as its GFA sold in the first nine months totalled 1.6 million sq m. Fitch expects BCL to achieve CNY50 billion in total contracted sales in 2017. Quality Land Bank: Fitch believes BCL has accumulated a quality land bank that is sufficient to support its growth. BCL had 11.2 million sq m in total gross floor area in its land bank at end-1H17. Of its development land, over 65% was located in core cities. These markets contributed around 80% of BCL's contracted sales in 2016 and 1H17. The change in its land bank, with a higher proportion in its core cities, also resulted in an increase in its ASP to CNY22,721 per sq m in 1H17 from CNY20,099 in 2016 and CNY11,664 in 2015. Strong Parent Support: BCL was repositioned as the only market-driven property development platform of BCG in 2015. The group injected CNY3 billion in capital via share subscriptions in 2015 and currently holds a 54.47% stake in BCL. BCG has continued to provide tangible support to BCL through project cooperation and direct asset injections. BCL is due to complete the acquisition of CNY4.2 billion of assets from BCG, including several quality projects in Beijing, Chongqing and Shenyang. DERIVATION SUMMARY BCL's business profile is comparable to 'BB' category peers but its standalone credit assessment is constrained at 'B+' because of its high leverage of 65%. BCL has a larger business scale than Ronshine China Holdings Limited (B+/Stable) and Yango Group Co., Ltd. (B/Positive). It also has other business segments in outlet malls and primary land development. BCL's land bank is mostly in Tier-1 cities, giving it a comparatively stronger business profile. BCL's leverage is much higher than Ronshine's 50% and is slightly lower than Yango Group's, which is closer to 70%. BCL's ratings include a three-notch uplift from its standalone profile because of its moderate linkage with its parent, BCG. BCL is BCG's only market-driven property developer and BCG has been providing keepwell arrangements to some of BCL's offshore debts. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Replenish land at 1.3x of GFA that was sold - ASP increases by 3% in 2017 and 10% in 2018 - GFA sold grows at average 5% per annum - Average capex of CNY1.5 billion per annum RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Leverage, as measured by net debt/adjusted inventory, sustained above 70% -Contracted sales/gross debt sustained below 0.7x (0.7x in 2016) -EBITDA margin falling below 15% on a sustained basis (15.5% in 2016) -Any signs of weakening linkage with its parent BCG Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Leverage sustained below 60% -Contracted sales/gross debt sustained above 1x -EBITDA margin rising above 20% on a sustained basis LIQUIDITY Sufficient Liquidity: BCL had CNY16.9 billion in cash (of which CNY98 million was restricted cash) as of end-1H17, sufficient to cover its short-term debt of CNY17.2 billion. It has obtained approval for the issuance of CNY10 billion in onshore corporate bonds that can add to its liquidity. Rising sales and a moderate pace of land acquisition this year will also allow BCL to generate positive cash flow from operation and improve its liquidity position. FULL LIST OF RATING ACTIONS Beijing Capital Land Ltd. - Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Stable - Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Stable - Senior unsecured rating affirmed at 'BB+'. Issued by Central Plaza Development Ltd and guaranteed by BCL - 6.875% CNY250 million senior notes due 2019 affirmed at 'BB+' - USD1 billion medium-term note programme affirmed at 'BB+'. 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 Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Hybrid totalling CNY5 billion is treated as 100% debt; - Payable and non-controlling interest totalling CNY7.9 billion added to debt, not counting the hybrid securities; - Land appreciation tax is excluded from operating cost and added to provision for tax; - Capitalised interest in cost of sales is deducted from operating cost. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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