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Fitch Affirms China Properties Group at 'CCC'
March 15, 2017 / 10:09 AM / 8 months ago

Fitch Affirms China Properties Group at 'CCC'

(The following statement was released by the rating agency) HONG KONG, March 15 (Fitch) Fitch Ratings has affirmed China Properties Group Limited's (CPG) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'CCC'. Fitch has also affirmed CPG's senior unsecured rating and the rating on its outstanding USD250 million senior notes due in 2018 at 'CCC', with a Recovery Rating of 'RR4'. KEY RATING DRIVERS Slow Sales, Uncertain Cash Flows: Fitch estimated that CPG had contracted sales of just under HKD1 billion in 2016, driven by sales of the completed units in Shanghai Concord and Chongqing Manhattan projects. The increase from HKD265m in contracted sales in 2015, however, was still not sufficient to fully cover its operational cash outflow and interest expenses. Fitch expects contracted sales to rise above HKD1bn in 2017 if CPG successfully launches the first phase of the residential units in the Chongqing ICC project. However, the launch is highly uncertain, given the company's sales plans have often failed to materialise over the past three years. CPG's lack of operational cash flow limits its ability to meet debt-servicing obligations. Lack of Operational Depth: CPG generated limited recurrent rental income of HKD0.6m in the six months ended June 2016, even though it holds investment properties with a carrying value of around HKD60bn. Most of CPG's properties are located in prime locations in downtown Shanghai and Chongqing, which kept its leverage, measured by net debt (excluding shareholder's loan)/adjusted inventory, as low as 11.5% at end-2015. Fitch expects the leverage to continue to stay below 15% in 2016-2019. However, Fitch considers the prime locations of CPG's properties alone to be insufficient to support the company's business profile, given its lack of operational cash flows. DERIVATION SUMMARY CPG is rated 'CCC' because of its lack of operational depth and unsustainable business strategy. It is a China-based home builder with only five projects in prime locations in Shanghai and Chongqing. The company has not acquired any land since Fitch first rated the company in 2013 and does not plan to expand the business in the future. Its leverage is very low due to the lack of business operations, compared with that of peers such as Xinyuan Real Estate Co., Ltd (B/Stable), Jingrui Holdings Limited (B-/Negative) and Sunshine 100 China Holdings Ltd (B-/Negative). CPG's EBITDA margin has been negative due to high selling, general and administrative expenses. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - contracted sales of HKD1bn in 2017 - refinancing the majority of its short-term debt, which consists of secured borrowings backed by CPG's key property assets, which Fitch does not expect to depreciate in the next 12 months - no new land acquisitions and limited development expenditure in 2017 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - contracted sales of over HKD3bn per year on a sustainable basis and the company undertaking reasonable project developments Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - deterioration in CPG's liquidity LIQUIDITY Tight Liquidity: CPG has limited operating cash inflow and is relying on refinancing to repay its total debt (excluding shareholder's loan) of around HKD8bn as of end-June 2016. All of the debt, except for the USD250 million offshore bond due in 2018 and the convertible bond held by its majority shareholder, comprises secured onshore and offshore bank borrowings. Fitch expects CPG to be able to refinance these borrowings as they are secured against assets with aggregate carrying value of over HKD50bn, which mainly comprise investment properties in prime locations in Shanghai and Chongqing. CPG still has around HKD10bn of property assets that are unencumbered as of end-June 2016 (compared with HKD15bn as of end-2015), which we think can provide liquidity, if necessary. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020570 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. 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