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Fitch Assigns Yida First-Time Rating of 'B'; Outlook Positive
April 10, 2017 / 12:10 PM / 8 months ago

Fitch Assigns Yida First-Time Rating of 'B'; Outlook Positive

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, April 10 (Fitch) Fitch Ratings has assigned China-based business park developer, Yida China Holdings Limited, a first-time Long-Term Issuer Default Rating of 'B'; The Outlook is Positive. Fitch has also assigned Yida a foreign-currency senior unsecured rating of 'B' with a Recovery Rating of 'RR4'. At the same time, Fitch has assigned Yida's proposed US dollar senior notes a 'B(EXP)' expected rating with a Recovery Rating of 'RR4'. The notes are rated at the same level as Yida's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating of the notes is subject to the receipt of final documentation conforming to information already received. Yida says it intends to use the net proceeds from the note issue to fund new property projects and for working capital purposes. Yida's ratings are constrained by its high leverage, as measured by net debt/adjusted inventory, the still-small contribution from operations outside the city of Dalian in China's Liaoning province and limited scale. Its ratings are supported by its strong record in business park operation in Dalian and expanding presence in other Chinese cities. The Positive Outlook reflects Fitch's belief that Yida's higher development property sales are supported by firm demand from its established business parks. This will allow the company to deleverage to below 45% over the next twelve months. Furthermore, as Yida's business parks mature and its business in entrusted operation of business parks expands, its recurring EBITDA can sustainably provide in excess of 0.3x coverage of interest expenses. KEY RATING DRIVERS High Leverage: Yida's leverage has remained above 45.0% historically and was at 46.7% at end-2016, which is higher than for most mid-to-high 'B' rating category Chinese developers. We expect leverage to drop gradually from 2017, due to stronger sales and better cash collection, as well as from cash gradually recycling from the Dalian government as a result of primary land development in the early years. However, leverage is likely to remain above 40% during 2017-2019, considering the company's expansion plans and continuous investment property development. Limited Geographic Diversification: More than 90% of Yida's attributable contracted sales were generated from Dalian before 2016, although this decreased to 82% in 2016 due to a higher contribution from new projects in the city of Wuhan in China's Hubei province. We expect Dalian to still account for around 80% of contracted sales in the next two to three years, given 87% of Yida's attributable land reserve was located in Dalian as of end-2016. Small Scale: Yida's contracted sales of around CNY7 billion-8 billion in 2015 and 2016 are small compared with 'B+' rated developers, which generate more than CNY10 billion in contracted sales annually. Housing market risk will continue to significantly affect Yida's credit profile, as development property sales remain its key operating cash contributor. Increasing maturity of the company's investment properties in its new business parks and the expanding scale of its development property sales, with more projects generating sustainable sales, will eventually mitigate its small scale. Leading Business Park Developer: Yida has 15 years of experience in business park development and operation, starting with its first project, Dalian Software Park, in 2002. The company has demonstrated an ability to attract large multinational corporations and reputable local companies to its business parks. Its strong retention rate is reflected by the 92% occupancy rate enjoyed by Dalian Software Park and average occupancy rates of above 80% for mature assets. The strong performance of its business parks can also be seen from the sustained positive annual rental reversion of 5%-8%. Its fast-expanding entrusted businesses in 2015 and 2016 also demonstrates the company's proficiency in business park operation. Rising Recurring Income: Fitch expects recurring income from Yida's business parks and entrusted operation business to increase at 10%-18% yoy from CNY435 million in 2016 to CNY649 million in 2019, with recurring EBITDA interest coverage improving from 0.3x towards 0.5x. Recurring income growth will be driven by both enlarged leasable gross floor area, with new parks in Dalian and Wuhan, and increasing occupancy rates in existing business parks. New Shareholder, No Immediate Impact: Fitch believes Yida's new shareholder, China Minsheng Investment Group (CMIG), may benefit the company's business development, but there are no immediate changes to the company's operations. CMIG can facilitate more business opportunities outside Yida's Dalian stronghold that Yida is already exploring. Furthermore, CMIG may bring more funding flexibility. CMIG, a leading private investment group, bought a 53% equity interest from Yida's founder, Mr. Sun Yinhuan. The acquisition was made by CMIG's subsidiary, China Minsheng Jiaye Investment Limited (CMIG Jiaye), which is CMIG's platform specialising in property investment. CMIG Jiaye held 61.1% stake in Yida as of end-March 2017. DERIVATION SUMMARY Yida's business profile as a leading regional homebuilder in Dalian and business park developer, with a sufficient and sound-quality landbank to support its property development, is commensurate with a 'B' rating. Yida also has a satisfactory EBITDA margin of above 20%, which is comparable with 'BB' rating category peers. Its recurring income from investment property assets, especially from mature office buildings in Dalian Software Park, provides an extra liquidity buffer. However, Yida's leverage is higher than most of its 'B' rated peers, such as Xinyuan Real Estate Co., Ltd. (B/Stable), and its contracted sales are small compared to 'B+' rated developers, such as Modern Land (China) Co., Limited (B+/Stable). Yida's insignificant recurring income and geographic concentration in Dalian cap its rating at 'B'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales to stay at CNY7 billion-9 billion during 2017-2019. - Construction expenditure accounting for 30%-40% of contracted sales during 2017-2019. - Land acquisition paid accounting for around 20%-30% of contracted sales during 2017-2019. - Capex for new investment properties at CNY350 million-450 million per year during 2017-2019. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action include: - recurring EBITDA/gross interest sustained above 0.3x (2016: 0.3x; 2015: 0.2x); - net debt/adjusted inventory of below 45% for a sustained period (2016: 46.7%; 2015: 52.8%); and - EBITDA margin sustained above 25.0% (2016: 25.6%; 2015: 27.8%). Developments that May, Individually or Collectively, Lead to Negative Rating Action - Failure to maintain the above positive rating sensitivities will lead to the Positive Outlook reverting to Stable. LIQUIDITY Adequate Liquidity: Yida had CNY2.9 billion in cash, including restricted cash, on hand as of end-2016 and unused bank facilities of CNY4.1 billion; sufficient to cover its short-term debt of CNY4 billion. Diversified Funding Channels: Yida has access to diversified funding channels, including domestic corporate bonds, bank borrowings, trust borrowings and the equity market. It issued two tranches of domestic bond, totalling CNY3 billion, during September 2015 to March 2016 at a cost of 6.0%-6.5%. Its average borrowing cost was hence lowered to around 7% in 2016, from 10% in 2014. The company's borrowing structure was improved after it replaced part of its short-term debt with longer-maturity corporate bonds in 2016. Also, the portion of secured debt among total debt was cut to 80%, from above 90% in previous years. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Tertiary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of relevant committee: 29 March 2017 Summary of Financial Statement Adjustments - Total debt adjusted for face value of bonds. - EBITDA adjusted for capitalised interests and revaluation of subsidiary acquisitions in 2016. 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