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Fitch Downgrades Sunshine 100's Notes to 'CCC'; Affirms 'B-' IDR
April 11, 2017 / 9:36 AM / 8 months ago

Fitch Downgrades Sunshine 100's Notes to 'CCC'; Affirms 'B-' IDR

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, April 11 (Fitch) Fitch Ratings has downgraded the senior unsecured rating and the rating on the outstanding USD215 million senior notes due in 2017 of China-based homebuilder Sunshine 100 China Holdings Ltd (Sunshine 100) to 'CCC' from 'CCC+'. The Recovery Rating is now 'RR6', from 'RR5'. Fitch has affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-', and maintains our Negative Outlook. The one-notch downgrade of the senior unsecured rating reflects Fitch's expectations that recovery prospects in the event of a default had deteriorated further because Sunshine's onshore debt - which ranks ahead of its US dollar senior notes - had increased by CNY5.5 billion in 2016, which exceeded its adjusted inventory increase of CNY1.5 billion. Its higher onshore debt therefore eats into the liquidation value that would otherwise have been available for its US dollar senior notes. The IDR was affirmed at 'B-' because the company has no imminent liquidity shortage, and it has been strengthening its business profile by rising exposure to projects in the Yangtze River Delta and Pearl River Delta areas and refocusing on residential projects. The Outlook remains Negative because Fitch believes the company's persistent negative operational cash flow - given the high development expenditure, selling expenses and borrowing costs - may continue to add to its indebtedness and push its credit metrics beyond the negative rating thresholds. KEY RATING DRIVERS Leverage to Remain High: Sunshine 100's leverage remained high at around 69% as of end-2016, rising from 63% at end-2015 and 53% at end-2014. This is due mainly to large construction expenditure for saleable residential resources and also for the commercial projects. Fitch expects leverage to stay at around 65%-70% in the next 12-18 months - given the inevitable high development expenditure following its refocusing on residential products, and its plan to launch sales in cities such as Wenzhou, Changzhou and Qingyuan, where its inventory level is low. Persistent High Development Expenditure: Fitch feels that Sunshine 100's high development expenditure during 2015 and 2016 has increased its cash needs and hurt its financial profile. Construction scale was large, with 3.3 million square metres (sqm) of total gross floor area (GFA) under construction at end-2016, among which 1.6 million sqm were newly started in 2016. Fitch estimates annual development expenditure to remain high at around 50%-60% of contracted sales in the next one to two years, due to the expansion in the Yangtze River Delta area. EBITDA Margin Bottoming: Fitch expects Sunshine's EBITDA margin to have bottomed out in 2016, and will be at 14%-16% in the next one to two years. The margin dropped to around 9.8% in 2016 from 12% in 2015, after the company recognised the low-margin projects presold in 2014 and 2015, and spent large selling expenses following the rising sales activities during the year. However, we believe the selling expenses would not increase as fast as in the past two years (26%-27% yoy), as the company has built up a sales team to support its current sales scale. Selling expenses would remain flat in the next one to two years, which would help to boost profitability. The improving profitability is also supported by the delivery of higher-margin projects that the company presold in 2015 and 2016, where we estimate the gross profit margin to be around 25%. Sales Beat 2016 Target: Contracted sales reached CNY10.4 billion in 2016, surpassing management's target of CNY8.5 billion for the year. This was attributed to strong residential sales from the three satellite Tier 3/4 cities of Qingyuan, Wuxi and Wenzhou and one Tier 2 city of Wuhan. The stronger-than-expected sales helped to improve liquidity. Fitch expects Sunshine 100's sales scale to be at around CNY10 billion-11 billion for the next one to two years - considering the strong markets in the satellite Tier 3/4 cities, and the company's improved project portfolio. Asset Quality Improving Gradually: Sunshine 100 is refocusing its resources on better-located projects to boost its sales performance from 2015, especially in the Yangtze River Delta which accounted for around 82% of newly acquired land by GFA in the last two years; 38% of attributable land reserves is located in the more developed Yangtze River and Pearl River Delta, up from 34% at end-2014. Sunshine had an attributable land bank of 9.7 million sqm as of end-2016, larger than most of its peers in the low- to middle 'B' category. Adequate Liquidity: Cash, including restricted cash, amounted to CNY6.8 billion as of end-2016, covering 79% of the company's short-term debt of CNY8.6 billion. Fitch believes Sunshine 100's liquidity is sustainable in the next 12-months because it had an undrawn bank facility of CNY7.6 billion as of end-2016, and it is capable of refinance in both onshore and offshore markets. DERIVATION SUMMARY Sunshine 100 has higher leverage than its closest peer, Jingrui Holdings Limited (B-/Negative), due to a slower turnover rate. Its scale is also smaller than Jingrui in terms of contracted sales and EBITDA. However, its land bank is larger than that of Jingrui, and profitability is also higher. Suneshine 100's business profile is better than its 'CCC' rated peer, Wuzhou International Holdings Limited and a trade centre developer in Tier 3/4 cities, given its focus on residential projects in Tier 2 and satellite Tier 3/4 cities. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Total contracted sales to be around CNY10 billion-11 billion during 2017-2019; - Cash collection ratio at 92%-95% during 2017-2019; - Construction expenditure accounts for 50%-60% of contracted sales during 2017-2018 each year; - Land premium payment accounts for around 7%-14% of contracted sales during 2017-2018 each year. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action include: - Net debt/adjusted inventory sustained above 70% (2016: 68.9%; 2015: 63.3%) - Contracted sales/total debt sustained below 0.5x (2016: 0.39x; 2015: 0.38x) - EBITDA margin sustained below 10% (2016: 9.8%; 2015: 12%) - A deterioration in Sunshine 100's liquidity position, such as a failure to refinance its existing offshore bond, in the next 12-18 months. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - The current rating is on Negative Outlook. Fitch does not anticipate developments with a substantial likelihood, individually or collectively, of leading to a rating upgrade. However, then the Outlook may revert to Stable if the above factors do not materialise. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 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 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Summary of Financial Statement Adjustments - EBITDA adjusted for capitalised interests. 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