November 22, 2017 / 2:10 AM / a year ago

Fitch Rates Times Property's Proposed USD Notes 'B+(EXP)'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 21 (Fitch) Fitch Ratings has assigned Times Property Holdings Limited's (Times Property; B+/Positive) proposed US dollar senior notes a 'B+(EXP)' expected rating and Recovery Rating of 'RR4'. The notes are rated at the same level as Times Property's senior unsecured rating because they constitute direct and senior unsecured obligations of the company. The final rating is subject to the receipt of final documentation conforming to information already received. Fitch revised the Outlook on Times Property to Positive from Stable on 11 January 2017 and we may take further positive rating action if the company can maintain leverage below 45% and keep its land bank sufficient for three years of development. The China homebuilder's ratings are supported by its execution track record but constrained by the need to consistently replenish its land bank with quality sites, which results in a fluctuation in leverage. KEY RATING DRIVERS Larger Scale, Strong Sales: Times Property's January-October 2017 sales increased by 32% yoy to CNY31.6 billion, almost reaching its annual sales target of CNY32.5 billion, with an average selling price of CNY15,340/sq m, notably higher compared with CNY11,860/sq m in full-year 2016 and only CNY9,010/sq m in full-year 2015. The company will be able to retrieve around CNY28 billion in 2017 from the sales proceeds, assuming a historical cash-collection rate of 86%. Fitch believes that Times Property's strong cash collection from larger sales will continue to support expansion in the next three years. Better Land Bank Quality: Times Property had 14.5 million sq m of land as of end-June 2017, with 13% located in Guangzhou, 34% in Guangdong's Tier 2 cities (Foshan, Zhuhai and Zhongshan) and the rest in less-developed noncore cities - Qingyuan, Dongguan, Changsha and Huizhou. Fitch estimates that the company kept its land bank in its core markets (Guangzhou, Foshan and Zhuhai) at above 3.5 years of development activity at end-June 2017. High-Cost Acquisitions: Times Property acquired nine projects with an average cost of CNY5,043/sq m in 1H17. The developer started to acquire higher-priced land parcels in its core markets from 2015 to expand the share of products that appeal to upgraders and to solidify its foothold in Guangzhou and core Tier 2 cities such as Foshan and Zhuhai. It bought several land parcels in Foshan and Zhuhai at above CNY12,000/sq m, resulting in a weighted-average land-acquisition cost of more than CNY8,500/sq m in 2016, compared with around CNY6,000/sq m in 2015 and less than CNY3,000/sq m before 2014. However, Fitch expects Times Property to add two to three projects from urban redevelopment sites annually to complement high-cost land acquisitions from public auctions. Stable Leverage: Times Property's leverage, measured by net debt/adjusted inventory, rose to about 40% at end-June 2017, from 33% at end-2016. Fitch expects leverage to fluctuate while Times Property expands, particularly as the government has implemented a series of policies since October 2016 to curb excessive increases in housing prices. The company's sustainable sales at current levels would be key to managing the fluctuation in leverage. Fitch will consider taking positive rating action if Times Property is able to maintain its leverage below 45%. Concentration in Guangdong Province: Times Property is a regional property developer focused on Guangdong Province in southern China. Guangzhou, Foshan and Zhuhai together accounted for more than 85% of the total contracted sales in the past three years. We believe that Times Property will focus on expanding within Guangdong Province and is unlikely to expand into other provinces in the near term. DERIVATION SUMMARY Times Property expanded by about 50% in 2016 to reach a contracted sales scale similar to 'BB' category peers such as Yuzhou Properties Company Limited's (BB-/Stable)'s CNY23 billion and China Aoyuan Property Group Limited's (BB-/Stable) CNY26 billion. Times Property had previously been constrained by relatively high leverage (around 40%) compared with its small scale, due to constant pressure to increase its land bank in its core markets in Guangdong province. The company has managed to keep its leverage stable while significantly boosting scale and saleable resources during the past two years to support future growth. Fitch revised the Outlook to Positive from Stable in January 2017 and will take further positive action if Times Property is able to meet positive rating sensitivities on a sustainable basis in the next 12 months. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales sustained above CNY30 billion in the next three years - Gross profit margin (including capitalised interests) maintained at 20%-25% over 2017-2019 - Attributable land premium around 45% of total contracted sales in the next three years. Recovery rating assumptions - The recovery analysis assumes Times Property would be liquidated in a bankruptcy because it is an asset trading company. - We have assumed a 10% administrative claim. - The liquidation estimate reflects Fitch's view of the value of inventory and other assets that can be realised and distributed to creditors. - We applied a haircut of 40% on its adjusted inventory, in line with the norm used for its peers. - We applied a haircut of 25% on its trade receivables, in line with the norm used for its peers. - We also assumed Times Property will be able to use 100% of the CNY2.5 billion in restricted cash to pay debt. - Based on our calculation of the adjusted liquidation value, after administrative claims, we estimate the recovery rate of the offshore senior unsecured debt to be 54%, which corresponds to a Recovery Rating of 'RR3'. However, Times Property's Recovery Rating is capped at 'RR4' because debt of offshore Chinese holding companies face structural issues as the onshore operating companies do not provide upstream guarantees. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Net debt/adjusted inventory sustained below 45% - Contracted sales/total debt sustained above 1.5x (2016: 1.4x) - EBITDA margin sustained above 20% (2016: 19.4%, 1H17: 19.3%) - Land bank sufficient for three years of development Negative: Future developments that may lead to the Outlook reverting to Stable: - Failing to maintain the positive guidelines LIQUIDITY Sufficient Liquidity: Times Property had cash and cash equivalents of CNY13.1 billion (including restricted cash) as of end-June 2017, compared with its CNY2.4 billion short-term debt. The company has already issued two offshore senior notes in 2017 to refinance the USD305 million 12.625% bond due 2019 (redeemed in February 2017) and the CNY1.5 billion 10.375% bond due 2017. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19F, Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 11 January 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures 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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