October 13, 2016 / 1:47 AM / a year ago

Fitch Rates Modern Land's Proposed USD Notes 'B+(EXP)'

(The following statement was released by the rating agency) HONG KONG, October 12 (Fitch) Fitch Ratings has assigned Modern Land (China) Co., Limited's (Modern Land: B+/Stable) proposed US dollar senior notes a 'B+(EXP)' expected rating and Recovery Rating of 'RR4'. The notes are rated at the same level as Modern Land'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. The Chinese homebuilder's ratings are supported by its improving land-bank quality, low leverage and strong liquidity. The rating is mainly constrained by its small scale as well as possible earnings fluctuations resulting from volatile conditions of the land market. KEY RATING DRIVERS Fast Expansion, Larger Scale: Modern Land's reported contracted sales increased by more than 70% yoy to CNY7.5bn in 1H16. We expect the company to achieve its CNY15bn reported contracted sales target for the full year based on Modern Land's project pipeline in 2H16. Fitch expects Modern Land's attributable contracted sales to increase in the double digits in the next two years to above CNY10bn each year, supported by more than CNY40bn of attributable saleable resources, by Fitch's estimate. Improving but Small Land Bank: Modern Land's land bank has strengthened after it extended coverage to more Tier 1 and 2 cities since 2014. Although Xiantao and Dongdaihe, two Tier 4 cities in China, continue to account for 35% of Modern Land's attributable land bank by area; Tier 1 cities like Beijing and Shanghai, and Tier 2 cities like Hefei, Changsha, and Suzhou account for more than 60% of Modern Land's existing saleable resources. However, Modern Land's land bank remains small and is the main obstacle to expansion. Its attributable available-for-sale land bank was merely 2.4 million square metres (sqm) in gross floor area (GFA) at end-June 2016, compared with attributable sales GFA of 545,000 sqm in 1H16. The land bank is enough for less than two years of sales. Modern Land is tapping new land acquisition channels to boost its land reserves, including seeking more M&A deals, collaborating with governments on green housing, and cooperating with asset management firms. Fitch will not consider further positive rating action until the company achieves a sustainably larger land bank. Margin to Recover: Modern Land's gross profit margin (GPM) dropped to only 19% in 1H16, mainly due to the low-margin projects and social housing projects delivered in Beijing, Nanchang and Changsha. Fitch expects Modern Land's 2H16 GPM to revert to 20%. Future project GPMs are also likely to remain at between 20% and 25%. Low Leverage, Disciplined Financial Policy: Modern Land's leverage continued to be controlled and comparable with 'B+'-rated peers in 1H16. Leverage rose to 26% in 1H16 from 22% in 2014, driven by increased pressure to replenish quality land bank and the shift towards higher-tier cities. Fitch expects Modern Land's leverage to remain below 40% until the company materially increases its land reserves relative to its sales.. Sufficient Liquidity, Lower Funding Cost: Modern Land's liquidity remains healthy with total cash of CNY5.7bn, compared with short-term debt of CNY3.5bn as of end-June 2016. Modern Land managed to significantly lower its funding cost to 8.4% in 1H16 from 10.5% in 2015, after the completion of a CNY1bn five-year onshore bond issuance in 1H16 at a 6.4% coupon rate. Fitch expects the lower borrowing cost to partially offset a lower GPM level and strengthen Modern Land's credit profile. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Attributable contracted sales of CNY10bn in 2016, CNY12bn in 2017, CNY15bn in 2018 and CNY18bn in 2019 - New land investment to maintain land bank at two years' worth of gross contracted sales - Average selling price to increase around 10% each year to reflect the higher cost of recently acquired land - Construction cost per square meter of around CNY3,000-4,000 in 2016-2019 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Attributable contracted sales sustained above CNY20bn - Net debt/adjusted inventory sustained below 30% (1H16: 25.9%) - Land bank sufficient for three years of development Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Land bank insufficient for two years of development - Attributable contracted sales decline below CNY10bn - EBITDA margin sustained below 20% (1H16: 13.5% including capitalised interest) - Net debt/adjusted inventory sustained above 40% Contact: Primary Analyst Fiona Zhang Associate Director +852 2263 9909 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 Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 19 August 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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